Economic Substance in Jersey and Partnerships


On 19 May 2021 the Draft Taxation (Partnerships – Economic Substance) (Jersey) Law 202- was lodged in the States Assembly.  The purpose of the draft Law is to extend Jersey’s economic substance rules to partnerships ( to date, these have applied only to Jersey resident companies); this is achieved through the enactment of a wholly new Law, rather than the extension of the existing economic substance law to partnerships.  It is believed that the enactment of this Law will meet the requirements of the EU Code Group, which in November 2020 made it clear that they expected partnerships to be subject to economic substance rules in all of the nil or only nominal tax jurisdictions.

A summary of the new rules is provided below:

Which partnerships are in scope of the new Law?

The draft Law introduces a new concept into Jersey tax law, namely the “resident partnership”.  A “resident partnership” is defined as follows:

(a) A partnership formed under Jersey law is a “resident partnership” unless its “place of effective management” (see below) is outside of Jersey in a country or territory where either (i) the highest rate at which a company or individual may be charged to tax on any part of its income is 10% or higher; or (ii) the partnership is required to satisfy a test that is substantially the same as the economic substance test.

(b) A partnership not formed under Jersey law is a “resident partnership” if its place of effective management is in Jersey.

For the avoidance of doubt, the term “partnership” has been given a very broad meaning and includes: (a) an incorporated limited partnership; (b) a limited liability partnership; (c) a limited partnership; (d) a separate limited partnership; (e) a foreign limited partnership; (f) any other arrangement that is subject to an assessment under Article 74 of Income Tax Law – such as general/customary law partnerships.

The term “place of effective management”, although appearing in a number of Jersey’s double taxation agreements, is also new to Jersey’s domestic tax law and has been defined as:

“a partnership’s place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the partnership’s business as a whole are in substance made”

The legislation confirms that a partnership can only have one place of effective management at any one time, even if there is more than one place where management decisions are made.

Guidance on the meaning of “place of effective management” will be provided in due course.

Which partnerships are outside scope?

All resident partnerships are in-scope, unless they are specifically excluded from the need to meet the economic substance test. The following are those partnerships that are excluded:

Wholly local partners exemption: where all the partners in a partnership are individuals subject to income tax in Jersey.

Wholly local business activities exemption: provided that the partnership is not part of a multinational group, where the partnership does not undertake business activities outside of Jersey.

Fund exemption: consistent with the rules for companies, the draft Law contains an exemption for fund vehicles

Gateway conditions to application of the economic substance test

Where a resident partnership is in scope, the remaining gateway conditions are consistent with the company rules, namely the partnership: (a) undertakes at least one of the nine relevant activities; and (b) receives gross income from the relevant activity.

Economic substance test

The economic substance test itself is also broadly lifted from the company rules and consists of three elements: (i) managed in Jersey; (ii) core income generating activities (“CIGA”) carried out in Jersey; and (iii) adequate people, physical assets and expenditure in Jersey. 

On the basis that the economic substance test is broadly similar, we have not reanalysed it in this briefing note, details can be found here.

It is noted that the differing governance structures for partnerships (as compared to companies) has resulted in some necessary alterations to the “managed test”, where the focus is on the partnership’s “governing body”, rather than the board of directors.  The governing body is defined as “the person or group of persons responsible for making the partnership’s strategic and management decisions” and therefore in the context of limited partnerships we would ordinarily expect the general partner to be the “governing body”.

Sanctions regime

The sanctions regime is also broadly familiar, with initial penalties of up to £10,000 per financial period of failure to comply and the potential for exchange of information with tax authorities in other jurisdictions.  However, recognising that the ultimate sanction in the context of companies (i.e. strike off) is less relevant in the context of partnerships, the maximum financial penalty is uncapped and may be increased by a maximum of £50,000 per year.  It is also noted that there is a mechanism for a report to be made to the Jersey Financial Services Commission (“JFSC”), presumably to enable the JFSC to consider taking appropriate action against any regulated service provider that continues to work with a partnership that persistently fails to meet its economic substance obligations.

When do the new rules apply from?

For partnerships existing on 30 June 2021, these economic substance rules will apply to the first financial period commencing on or after 1 January 2022.

For partnerships established from 1 July 2021 onwards, these economic substance rules will apply to every financial period of the partnership.

KPMG in the Crown Dependencies and Economic Substance

KPMG in the Crown Dependencies is ideally placed to assist all entities (companies and partnerships) with the impact of the economic substance rules across the Crown Dependencies; from classification of entities through to assistance with preparation of tax returns.

KPMG in the Crown Dependencies have also developed the KPMG Economic Substance Tool to help entities to understand and manage the challenges posed by the economic substance rules. The Tool helps entities to identify their obligations, assess the likelihood of compliance and collate relevant information in preparation for the submission of subsequent tax returns and then report– all housed within an environment that has management review and control processes built into its core.