There is no doubt that ‘substance’ is flavour of the month in the offshore jurisdictions. But what is it and how will it impact your offshore company?

To start with it is important to understand that the recent focus on substance was driven by the EU list of non-co-operative jurisdictions for tax purposes published in December 2017*. This identified areas of concern over tax practice and transparency and ‘invited’ relevant jurisdictions to address those deficiencies by 31 December 2018 (or be blacklisted). For the Channel Islands, where transparency and reporting are well established, the area of concern was the “existence of tax regimes that facilitate offshore structures that attract profits without real economic activity” or, in very simple terms, lack of ‘substance’ within the jurisdiction.

In line with the other UK Crown Dependencies, Jersey responded by passing the Draft Taxation (Companies – Economic Substance) (Jersey) Law which came into force on January 1st 2019. This legislation applies to all companies resident in Jersey for tax purposes and seeks to ensure that companies performing various prescribed activities generate an appropriate level of economic activity and can also demonstrate effective governance and oversight in the island. The activities are defined by the OECD’s Forum on Harmful Tax Practices** and include banking, insurance, shipping, fund management, holding companies, headquarters and intellectual property.

The most immediate impact is likely to be on ‘restricted service’ entities – companies which have a registered office address on the island but non-resident Directors and little or no local infrastructure. Where their activities are ‘relevant’ these entities will need to change, close or move onshore (relocation to another offshore location is unlikely to be an option because most have already committed to implement an equivalent substance regime). So one of the first questions to ask is - Do the company’s activities fall within the OECD definitions and if so does it still serve a valuable purpose to you?

There is no need to panic though. If this all seems complicated and potentially expensive, there is help at hand. At VG, we have worked with restricted service entities for many years and we are committed to supporting current and new clients. We understand the importance of protecting your legitimate confidentiality while meeting all relevant laws and regulations. You will, almost certainly, need specific advice if the company falls within the scope of the new law but we do offer a preliminary analysis to help make that determination and if necessary we can help you to build a revised structure that meets substance requirements.

In practice this could mean providing local directors to help demonstrate strategic and management decision-making, organising board meetings, producing accounts, performing administrative functions and retaining records, or a combination of these functions. However, whatever is needed to demonstrate that the economic substance of the company on the island is commensurate with its activities, our commitment is to offer a competitive, fixed fee for those services so that you have certainty and clarity.

Demonstrating substance is particularly problematical for companies holding, or deriving income from intangible assets, such as intellectual property. If you own or control such a company, then you need to take advice without delay. Whilst restructuring may be possible, the timeframe in which this can be implemented is limited.

In conclusion, substance is an important issue if you have an offshore company and you do need to take appropriate advice as soon as practicable. 

Key take-outs:

  • The challenge from the EU Code of Conduct Group to all the jurisdictions was to have legislation which was effective from the 1st January 2019.
  • Under the new legislation, all companies resident in Jersey for tax purposes are required to prove substance or they could be forced to close or move onshore.
  • Demonstrating substance is particularly problematical for companies holding, or deriving income from intangible assets, such as intellectual property.

Our solutions

Corporate

Our team partners with businesses of all sizes and across all stages of the corporate lifecycle, from entrepreneurs just starting out to blue chip and other major international corporations, across a variety of sectors and jurisdictions. We work seamlessly with you and your team of professional advisers to provide a diverse range of solutions.

Our Corporate solutions include:

  • Real estate
  • Debt capital markets
  • Employee incentives
  • Tailor-made solutions
  • TISE listing member services
  • Corporate administration
    • Entity establishment
    • Company secretarial
    • Accounting and reporting

Testimonials

“VG has been the Trustee of our Jersey family trust since its establishment in 2010; they have consistently excelled in their level ;of service, knowledge and diligence across all the activities of the trust. I would recommend them wholeheartedly."

Our solutions

Private Wealth

We translate and meet the needs of ultra-high-net-worth individuals and their families globally. We enact bespoke solutions for family business succession strategies, estate planning, intergenerational wealth transfer and tax efficiency optimisation.

Our Private Wealth solutions include:

  • Wealth structuring
  • Fiduciary services
  • Protector and enforcer services
  • Luxury assets
  • Family governance
  • Real estate investment services
  • Family investment companies
  • Registered office
  • Family succession
  • Philanthropy and charity

Testimonials

"I started working with my Trustee and VG in 2015. In the years that I’ve known them, communication has been straightforward; they have consistently explained both their and VG’s position and applied what seems to be the very best efforts in resolving any issues or following through on my requests. My Trustee is always a phone call away, they understand that business issues sometimes need to be addressed promptly and urgently. I feel that I am in good hands"