Jersey offshore tax and legal regimes

The term 'offshore' is not used in Jersey legislation or in describing company forms. Non-residence has been the key criterion for obtaining offshore tax treatment. Normally, non-resident tax treatment is given to foreign income, while income arising in Jersey is taxed more highly.

The main forms useful for offshore operations in Jersey include the Limited Partnership and Trust, and until recently the International Business Company and the Exempt Company. However, the IBC is being phased out in accordance with Jersey’s commitment to the ‘Rollback’ provisions of the EU Code of Conduct for Business Taxation. Benefits for existing beneficiaries of the IBC regime will be progressively extinguished by no later than the December 31, 2011. Meanwhile, no new Exempt Company formations have been possible since June 3, 2008, under recently introduced reforms to Jersey's corporate tax system (see below).

It became clear in May 2002 that Jersey, along with its fellow UK dependent territories Guernsey and the Isle of Man, would agree to be part of the EU's information-sharing regime, whereby financial institutions are obliged to pass details of income on investments by nationals of EU member states to their home tax administrations. The EU finally began information-sharing in 2005, and after some hesitation, Jersey decided to opt for a withholding tax on the Swiss model. This withholding tax became effective from July 1, 2005, initially at a rate of 15%. This rate increased to 20% from July 1, 2008 and will rise to 35% on July 1, 2011.

Jersey's Comptroller of Income Tax reported in mid-2006 that GBP13 million had been collected in withholding tax revenues from bank deposits in the first six months of the directive. For the year 2007, Jersey paying agents retained and passed to the Comptroller a total of GBP34.98 million of withholding tax. This figure increased slightly in 2008, to GBP36.62m.

Under the terms of the agreements entered into with each EU Member State, 75% of the tax retained is sent to the individual Member States concerned and the remaining 25% is retained by the Comptroller of Income Tax.

In November, 2002, in response to competition from other jurisdictions, including the Isle of Man, and with an eye to the EU's 'Code of Conduct' Committee, the authorities announced plans to reduce the rate of income tax on corporations in Jersey to zero. Financial institutions continue to be liable to income tax at a rate of 10%. The Finance and Economics Committee published its Fiscal Strategy proposals in February 2005 and these were approved by the States Assembly in May that year. The States agreed to introduce a broad-based, 3% Goods and Services Tax (GST) in 2008 to compensate for the loss of revenue caused by the elimination of business tax.

The 'zero/ten' tax system was introduced on January 1, 2009 by the Income Tax (Amendment No. 28)(Jersey) Law 2007 and the Income Tax (Amendment No. 29)(Jersey) Law 2007.

For the purposes of the 10% tax rate, the new tax law defines a ‘financial services company’ as one registered, or holding a permit, by virtue of various Laws administered by the Financial Services Commission. The 10% rate applies to the following entities:

All 'non-financial services entities' are liable for the 0% standard corporate tax rate, excluding utility companies, which pay income tax at 20%.

All companies resident for tax purposes in the Island prior to June 3, 2008, switched to a tax rate of either 0% or 10% for the year of assessment 2009 onwards. However, a company that becomes resident for tax purposes in the Island on or after June 3, 2008, will be taxed at either a 0% or a 10% rate immediately. Such companies are unable to elect for exempt company status after this date.

Jersey's 0/10 corporate tax regime may prove to be short-lived, however, due to concerns expressed by the EU that it does not adhere to the 'spirit' of the Code of Conduct on Business Taxation. In common with Guernsey and the Isle of Man, the Jersey government has announced a comprehensive review of the island's fiscal strategy, with a view to introducing further changes to the tax regime.

The findings of the review, to be carried out during 2010, will be finalised in time for inclusion in the 2011 budget.

“The FSR will review all taxes and charges including personal income tax, GST, duties and, importantly, our social security contributions. Any tax options coming out of the review will be assessed for efficiency, competitiveness, who pays, fairness, the cost of collection and revenue stability. Islanders will be consulted on the options and their responses will help formulate any proposals for change," announced Phillip Ozouf, Jersey’s Treasury Minister, in the 2010 budget, delivered in December 2009.

“While I am not going to rule anything in or anything out, and I believe that our success has been built on low taxes and high economic growth, members must appreciate that in trying to generate as much revenue as possible from export services, and particularly financial services, we must remain internationally competitive and protect jobs.”

“A key part of the FSR is a review of business taxation. This was always intended to be part of the Review but clearly recent events have increased our focus on this area. I am conscious that recent press speculation has created uncertainty in the finance industry and it is important that I respond to this."

Ozouf emphasized, however, that the 0/10 regime has not been found to be non-compliant with the EU Code of Conduct on Business Taxation.

“We do however understand that certain EU Member States have questioned whether 0/10 could be interpreted as being outside the ‘spirit’ of the Code,” he said.

The following information describes the situation in Jersey prior to the introduction of the 'zero/ten' tax reforms in 2009.

Jersey Forms of Offshore Operation

Jersey Tax Treatment of Offshore Operations

NB: This section describes the situation that obtained prior to the introduction of the 'zero/ten' regime.

See Domestic Corporate Taxes for the general principles of Jersey corporate taxation, which also apply to offshore entities.

IBCs are subject to a minimum annual tax liability of GBP1,200. The diminishing sliding scale applicable to the 'international income' of IBC's is as follows:

Profit up to GBP3m	2%
The following GBP1.5m	1.5%
The following GBP5.5m	1.0%
Thereafter	0.5%

In common with many offshore jurisdictions, Jersey allows its International Business Companies (which have to be owned by non-residents who have declared their beneficial ownership) to set their own rates of tax, with a minimum of 2%, in order to climb over the bar of any minimum tax rate specified in the owner's country of origin.

'Designer' taxation was already permitted informally in Jersey, but was regularised by the 1998 Finance Act. Unfortunately for Jersey, this was the year in which the OECD started its pogrom against offshore jurisdictions, and in which the UK Treasury was preparing a battery of measures against offshore, including a ban on 'designer' taxation, offshore mixing, and other techniques used by companies with foreign income flows.

In 2001 the UK Government finally allowed Jersey's 1998 Finance Act to receive royal assent, after holding it up for two years. Even though a UK company is unable to use a 'designer' tax through Jersey, the island's rules are still useful to companies from other countries.

Exempt companies pay a fee of GBP600 per annum while they are exempt. Income arising in the island from an 'established place of business' will be taxed at 30%. Holding directors' meetings, issuing invoices and other minor administrative tasks will not be caught by this provision. Interest received resulting from Jersey banks is counted as international income. There are no withholding taxes on dividends, interest, royalties or other payments made by exempt companies. Collective investment companies can have exempt status, and Jersey residents may hold their shares.

Foreign partnerships are not liable for tax on foreign income; however assessments may be made on the firm in the name of resident Jersey partners for the profits of trading operations in Jersey. Limited partnerships are not subject to income tax assessment; but their resident partners are liable to tax on their share of the whole of the partnership's income; non-resident partners are liable on Jersey income only (as usual, excluding Jersey bank interest).

Captive insurance companies can be exempt, but they may need to demonstrate that there is economic benefit to the island.

Trusts with non-resident beneficiaries are usually (by concession) exempted from Jersey income tax on income arising outside the island and on Jersey bank interest. If some of the beneficiaries or life tenants are Jersey residents, the picture becomes more complicated, and exemption may be partly or wholly lost.

Jersey Taxation of Foreign Employees of Offshore Operations

This section refers to the taxation of foreign employees of non-resident operations and International Business Companies; see Domestic Personal Taxes for the general principles of individual taxation in Jersey, which also apply to the resident employees of non-resident entities. There is in fact no distinction between the employees of resident or non-resident operations. It is a question of individual status. Most types of compensation and benefit paid to employees are taxable; there are no special privileges or exemptions for expatriate workers.

There is no statutory definition of residence. Jersey often follows the UK in this respect. Normally, an individual is resident if he spends more than six months on Jersey in any one year, or more than 3 months on average in each of 4 consecutive years. If the individual has a place of abode in Jersey, the rules are tighter.

Non-residents are liable to pay Jersey income tax only in respect of income arising in Jersey or from Jersey sources. Commonwealth or EU citizens may claim proportional allowances in respect of Jersey income. By concession, Jersey bank interest is not taxed in the hands of non-residents. Tax due from a non-resident director of an International Business Company in respect of duties performed on the island is not pursued.

Jersey Exchange Control

Jersey Offshore Activities

NB: This section describes the situation that obtained prior to the introduction of the 'zero/ten' regime.

For International Business Companies, activities on the island must not involve transactions with Jersey residents, but are not otherwise specifically limited. For exempt companies, activities are permitted on the island as long as there is no established place of business there. In most other cases of non-residence there are no specific rules about Jersey activities; income is simply split according to its source and taxed or not accordingly. However, In accordance with the Island’s commitment to the European Council of Finance Ministers (Ecofin), the International Business Company vehicle was abolished to new entrants with effect from 1 January, 2006. In accordance with the 'zero/ten' corporate tax reforms, no new exempt companies could be formed in Jersey from June 3, 2008.

Jersey Employment and Residence

There are no special privileges or disabilities for the employees of non-resident or offshore operations as such. Nationals of European Union member states have free right of movement in Jersey for the purposes of work and establishment. Generally a work permit will be granted only if no suitably qualified local exists. A work permit is issued for the duration of the vacancy up to a maximum period of 3 years. The expectation is that during this period the employer will continue to seek to fill the post on a more permanent basis by finding someone who is free of permit restrictions, training them if necessary. In exceptional circumstances, with the approval of the Home Affairs Committee, a permit may be issued for up to 5 years. Preference is given to UK and other European Union nationals. A non European Economic Area national seeking entry for more than 6 months needs to obtain an entry clearance from a British Embassy or High Commission abroad, before arrival.

Long-term residency in Jersey is carefully controlled; with certain exceptions consent for residency will be given only to a person owning a residence, and in turn the purchase of a residence is subject to consent, which is given in only a limited number of cases, usually involving a luxury dwelling or an individual who is clearly going to contribute significantly to the island through payment of local taxes.