Economic substance – what does it mean?
In RESPONSE to concerns raised by the EU Code of Conduct (the Code Group) about profit shifting, Jersey, Guernsey and Isle of Man, along with 10 other jurisdictions, have committed to introducing new legislation by the end of 2018.
This will require companies resident in their jurisdiction to demonstrate a link between the economic activity carried out there and the economic substance which supports that activity.
The Crown Dependency governments have worked since then to develop their own new legislative framework to be in place by the end of 2018 and to take effect in respect of all companies resident in one of the CDs for accounting periods starting after 1 January 2019.
The Code Group published some guidance in a scoping paper dated 8 June 2018, which confirmed its focus on so-called geographically mobile businesses carrying on ‘relevant activities’ which are perceived to be at risk of profit shifting – intellectual property, banking, insurance, headquartering, shipping, finance and leasing and fund management.
Pure equity holding companies should be subject to reduced substance requirements on the basis that they are passive and as long as they do not carry out any of the relevant activities. The timetable is tight – it is expected that the draft law and guidance will be published in around late October or early November.
At recent Deloitte client seminars on economic substance in Guernsey and Jersey, I also reported how some companies will approach this work as part of a general review of the group’s transfer pricing policy where the focus is also on where key roles and functions are carried on. Deloitte is also supporting corporate service providers to review their client structures to determine which will be impacted and what changes may be required by the CSP in delivering its services.
What is clear is that there is little time before the new rules come into effect and so many companies are starting to work through the impact now.