EU Takes Issue With Jersey's Tax Regime

by Ulrika Lomas, Tax-News.com, Brussels

11 February 2011

The European Union Council’s High Level Working Party has met to consider Jersey’s zero-ten corporate tax regime and has confirmed the earlier findings of the Code Group that the combination of the Deemed Distribution rules and zero-ten does give rise to harmful effects.

The Treasury and Resources Minister, Senator Philip Ozouf commented: "We are pleased that we now have clarity and that this conclusion has confirmed our expectations. Over the coming weeks we will be considering all of the appropriate options for Jersey and will announce a course of action once this process is complete."

The Code Group will now meet on the February 17 to formally assess Jersey's corporate tax regime.

The EU Code of Conduct Group was set up in 1998 to assess whether business tax measures in member states were harmful, using a Code of Conduct as the basis for assessment. The scope of the code included business tax measures in the dependent and associated territories of member states.

In 1999 the Code Group found that some of Jersey's then existing tax measures were found to be harmful under the Code. Jersey replaced these measures with the present 0/10 corporate tax regime.

In 2003 this was accepted as being code compliant, but at that time the regime did not include an element of shareholder taxation which the Code Group has now considered.

The Code of Conduct Group decided that the 0/10 regime in its present form does give rise to harmful effects and recommended that the European Council of Finance Ministers should review this, on the basis of the conclusions of the High Level Working Party.

Jersey’s deemed distribution rule is included in the island’s personal tax code, and seeks to ensure the taxation of individuals’ holdings in profit-making companies as their respective holdings appreciate. A 'deemed distribution' is presumed by the government and tax is liable on the amount irrespective of whether a distribution is disbursed to the company shareholder.

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. All 'non-financial services entities' are liable for the 0% standard corporate tax rate with financial services companies paying 10%.

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