Crown Dependencies Economic Substance Requirements: Guidance Explained

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The scope of the new economic substance legislation for corporations has been clarified by the crown dependency Governments. The guidance confirms that going forward, companies based in any of the following UK Crown Dependencies, must continue carrying out their core income-generating activities within Guernsey, the Isle of Man and Jersey, in any relevant sector.
3 jurisdictions jointly collaborated on drafting the legislation in 2018; after EU threats of being added to the dreaded blacklist for being uncooperative tax jurisdictions. As a result, the following 3 dependencies implemented very similar statutes at the end of the 2018 financial year for an imminent 2019 implmentation on joint guidance:

The Isle of Man.
The guidance confirms that many business owners owning pure equity-holding companies will not be regarded as conducting commercial activities by passively holding investments or receiving income or gains from them.

Pure Equity Holding Companies & Fund Managers
In order for a pure equity-holding company, it has to fall outside the definition of bound by more onerous requirements, and thus be the company would have to carry out real activities that are commercial in nature; for example, activities directly linked to the sale or trading of goods, assets or services in exchange for profit.

The guidance also stipulates that intra-group financing falls within scope of the economic substance legislation, although providing trade credit on terms that do not require the debtor to pay interest is not.

Crown dependency -resident corporate fund managers (which will include corporate general partners to fund partnerships) will be in scope of the regime. This will apply to 2 requirements:

Whether the fund is adequately regulated.
Whether or not the fund is established in the relevant crown dependency or somewhere else.

CIGA: Core Income-Generating Activity
According to experts, the explanation of CIGA is the guidance’s most important statement and clarification. So, going forward income activities that generate a company’s main form of income in any relevant sector must be carried out by the company in the relevant crown dependency. It is not necessary for a company to perform all of the CIGAs in the crown dependency itself; however it must perform one of CIGAs that generates the type of income the company in question has. Jersey recently re-drafted its substance legislation to make this point more clear.

However, the guidance fails to clarify the meaning of what constitutes ‘adequate’ which is used in many key requirements as detailed in their economic substance legislation. It also fails to clarify the process that will be used by local tax officials in order to determine whether a company meets the substance requirements, despite providing more detail on the requirement for relevant corporations to be managed in the relevant crown dependency.

Further updates of the guidance are expected to be released soon, with more information to be released on companies holding intellectual property rights and the reduced substance requirements for pure equity-holding companies.