The Taxation (Partnerships - Economic Substance) (Jersey) Law 202- was lodged with the States Assembly on 18 May 2021 and, if passed, is expected to come into effect from 1 July 2021 (with a six month transition period to 1 January 2022 for partnerships established before 1 July 2021).
The existing Economic Substance legislation applies to companies tax resident in Jersey. The extension of the rules to partnerships is part of Jersey's ongoing political commitment to the EU Code of Conduct Group.
The substance requirements apply to resident partnerships (including incorporated limited partnerships, limited liability partnerships, limited partnerships, separate limited partnerships, Jersey-resident foreign limited partnerships and general partnerships) that carry on certain specified geographically mobile activities, including fund management business, finance and leasing business and holding partnership business.
Where a partnership does not have separate legal personality, its general partner (or, if it has more than one general partner, all its general partners jointly) will be liable for any penalty for breach of the law.
Resident partnerships are in scope of the law where they have gross income in relation to their relevant activities. Resident partnerships are those where key management and commercial decisions that are necessary for the conduct of the partnership's business as a whole are in substance made in Jersey. The law provides that a partnership will have one place of effective management at any one time (even if there is more than one place where management decisions are made). Jersey partnerships will be deemed resident partnerships automatically unless their place of effective management is in another jurisdiction that either has an income tax rate of at least 10% or an equivalent economic substance test.
The Crown Dependencies are expected to issue guidance notes once the law comes into force, in particular on the meaning of "place of effective management".
The following resident partnerships are outside the scope of the law:
- resident partnerships that are investment fund vehicles (including collective investment funds and private funds);
- resident partnerships that are not part of a multinational group and do not undertake business activities outside of Jersey; and
- resident partnerships where all the partners in the partnership are individuals who are subject to income tax in Jersey.
The law establishes an economic substance test which require partnerships to demonstrate that:
1. They are managed in Jersey in relation to that activity:
- meetings of the partnership's governing body (all of whom must have the necessary knowledge and expertise to discharge their duties as a board) must be held in Jersey at adequate frequencies, having regard to the level of decision making required;
- a majority of that governing body must be physically present in Jersey at those meetings;
- records are kept of the strategic decisions of the partnership made at those meetings; and
- such records must be retained in Jersey (or, if in electronic form, maintained and accessible in the Island).
2. They have adequate employees, expenditure and physical premises
Having regard to the level of relevant activity carried on in Jersey, the partnership has adequate:
- people performing work in relation to the activity of the partnership who are physically present in Jersey;
- expenditure in Jersey; and
- physical assets in Jersey (e.g. dedicated premises or access to meeting rooms).
In this context, "people performing work" is not limited to partners or persons employed by the resident partnership, but includes persons employed by the resident partnership or another entity or partnership and whether on temporary or long-term contracts. It is anticipated that the resources of any outsourced service provider in Jersey will also be taken into consideration.
3. All of the partnerships' "core income-generating activities" (CIGA) are carried out in Jersey
A resident partnership's governing body must conduct all of its CIGA in Jersey and must be able to monitor and control any CIGAs carried out by another entity or partnership in Jersey.
The law does not prohibit the outsourcing of activities to other entities, provided the partnership's governing body monitors and retains the ability to control the activities of service providers in Jersey.
Implications and Sanctions
The law provides sanctions for non-compliance including financial penalties, reporting to relevant tax or regulatory authorities and the ability to make applications to the Royal Court of Jersey for a winding up order in relation to certain partnerships.
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.