The recently submitted Draft Taxation (Partnerships – Economic Substance) (Jersey) Law 202- is expected to be approved on 29 June 2021. In line with EU global commitments, it will extend the Jersey economic substance regime to Jersey resident partnerships generating income from relevant activities from 1 July 2021, with existing partnerships having a 6-month transition period. Partnerships that are funds will be predominantly out of scope but the activities of a general partner may themselves require substance under the existing legislation.
Carey Olsen continues to be closely involved in the development of substance legislation and is happy to advise on the impact it may have on structures in Jersey, as well as the equivalent regimes in Guernsey, BVI, Bermuda and the Cayman Islands. Further information will be published in due course. In the interim, the proposals in Jersey can be summarised as follows:
What does the law propose?
From 1 July 2021, an 'economic substance test' similar to that for Jersey resident companies will apply to 'resident partnerships' generating gross income from 'relevant activities' in relevant financial periods, being financial periods starting on or after: (a) for those formed after 1 July 2021, their date of formation; and (b) for those formed before 1 July 2021, 1 January 2022. The regime will be familiar to those with an understanding of the company regime, with the main difference being that the test will look at the activities of the relevant governing body. For example, for limited partnerships, the activities of the general partner will be key.
What are 'resident partnerships'?
Resident partnerships are partnerships deemed to have their effective place of management in Jersey. Jersey partnerships will be deemed resident partnerships automatically unless their effective place of management is in another jurisdiction that either has an income tax rate of at least 10% or an equivalent economic substance test. On the basis they are taxed or used domestically, exceptions will be made for: (a) partnerships where all the partners are individuals subject to income tax in Jersey; and (b) partnerships that are not part of a multi-national group and do not undertake business activities outside of Jersey.
What are 'relevant activities'?
Relevant activities are certain activities carried on by or through the resident partnership. There are nine categories, which mirror those under the company regime: banking business, distribution and service centre business, finance and leasing business, fund management business, headquarters business, insurance business, intellectual holding property business and shipping business. Some take priority over others, and the activities of a fund will not necessarily be considered relevant activities.
What is the 'economic substance test'?
A resident partnership will meet the economic substance test in relation to a relevant activity if: (a) it is managed in Jersey, meaning in summary that its governing body meets in Jersey at an adequate frequency with a majority physically present at those meetings, records are kept of the strategic decisions at those meetings and passed by members who have the necessary knowledge and expertise to do so, and all records are kept in Jersey; (b) it has adequate levels of people, expenditure and assets in Jersey; and (c) all core income-generating activities (CIGA) are carried out in Jersey (and to the extent outsourced to another person in Jersey the partnership is able to monitor and control those activities).
What are the penalties?
If a breach is determined for a financial period, the resident partnership is liable to a fine for that period not exceeding £10,000. A higher penalty will apply if a breach occurs in a financial period where the partnership has received prior notices. That higher fine will be an amount of up to £50,000 multiplied by the number of previous notices plus 1. In respect of any breach, the Tax Office will also be required (subject to limited exceptions) to exchange the information received with the authorities in each jurisdiction in which the partnership has its controlling partner, ultimate holding body of that controlling partner and the ultimate beneficial owner of the partnership. Additional penalties will apply to those who provide false or misleading information, or obstruct the Tax Office.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.