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Jersey Fine Tunes New Anti-Avoidance Rule

by Jason Gorringe,, London

26 November 2012

Jersey's Treasury Minister, Philip Ozouf, has announced a revision to new anti-avoidance rules, to be introduced from January 1, 2013, as part of the island's Budget, on account of the forthcoming termination of the island's deemed distribution regime.

The island's deemed distribution arrangements are being revoked by the end of the year following a decision by the European Union's Code of Conduct Group on Business Taxation that the provisions are "harmful."

The new anti-avoidance rules seek to ensure that when taxpayers extract profits from a company, by whatever means, that income will be subject to income tax. However, if a company reinvests its profits to grow its business, neither the company nor the shareholders will be taxed. The new rules partly work by broadening the definition of a distribution. The calculations use the taxable profits reported by the company, and hence anything which is not taxable in the company, such as capital gains, is not taken into account.

Under the outgoing deemed distribution regime, tax is paid on individuals' holdings in profit-making companies as their respective holdings appreciate. A 'deemed distribution' is presumed by the government and individual income tax is liable on the amount irrespective of whether a distribution is disbursed to the company shareholder.

According to Ozouf, the proposed changes to the anti-avoidance rules, to go before the island's legislative assembly on December 4, 2012, are intended to:

  • Ensure the new distribution rules do not discourage shareholders from making commercial loans to trading companies;
  • Provide the option of a simplified basis of taxation for those taxpayers who do not want to complete the calculations required under the distribution rules; and,
  • Make a number of minor amendments to ensure that the distribution rules operate as anticipated.

Announcing the amendments, Ozouf explained:

"While we are determined to protect revenues, the Treasury has listened to feedback and we are proposing a number of additional measures to address the concerns raised."

"While we must ensure our tax revenue is protected from efforts to avoid or excessively defer tax, we would not want to prevent trading companies from obtaining commercial loans from their owners in order to expand or sustain their businesses."

"These changes will make it more straightforward for small trading companies to apply the distribution rules, without damaging the robustness of the rules as a whole."

TAGS: individuals | tax | business | law | international financial centres (IFC) | corporation tax | Jersey | offshore | legislation | tax planning | standards | individual income tax

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