The Draft Taxation (Partnerships – Economic Substance) (Jersey) Law 202- was lodged on 18 May 2021. If passed, the law will bring certain partnerships within the scope of Jersey’s Economic Substance regime.
Certain Jersey tax resident companies have been subject to Economic Substance rules since 1 January 2019 and the extension of the regime has been made in response to political commitments given to the EU which, in 2020, advised that it expected Jersey and seven other jurisdictions to extend the rules to partnerships if they were to remain classified as ‘cooperative’ tax jurisdictions.
Partnerships in existence before 1 July 2021 will first be in scope of the law for accounting periods commencing on or after 1 January 2022. Partnerships formed on or after 1 July 2021 will be in scope from the date of formation.
Who’s in scope?
The Economic Substance requirements will apply to a Jersey “resident partnership” undertaking a “relevant activity” unless it is exempt.
The term partnership is broad and includes ILPs, LLPs, LPs, SLPs, foreign LPs and any other arrangements subject to assessment under Article 74 of the Income Tax (Jersey) Law 1961 (i.e. general partnerships).
Resident partnership
A partnership will be a “resident partnership” if it is formed under Jersey law, unless its place of effective management (POEM) is outside of Jersey:
- in a country or territory where the highest rate at which any company or individual may be charged to tax on any part of its income is 10% or higher; or
- the partnership is required to satisfy a test substantially the same as the Economic Substance Test.
This is a minor deviation from Jersey’s well known corporate tax residency rules and also from the existing company Economic Substance rules.
Additionally, the use of POEM (an OECD-driven international tax concept) as opposed to Central Management and Control (a common law concept) also represents a nuance which potentially affected partnerships will want to be aware of, albeit the two will often be aligned.
Non-Jersey law partnerships will also be in scope if their POEM is in Jersey.
Relevant Activities
The relevant activities broadly mirror those contained in the 2019 law applicable to companies, covering:
- Banking business
- Distribution and service centre business
- Financing and leasing business
- Fund management business
- Headquarters business
- Holding partnership business
- Insurance business
- Intellectual property business
- Shipping business
What exemptions exist?
There are more exemptions than apply for companies, including where:
- all of the partners are individuals, all of whom are subject to income tax in Jersey; or
- the partnership is not part of a multinational group and does not undertake business activities outside of Jersey.
Consistent with the company regime, there is an exemption for collective investment schemes.
Particular care should be taken with the exemptions and specifically those looking to rely on where business activities are undertaken, as this has direct crossovers with the income tax treatment of Jersey partnerships and it is crucial that consistency in reporting is achieved.
How will it work?
As with the relevant activity definition, the substance requirements for partnerships will also be similar to the current rules applying to companies.
The directed and managed test from the company regime becomes the “managed test” which is broadly aligned but we expect further clarity in due course in the form of guidance notes. The Core Income Generating Activities and People, Expenditure and Physical Assets tests are also aligned with the company rules.
What sanctions may apply?
The penalty regime for those partnerships which fail the Economic Substance Test initially mirrors that which applies to companies; the first failure can result in a penalty of up to £10,000, rising to up to £100k in the next financial period. Moving away from the company regime though, penalties then increase by £50,000 for each consecutive period of failure thereafter.
ILPs and LLPs may face being wound up or dissolved respectively.
Reporting requirements
Currently, many partnerships will not be required to file tax returns in Jersey and the reporting requirements will therefore need to be amended. This is an area Revenue Jersey is still working on but we anticipate an annual confirmation may be introduced with any tax return deadlines aligned with the corporate filing deadline of 31 December.
What action is needed
The law is due to be debated on 29 June 2021. Although amendments are possible, it is likely the law will be passed without significant change.
There are a number of actions businesses should start thinking about:
Identify in-scope entities, undertake any remedial action
As with companies in 2019, in-scope partnerships should be identified and assessed, with any remedial action undertaken during their first in-scope financial period and a revenue defence pack prepared to ensure those responsible for signing the confirmation statements and tax returns have the appropriate supporting information to do so with confidence.
Interaction with companies
There were discussions during the first company filings around whether companies with an interest in a partnership were deemed to be undertaking the activity of the partnership and therefore subject to the Economic Substance Test where a relevant activity was undertaken at partnership level. Any companies with an interest in a partnership should revisit their substance assessment to ensure only one of the company or the partnership is declaring a relevant activity going forward.
Amend existing policies and procedures
Many affected businesses have dealt with their first company filings and are now embedding substance into business as usual through appropriate policies and procedures. Those documents will need to be amended to reflect the extended regime as it applies to partnerships and to also ensure some of the subtleties, some of which are highlighted above, are appropriately dealt with.
As a concluding comment, having dealt with the introduction of Economic Substance for companies and the first substance-era tax return filings, many will have identified that early action made the process far less painful when it came to completing the tax returns further down the line. We would also encourage an ‘early bird’ approach to be adopted with the partnerships regime - definitely within the first potentially in-scope accounting period - to minimise future challenges.
Should you require any more information or assistance, please get in touch with one of the individuals listed below, or your normal PwC contact in our Channel Islands tax team.
