Jersey Presents 'Zero/Ten' Tax Proposals

by Jason Gorringe, Tax-News.com, London

11 May 2006

The Jersey government has announced that it intends to implement a ‘zero/ten’ tax system for companies from 2009 which will incorporate a standard rate of corporate income tax of 0% and a special rate of corporate income tax of 10% into the Island’s existing schedular tax system.

Under the proposals, a small proportion of companies can be subject to the 10% special rate of corporate income tax and it is proposed that this rate will apply to ‘specified financial services companies.’ These will include banks, trust companies, collective investment fund functionaries (but not funds or fund managers), investment managers and brokers.

The concept of a ‘specified financial services group’ whose members will be taxed at the 10% rate is also proposed. Financial services groups will be able to elect for this status.

Shareholder taxation measures are proposed, designed to avoid trading profits being rolled up and extracted tax free by individuals resident in the Island.

It is also proposed that ‘look through’ be introduced for investment holding companies, but not for trading companies, owned by Island residents. Looking through a company to assess a company’s shareholders on its income is an anti-avoidance mechanism. In the United Kingdom the look through provision for income looks through any offshore arrangement to which a UK resident individual has made a ‘transfer of assets,’ subject to a motive test.

Under the proposed zero/ten system, a resident company taxed at the 0% rate is on all fours with an offshore company and so it may be considered natural for the zero/ten system to apply look through as a default, with or without a motive override.

‘Investment company’ will be defined to prevent Island residents using companies with only ancillary or incidental trading activities (and potentially subject to the 0% rate of corporate income tax) to avoid tax on investment income

Another measure would see a form of non-resident landlord scheme introduced which will be backed up with a 20% withholding tax on rents paid to non-residents who fail to meet their compliance obligations.

Jersey has decided to introduce the zero/ten system to remain compliant with the European Union's Code of Conduct on business taxation which seeks the rollback of "harmful" tax measures.

The EU identified four tax measure in Jersey which it deemed to be harmful: the exempt company; the international business company; international treasury branch operations that permit computational tax deductions; and captive insurance companies.

The Jersey government is aiming to launch a consultation with representative bodies of the financial services industry during May and lasting until the end of June 2006. Jersey also intends to seek the views of the UK Treasury on its proposals.

The Jersey government intends that the zero/ten proposals will be presented before the States by mid August 2006 and approved by the end of the year.

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