Q&A: A jurisdiction of substance

Leading figures in Jersey’s funds market tell Nicholas Pratt about the importance of new economic substance legislation and its implications in terms of corporate governance and jurisdiction decisions.


What does the new law mean for fund managers?
The law requires fund managers in Jersey to pass an economic substance test. This means a number of things, such as ensuring the fund manager is directed and managed in Jersey, has adequate resources on the island and conducts core income-generating activity on the island.

How does the new law complement the OECD’s base erosion and profit-shifting (Beps) project?
Jersey has been a long-time supporter and implementer of the OECD’s Beps project. Jersey was one of the earliest adopters of OECD’s Multilateral Instrument (MLI), designed to stop multinationals from shifting profits between countries to avoid paying tax. It is worth noting that as part of the EU’s Code of Conduct Group (CoCG) assessment process, Jersey was assessed on its implementation of Beps measures. No concerns were raised by the (CoCG) regarding Jersey’s standards of tax transparency and implementation of anti-Beps measures.

How has the industry responded to the new law?
The overwhelming message from industry is to confirm that Jersey is a jurisdiction of substance, and that having legislation in place helps us to demonstrate this. Jersey has always looked to be a good global citizen and a good neighbour to the EU. The recent whitelisting recognises this policy and was very warmly welcomed by industry.

Will the substance measures impact jurisdictional decisions?
The clear experience so far is that economic substance has had a positive effect on Jersey’s attraction as a funds domicile. It has been widely considered that Jersey’s strong regulatory environment has meant that fund managers already view Jersey has a jurisdiction where they will have substance. In comparison to other similar jurisdictions, the Jersey industry seems very well able to satisfy the economic substance requirements and indeed to absorb more substance where it is needed.


What does the new law mean for fund managers?
The legislation – which is similar to laws passed in other offshore jurisdictions in response to pressure from the EU CoCG – requires in-scope entities to demonstrate economic substance in the jurisdictions in which they are tax-resident.

Fund managers will need to demonstrate real presence in Jersey, with an emphasis on adequate expenditure, premises and employees in Jersey. In addition, they will need to carry out certain core income-generating activities in Jersey.

Fund managers should also review outsourcing arrangements to determine whether the third-party service provider agreements in place enable the fund manager to meet the “directed and managed” tests set out, particularly in relation to provision of office space and appropriate access to sufficiently senior employees. We anticipate further guidance – in the form of detailed, formal guidance notes – on the precise definition of activities to fall within the scope of the law, and the definition of adequacy in respect of employees, expenditure and premises under the tests.

How will governance change in Jersey?
Jersey’s fund management industry has been built on a strong corporate governance model, so the industry is well placed to respond to the requirements of the new law. We expect an increased demand for high-quality non-executive directors, but otherwise we would hope that compliance with the new law will not present significant challenges for the majority of Jersey’s fund managers.

How has the industry responded to the new law?
The funds industry – including legal advisers – have collaborated and consulted with the government on its response to the EU CoCG’s demands and has advised clients on the requirements of the new law. Although we are still awaiting formal guidance notes on the precise interpretations of how “adequate” substance will be measured in respect of core income-generating activities, there is already significant work that can begin, including reviews of structures and third-party outsourcing agreements.


What changes should managers expect as a result of the new law?
I think this is likely to depend to some extent on the asset classes of respective funds. For real estate and private equity, for example, it may be that where fundamental decisions about investment criteria, preferred jurisdictions, and so forth are typically made at board level, little should change for funds that have already been taking and following advice about where and where not to make those decisions. For hedge funds and others with more liquid portfolios, though, it may be necessary to consider the extent to which discretion can be granted for day-to-day transactional matters outside the jurisdiction. From Jersey’s perspective, I can envisage more day-to-day activities within certain sectors being performed on-island. Greater specialisms will undoubtedly develop locally as market needs dictate.

What challenges does the new law present?
In addition to the policy objective of maintaining Jersey’s reputation as being at the forefront of international standards on transparency and regulation, it has been very important that – while having teeth – the new regime does not result in an unmanageable amount of red tape and seemingly endless time spent on compliance. It would be ironic if, with an island of limited resource in terms of qualified professionals with the requisite skill-sets, legislation tied up the very people who should be conducting core income-generating activities on compliance and reporting functions that are, by their nature, administrative. While people are taking the new rules very seriously, they are not, in my view, taking their eyes off the ball in terms of their fundamental commercial operations and service to clients. The focus is on best practices and maintenance of adequate records of those practices.

Will the new laws make Jersey more or less attractive as a domicile?
This is a difficult one to call and it is important not to be seen as boasting about Jersey’s status as a fully cooperative jurisdiction on tax matters as recently announced by the EU Council of Ministers. That said, we should applaud the individuals involved in discussions with the EU last year and drafting the legislation for achieving a balanced approach that I believe adds to the island’s jurisdictional credentials. I certainly do not see the new regime as making Jersey less attractive. In terms of possible company migrations to Jersey, we are already seeing this in some instances where client structures, investors, or asset locations dictate.

As a practical matter, some funds less focussed on Europe may not care too much what the EU thinks about jurisdictions within their structures. For others with a more global spread of investments or investors where Europe does matter, though, consistency may favour centralising in a single jurisdiction and in those situations, it would seem that Jersey and the other crown dependencies have some competitive advantage as things currently stand in terms of EU white, grey and blacklists. 

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