Implications of Coronavirus for Economic Substance and Corporate Tax Residence

The Government of Jersey's Comptroller of Revenue has confirmed that where companies' operating practices have to be adjusted in response to the COVID-19 pandemic, the Comptroller will not treat the company as having failed the economic substance test. The Comptroller has also confirmed that such adjustments will not disturb the tax residence in Jersey of foreign registered companies, provided that the changes are temporary. 

Under the Taxation (Companies – Economic Substance) (Jersey) Law 2019, certain companies that are tax resident in Jersey must satisfy the economic substance test. Companies that are tax resident in Jersey include companies that are registered, or managed and controlled, in the Island. 

Part of the economic substance test is for companies to demonstrate that they are directed and managed in Jersey in respect of their relevant activities for economic substance. The directed and managed part of the economic substance test is separate and distinct from the managed and controlled test used to determine the tax residence of foreign registered companies. 

Concerns have arisen that measures taken to prevent the spread of COVID-19, such as restrictions on travel and voluntary and mandatory social distancing, could cause difficulties for companies required to demonstrate that they are directed and managed, or managed and controlled, in Jersey.  The Comptroller has accordingly given some helpful reassurance on these issues. 

Where directors would normally travel to Jersey to be physically present at board meetings, but to avoid travel or self-isolate, meetings are temporarily held virtually [or by telephone], the Comptroller has confirmed that this would not be regarded as failing to meet the economic substance test. 

The Comptroller has similarly confirmed that for foreign registered companies that are tax resident in Jersey on the basis of being managed and controlled in the Island, temporary changes of procedure made because of COVID-19 would not change the determination of corporate tax residence as it stood before the pandemic. 

Jersey tax resident companies that have adjusted their operating procedures as a result of COVID-19 should clearly record in their books and records, and particularly in board minutes for meetings where directors have not been physically present due to implementation of such measures, the operating procedures that are being applied. If companies intend to hold virtual or remote meetings, they should also check that virtual meetings (including meetings by telephone) are permitted by their Articles of Association. 

Companies must also be mindful of the consequences of any adjustments to their operating procedures in jurisdictions other than Jersey, which may not take into account the COVID-19 pandemic when assessing the tax residence of companies. 

Walkers has a dedicated Regulatory & Risk Advisory Group that can offer legal advice and guidance in connection with all aspects of the Channel Islands' regimes for economic substance.

Jonathan HeaneyManaging PartnerT +44 (0)1534 700
Nigel WestonPartnerT +44 (0)1534 700
Christopher ReedGroup Partner*T +44 (0) 1534 700
Leanne WallserGroup Partner*T +44 (0) 1534 700
Tom FothergillSenior CounselT +44 (0) 1534 700

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