The Requirement to Demonstrate Economic Substance

The Governments of the Crown Dependencies, including Jersey, have published legislation that will require resident companies to demonstrate that they have “adequate economic substance in their jurisdiction”.

This legislation was passed in these jurisdictions after the EU Code of Conduct Group expressed concern over the tax policies being followed in certain non EU countries, including the Crown Dependencies, against the general concepts of transparency and fair taxation.

This legislation necessitates companies impacted by this legislation, to be directed and managed, to have adequate employees, adequate expenditure and physical presence in that particular jurisdiction and to conduct their core income generating activities there.

The substance requirement introduced by the legislation applies only to corporate taxpayers that are “resident companies”.  Residence in Jersey is being determined by reference to the Income Tax (Jersey) Law 1961 (as amended) and includes Non-Jersey Companies managed and controlled in Jersey.

The Law does not affect trusts, partnerships, foundations and companies that have no gross income with regards to a “relevant activity”, although general partners and trustees (i.e. PTCs) that are themselves companies may be caught.

It should be noted that the legislation has been approved by the governing legislative body in Jersey and is effective for company accounting periods commencing 1stJanuary 2019.

The following businesses are deemed to be relevant sectors, for purposes of the legislation:

  • banking
  • insurance
  • shipping
  • fund management
  • financing and leasing
  • headquartering
  • operation of a holding company
  • holding intangible property
  • distribution and service centre business

The legislation goes onto impose three tests if the company falls into one of these sectors, although a company is not required to meet these tests if it has no gross income in relation to a relevant activity carried out by it.


  1. The company is directed and managed in Jersey.

The company needs to demonstrate the following:

 a) That it holds board meetings in Jersey;

 b) That the majority of Directors are physically present at these meetings;

 c)  That the taking of minutes and strategic decision making occurs at these meetings;

 d) That the Directors are able to evidence their knowledge and expertise in relation to the Company and its affairs;

 e)  That the minutes and records of the Company are retained in the Jurisdiction.


  1. Conducts Jersey Core Income Generating Activities (CIGA)

The Company needs to conduct core-income generation activity in the jurisdiction. What this means in practice will vary from one relevant sector to another. Examples of potential CIGA are set out in the legislation.

Although a relevant sector company can outsource some or all of its CIGA, the CIGA must still be undertaken in Jersey and subject to adequate oversight by the company. In addition the service providers’ resources themselves be taken into account when considering adequacy.


  1. Meets adequate physical substance requirements in relation to level of relevant activity carried out in Jersey.

The third requirement is that a relevant sector company needs to demonstrate that in relation to the level of activity, there are:

 a) An adequate number of qualified employees in relation to activity physically present in Jersey, (be they employed direct by the company or outsourced to another entity resident in the jurisdiction);

b) An adequate level of cost expenditure in Jersey proportionate to the income/revenue flowing into the Company; and

c) An adequate level of physical assets in Jersey.


Who determines if the company is a relevant Sector Company?

The Jersey tax authorities will make their determination from the additional information contained within the new company tax returns which are being introduced, once submitted. First submissions are due in January 2020.


Sanctions for Non-Compliance

Sanctions are progressive and include financial penalties and the exchange of information to foreign tax authorities in the jurisdiction where an immediate parent company resides.

The ultimate sanction for repeated non-compliance would be for the relevant Sector Company to be struck off the companies register.

For further and more detailed information about the new law follow the link to the legislation of the Taxation (Companies-Economic Substance) (Jersey) Law 2019


Actions to this proposed legislation being made by Bond Trust Company Limited 

Bond Trust is conducting a thorough review of its client base to ascertain which of its Jersey or non-Jersey resident Companies controlled from Jersey fall within scope of the new Economic Substance legislation. 

Additional guidance on the provisions of the legislation and its interpretation has been released by the relevant Department of the Government of Jersey. This guidance provides clarity on the interpretation of the legislation, enabling Bond Trust and its appointed advisors to move forward with the review of all Companies under administration.

In the meantime, should you have any questions or concerns about this new legislation, please feel free to contact your client director. 

Where a company clearly falls within the ambit of the legislation, we will be contacting you to discuss possible remedial action in relation to the company to counter any negative consequences that might arise from this new legislation.