A draft law to extend Jersey’s economic substance principles to partnerships has been lodged with the States Assembly. If passed, the new rules will apply to all forms of partnership that are resident in Jersey and generating gross income from a ‘relevant activity’.
What partnerships are in scope?
The term ‘partnership’ is broad and includes incorporated limited partnerships, limited liability partnerships, limited partnerships, separate limited partnerships, foreign limited partnerships and any other arrangements subject to assessment under Article 74 of the Income Tax (Jersey) Law 1961 (i.e. general partnerships).
Are any partnerships out of scope?
Notably, partnerships that are collective investment funds continue to be out of scope. So too are partnerships made up of individuals who are all subject to personal income tax in Jersey, as well as wholly domestic partnerships (i.e. partnerships not undertaking business outside of Jersey and not part of a multinational group).
How is residence determined?
The residence of a partnership for the purposes of the proposed law will be determined by its place of effective management. A partnership’s place of effective management is the location where key management and commercial decisions necessary to the conduct of the partnership’s business as a whole are made. A partnership will have only one place of effective management at any one time, even if there is more than one place where management decisions are made. A foreign limited partnership will be considered resident in Jersey if its place of effective management is in Jersey.
In the context of limited partnerships, ‘management’ is likely to mean decisions of the general partner. For limited liability partnerships, the managing partners will be regarded as its governing body.
What are the ‘relevant activities’?
The relevant activities of a partnership that will bring it in scope of the new law are broadly as per the relevant company substance activities. They are:
- 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.
Satisfying the economic substance test
In-scope partnerships will be required to be managed in Jersey and to carry on their core income generating activities in Jersey, with an adequate number of people, expenditure and physical assets in the island.
A partnership can meet these requirements if, amongst other things, it holds meetings in Jersey at adequate frequencies, makes strategic decisions at such meetings, the members of the governing body have the necessary knowledge and expertise to discharge their duties, and the records of the relevant partnership are kept in Jersey.
Reporting requirements for partnerships are anticipated to change. It is likely this will include a requirement that partnerships register with the Taxes Office in Jersey and file an annual confirmation, including (where necessary) economic substance information.
If the law comes into force, it is anticipated the penalty regime will initially mirror that which applies to companies. An initial failure will result in a penalty of up to £10,000, rising to as much as £100,000 in the next financial period. Penalties then increase by a maximum of £50,000 for each consecutive period of failure thereafter.
Partnerships may also be susceptible to an enforced winding-up or dissolution.
The new law is still under debate. However, if approved, it is likely to have effect from 1 July 2021 as partnerships formed after this date will be in scope from the date of their formation. For all partnerships in existence before 1 July 2021, they will first be in scope of the law for accounting periods commencing on or after 1 January 2022.
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