Treatment of companies managed outside Jersey

Tax residency of Jersey companies

Jersey companies may (contrary to the default position) be treated as exclusively tax resident in jurisdictions other than Jersey pursuant to Article 123(1)(a) of the Income Tax (Jersey) Law 1961. The criteria for a Jersey incorporated company to be resident (for taxation purposes) in a jurisdiction other than Jersey are as follows:

• The company must be centrally managed and controlled in a jurisdiction outside Jersey.
• The company must be tax resident in the other jurisdiction.
• The highest rate of corporation tax in the other jurisdiction must be 20% or above.

The legislation permits Jersey companies to become tax resident for legitimate commercial reasons in jurisdictions outside Jersey. This has permitted Jersey companies with tax residence elsewhere to be used in a wide range of transactions. This is particularly important in the funds, private equity and real estate investment sectors, where UK tax residency can be a decisive factor in a company’s eligibility for certain favourable UK tax treatments (eg, in relation to real estate investment trusts).

Recent UK changes

In its July 2015 Budget, the United Kingdom announced that it will reduce its corporation tax rate to 19%. This change – due to come into force in 2017 (and reduced to 18% in 2020) – could mean that the above Jersey legislation may no longer be effective for one of Jersey’s key markets.

Without any changes to Jersey’s tax legislation, there is a danger that, for example, Jersey companies which are managed and controlled in the United Kingdom or elsewhere could be deemed to be dual resident investment companies (DRICs). This would have significant consequences in the United Kingdom – particularly due to the additional changes to the DRIC legislation as a result of the European-wide base erosion and profit shifting initiative.

Proposed Jersey changes

In order to preserve the status quo and ensure stability for both existing and new clients using Jersey companies, the government has confirmed, in writing, that it is committed to identifying appropriate legislative changes to ensure that Jersey companies managed and controlled in the United Kingdom or elsewhere outside Jersey will not be deemed to be DRICs or otherwise considered resident in Jersey.

While these changes have not yet been identified, they are expected to include a reduction of the 20% rate specified in Article 123(1)(a). Any changes will be announced on October 20 2015 as part of the 2016 Budget, and the government has committed to making the changes effective before the reduction of the United Kingdom’s corporation tax rate.

Therefore, Jersey will remain a preferred jurisdiction for facilitating international cross-border transactions, including real estate investments, holding companies, private equity structuring and joint ventures.