Basis for assessing the residency of Jersey companies in the Income Tax (Jersey) Law.

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A decision made (21/11/2006) regarding the basis for assessing the residency of Jersey companies in the Income Tax (Jersey) Law.

Subject:	The basis for assessing the residency of Jersey companies in the Income Tax (Jersey) Law.
Decision Reference:	MD-E-2006-0203		Exempt clause(s):
Type of Report: (oral or written)	Written		Person Giving Report (if oral):	N/A
Telephone or e-mail Meeting?	N/A		Report File ref:
Written report – Title	The basis for assessing the residency of Jersey companies in the Income Tax (Jersey) Law – proposed amendment.
Written report – Author (name and job title)	Paul de Gruchy, Director, Finance Industry Development
Decision(s): To approve the Proposition annexed to the Report, and instruct the Director – Finance Industry Development to lodge the Proposition as an Amendment to the Income Tax (Amendment No.26) (Jersey) Law 200-.
Reason(s) for decision: To clarify the Income Tax (Jersey) Law to confirm that a Jersey company may be regarded as not being tax resident in the Island by the Comptroller if the management and control of the company is carried out in another jurisdiction that has a standard rate of tax applicable to companies resident in that jurisdiction equal to or greater than 10%. This change will enable Jersey companies to be utilised in a wider range of activities, while minimising the risk of Jersey companies seeking to avoid Jersey tax through moving their management and control.
Action required: Paul de Gruchy to request that the Greffe lodge the Proposition for discussion by the States on 5 December 2006.
Signature: Senator P.F.C.Ozouf (Minister)		Date of Decision: 21 November 2006

Basis for assessing the residency of Jersey companies in the Income Tax (Jersey) Law.

MINISTER FOR ECONOMIC DEVELOPMENT

THE BASIS FOR ASSESSING THE RESIDENCY OF JERSEY COMPANIES IN THE INCOME TAX (JERSEY) LAW – PROPOSED AMENDMENT

1 THE ISSUE

1.1 The Treasury Minister has lodged the Income Tax (Amendment No.26) (Jersey) Law 200- for consideration by the States on 5 December 2006. This amendment to the Income Tax Law brings into effect the changes described in the 2007 Budget, which is due to be debated at the same time.

1.2 It is proposed that the Proposition, a copy of which is annexed to this Paper, be lodged by the Minister. The Proposition sets out an amendment to the Income Tax Law in relation to the basis for assessing whether a Jersey company should be regarded as tax resident in the Island for the purposes of the Income Tax Law.

2.1 The issue addressed in the Proposition was under discussion with Treasury prior to the Budget being lodged. However, as it is a fiscally neutral proposition, it was not something that could be finalised in the tight deadline prior to the Budget being lodged, and it has only been possible to finalise the wording of the Proposition subsequent to the lodging of the Budget.

2.2 It is recommended that the Minister approve the Proposition, and instruct the Director, Finance Industry Development, to lodge the Proposition at the Greffe at the earliest opportunity, for consideration by the States on 5 December 2006.

2 BACKGROUND

2.1 Article 123 of the Income Tax (Jersey) Law currently provides that:

(1) Except as provided by Article 123A of this Law [relating to exempt companies] a company incorporated under the Loi (1861) sur les Sociétés à Responsabilité Limitée or the Companies (Jersey) Law 1991 shall be regarded as resident in Jersey, and a company incorporated outside the Island shall be regarded as resident in the Island if its business is managed and controlled in the Island.

2.2 The general view is taken that this provision means that all Jersey companies are tax resident in the Island. An exempt Jersey company, however, will ordinarily not be liable for any tax provided it pays its annual exempt company fee, but it will still be regarded as tax resident in the Island.

2.3 There are considerable commercial opportunities available if it could be provided that in certain circumstances a Jersey company was not resident in the Island. Such a company could then be used in a wide range of transactions that would indirectly provide significant tax revenues to the Island, through the services provided by Jersey professionals and financial services businesses to such companies. Such a company would not be exempt, and so would not be liable to pay the exempt company fee, but would be non-resident on the basis that its management and control is carried out in another jurisdiction. It is likely that the company would pay tax in that jurisdiction.

2.4 Exempt companies will no longer exist once zero/ten legislation comes into force. There will, therefore, be a loss of £600 per year to Treasury for each company that follows the “non-residency” route rather than the exempt company route in order to ensure that the company is not liable for tax in Jersey prior to the introduction of zero/ten, when such companies would become generally subject to a zero rate of tax in any event. However, this loss is expected to be significantly exceeded by the taxation levied upon the profits in the Island generated by providing services to such companies.

2.5 Clearly, it is important that tax revenues are not threatened by Jersey companies simply seeking to move the management and control of a Jersey company off Island, and thus claim that as a result the company has become non-resident. It is therefore proposed that for a company to be regarded as non-resident its management and control must be carried out in a jurisdiction where the general rate of tax applicable to the company in question is equal to or greater than 10%. This will ensure that only companies seeking to be resident in another jurisdiction for bona fide commercial reasons, rather than simply with a view to reduce their tax liability in Jersey, will wish to utilise the “non-residency” route. The risk of investment companies with Jersey resident shareholders moving their management and control off Island in order to reduce liability to Jersey tax must be judged as slight, for the simple reason that such companies are not likely to be used in any event by persons who are primarily motivated by a desire to reduce their liability for Jersey income tax.

2.6 It was originally intended that this amendment to the Income Tax Law would be proposed by the Treasury Minister as part of the Budget legislation. However, due to pressure of time, coupled with the fact that it was economic development, rather than fiscal demands that was the real driver behind this proposed change, it was not possible to finalise the precise wording of this amendment prior to the lodging of the Budget.

3 RECOMMENDATION

3.1 It is recommended that the Minister approve the Proposition, and instruct the Director, Finance Industry Development, to lodge the Proposition at the Greffe at the earliest opportunity, for consideration by the States on 5 December 2006.

PAUL DE GRUCHY

Director, Finance Industry Development

17 November 2006