Friday, November 8, 2019

Economic substance requirements in Jersey and Guernsey

Jersey and Guernsey have passed new legislation introducing substance requirements for Jersey and Guernsey companies. This follows a period of consultation and close engagement with other jurisdictions and organisations.

The respective legislations came into force in each island on 1 January 2019. They have been designed to address concerns raised by the EU Code of Conduct Group that companies could be used to artificially attract profits that are not commensurate with economic activities and a substantial economic presence in the respective islands.

Many of the practical elements of the legislation will already be applied as a matter of course by companies in Jersey and Guernsey. These new rules have therefore been welcomed by practitioners and industry as representing the opportunity to further cement Jersey and Guernsey’s respective reputations as well-regulated, compliant and transparent jurisdictions. 

The Governments of Jersey and Guernsey have worked alongside the Government of Isle of Man to produce first level guidance notes originally issued in November 2018. More detailed guidance notes looking at implementation in relation to specific sectors were subsequently published in April 2019. These guidance notes are acknowledged to be a living and breathing document and will therefore be updated over the course of time.

Who is affected?

From 2019 substance requirements have been introduced for:

  • Jersey/ Guernsey resident companies;
  • carrying on ‘relevant activities’;
  • that are in receipt of gross income from the relevant activities.

Any Jersey/ Guernsey incorporated companies or foreign incorporated companies that are controlled in Jersey/ Guernsey that carry on any of the following activities are affected by the new rules. These companies will need to demonstrate that they have sufficient substance in Jersey/ Guernsey for accounting periods beginning on or after 1 January 2019. The ‘relevant activities’ are:

  • Banking business
  • Insurance business
  • Fund Management business (this does not include companies that are Collective Investment Vehicles)
  • Finance & leasing business
  • Headquarters business
  • Shipping business
  • Holding company business (a pure equity holding company)
  • Intellectual property holding business
  • Distribution and service centre business

The Substance Requirements

  • Directed and managed

A requirement to demonstrate that the company is directed and managed in Jersey/ Guernsey, in relation to the relevant activity. This includes holding board meetings locally that record the making of strategic decisions at the meeting, with directors who have the necessary knowledge and expertise to discharge the duties of the board.

  • Conducting core income generating activities

A requirement to demonstrate that the company conducts core income generating activities (“CIGA”) in Jersey/ Guernsey. The law provides a list of activities that may be regarded as CIGA for each relevant activity, although the list is not exhaustive. Where a CIGA is outsourced to another company, the relevant company must be able to demonstrate that it has adequate supervision of the outsourced activities and that those activities are undertaken on the Island. Some companies may undertake or outsource all or part of an activity outside of the Island. If that activity is not part of the CIGA, this will not affect the company’s ability to meet the substance requirements (for example, back office functions, such as IT support). In addition, the substance requirements do not preclude companies seeking expert advice or engaging specialists in other jurisdictions. However, the income subject to tax in the Island must be commensurate to the CIGA undertaken in the Island.

  • Adequate people, expenditure and physical assets

Having regard to the level of relevant activity carried on in Jersey/ Guernsey, there are an adequate number of employees in Jersey/ Guernsey, adequate expenditure incurred and there are adequate physical assets in Jersey/ Guernsey. The term ‘adequate’ is not defined and therefore has its ordinary meaning. What is adequate for each company will be dependent on the particular facts of the company and its business activity.


A formal hierarchy of sanctions have been introduced for non-compliance ranging from £3,000 for failure to submit a return or incomplete disclosure to a penalty of up to £100,000 for persistent non-compliance and failure to enact remedial measures.

Exchange of information

Where a company has not met the economic substance test the Comptroller (Jersey)/ Director (Guernsey) must provide information to the appropriate competent authority. i.e. generally, the authority in the EU where the holding company/ultimate holding company/beneficial owner resides.

For high risk IP companies, there is a rebuttable presumption that the company has failed the substance requirement as the risks of artificial profit shifting are considered to be greater. As a result, the information contained in the income tax return will always be exchanged to the above authorities. To rebut the presumption and not incur further sanctions, a high risk IP company will have to produce material which explains how the development, enhancement, maintenance, protection and exploitation functions have been under its control and that this has involved people who are highly skilled and perform their core activities in the Island.

New annual tax reporting for affected companies

The corporate income tax return process for 2019 will be enhanced to enable companies to report relevant information in the return. The information to be reported may be quite substantial, depending on the specific circumstances and includes:

  • Business/income types in order to identify the type of relevant activity;
  • Amount and type of gross income by relevant activity;
  • Amount of operating expenditure by relevant activity;
  • Confirmations and answers to ‘directed and managed’ questions;
  • Details of premises – business address;
  • Number of (qualified) employees;
  • Confirmation of the CIGA conducted for each relevant activity;
  • The financial statements; and
  • Confirmation of whether any CIGA have been outsourced and if so relevant details.

Next Steps

Although many Jersey companies will already be carrying out many of the aspects of the new rules, company directors should consider the wider impact of the substance legislation to determine whether they need to put in place further measures to satisfy the regulations.

For more information please contact David Osborne, Head of Tax at Baker Tilly Channel Islands, on  or DL: +44 (0)7829 727549

Disclaimer: Statements and opinions expressed in articles, reviews and other materials herein are those of the author(s).

While every care has been taken in the compilation of this information and every attempt made to present up-to-date and accurate information, we cannot guarantee that inaccuracies will not occur.


Baker Tilly Channel Islands Limited will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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