26 April 2019

Crown Dependencies release joint guidance on economic substance legislation

Earlier today, the tax authorities of Guernsey and Jersey released a new joint guidance document (along with the Isle of Man) on the application of each island's economic substance legislation. This guidance substantially builds on the initial key aspects guidance issued by the Crown Dependencies, which was updated on 21 December 2018.

Economic substance legislation has effect in both Guernsey and Jersey as of 1 January 2019, and applies to companies that are tax resident in either of those jurisdictions and are generating income from certain activities in any accounting period commencing on or after that date. As many companies are therefore already subject to economic substance requirements, this new guidance provides welcome details for aiding compliance for current and future periods.

In summary, the new guidance provides further details on the relevant activities, which help explain, in practical terms, how your business can fall within the scope of the economic substance legislation. There is also further clarification on how the economic substance test itself will be applied, with practical examples of the directed and managed test, the conducting of core income-generating activities and how employees will be counted for the purposes of the people and premises test.

Please note the guidance is a developing document that will be updated and expanded over time. Compliance for a period will be assessed by the tax authorities retrospectively following submission of your annual tax return. Given the potential severity of sanctions for non-compliance, including a progressive penalty system and the risk of being struck-off, care should be taken to ensure compliance on an ongoing basis.

Carey Olsen's taxation and substance services

Carey Olsen is equipped to advise on the implications of the legislation to your structures. Members of our taxation and substance team advise clients across all sectors on various local tax matters, including tax residence, economic substance requirements, income tax, FATCA and the OECD’s Common Reporting Standard. To help businesses ensure compliance with economic substance requirements, our team conducts substance audits on existing structures, procedures and documents to help identify any issues. 

Our team works closely with businesses to provide practical advice and tailored solutions to help remedy any gaps or other issues that could prevent compliance with economic substance requirements.

For advice on the application of economic substance requirements to any specific circumstances and how the guidance could apply, please visit out taxation and substance service page.