Economic substance for Jersey funds

The Jersey economic substance scheme has been in existence for almost three years now. On the one hand, its scope has recently widened to include partnerships as well as self-managed business funds; but on the other hand, certain exemptions apply so that partnerships (and in many cases corporations) acting as fund vehicles are out of scope. The purpose of this note is to provide information on the impact of the economic substance regime on the Jersey fund industry.

The economic substance regime is set out in two main pieces of legislation, the Taxation (Companies – Economic Substance) (Jersey) Act 2019 (which came into force on 1 January 2019 and was amended on 4 June 2021 to incorporate the companies funds in scope) (the “Business Substances Act“), and the Taxation (Partnerships – Economic Substance) (Jersey) Act 2021 (which came into force with effect from 30 June 2021, opening up the scope of partnerships) (the “Substance of Partnerships Act partnerships”) (together the “Substance laws”).

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A company or partnership will fall within the scope of the economic substance regime if it is a “resident company” or a “resident partnership” which carries out one or more “relevant activities” and receives gross income of relevant activity. A company will be a ‘resident company’ for substance purposes if it is resident for tax purposes in Jersey.

A company registered in Jersey will normally be tax resident in Jersey unless its central management and control is in another jurisdiction which has the highest corporate tax rate of 10% or more. Similarly, overseas companies may be tax resident in Jersey where central management and control is in Jersey.

A partnership will be a “resident partnership” if certain conditions are met, but being “resident” for substance does not make the partnership in question taxable in Jersey – partnerships continue to be transparent for tax purposes of Jersey. A partnership governed by Jersey law will generally be deemed to be resident in Jersey unless its “place of effective management” (“POEM”) is in a jurisdiction where the partnership is subject to a substance regime. substantially similar economic or highest income tax rate of any person is at least 10%. A company’s POEM is where the key management and business decisions necessary to conduct its business are made. A non-Jersey partnership resides in Jersey if its POEM is in Jersey.

In all cases, the residence of a Jersey company or partnership, or an overseas company or partnership seeking to reside in Jersey, must be reported to Revenue Jersey.

Of the nine relevant activities defined in the Substances Acts, fund practitioners will generally be most interested in “fund management activities”. However, in certain circumstances other relevant activities may also be relevant (often in relation to subsidiaries of the fund vehicle), such as holding company activities (where the principal function of the company or partnership is share ownership) and financing and leasing activities.

A company or partnership engaged in fund management business is a company which provides fund management services to a fund (including a collective investment fund or Jersey private fund) in respect of its investments and its risk decisions. This does not include the provision of other services to a fund, such as administration or registered office services. The Corporate Substance Act also now provides that self-managed corporate funds are covered by the scope. In contrast, partnerships that act as fund vehicles are exempt from the law on the substance of partnerships. Accordingly, it is the official acting as fund decision maker (such as a general partner, managing trustee or investment manager) to whom the substance laws normally apply.

The criterion of economic substance

If a company or partnership falls within the scope of the substance laws, it must pass the ‘economic substance test’ by being run (in the case of a company only) and managed in Jersey, having adequate employees, expenses and physical assets in Jersey, and carrying out all of its “principal revenue-generating activities” (“CIGA”) in Jersey. Each of these requirements only applies in relation to the relevant business of the corporation or partnership.

The requirement to be directed (in the case of a company only) and managed in Jersey means that the board of directors (or the “governing body” in the case of a partnership) must hold meetings in Jersey at an adequate frequency, with directors who have sufficient knowledge and expertise in relation to the relevant business, and with minutes and records kept in Jersey which show that its strategic decisions are made in Jersey. For companies, a quorum of directors at the meeting must be physically present in Jersey (although if the CIGA is conducted at the meeting, the majority of directors must be physically present in Jersey). For partnerships, the majority of the governing body must be physically present in Jersey for the meeting.

Although there is some flexibility for occasional board meetings to be held outside of Jersey, where CIGA is run at the meeting, the meeting must take place in Jersey. Guidelines issued by the Government of Jersey allow isolated cases of CIGA to occur outside of Jersey, but make it clear that the quality and quantity of CIGA undertaken in Jersey must clearly trump anything undertaken outside of Jersey. of Jersey.

With respect to employees, expenses and physical assets, the substance laws do not define “adequate”, which will therefore depend on the circumstances. However, it is clear that these requirements can be outsourced to a service provider in Jersey, so the service provider’s employees and office assets, and the fees paid on them, may be sufficient for the company or partnership can meet these requirements.

The Substances Acts also provide that the CIGA of a company or partnership within scope must be operated in Jersey. The CIGA is specifically defined in relation to each activity concerned. In the case of fund management activities, the CIGA includes decisions relating to the holding and sale of investments; calculate risks; make decisions on currency or interest rate fluctuations and hedging positions; and prepare relevant regulatory reports for authorities and investors. Again, CIGA can be outsourced under certain circumstances as long as the company or partnership is able to monitor and control the outsourcing.


When a company or partnership in scope fails the economic substance test, it may face a fine which can increase significantly from the first year of non-compliance to subsequent years, as well as reporting by Revenue Jersey to the tax authorities in the jurisdictions of the company or the beneficial owners of the partnership, and ultimately to deregister (in the case of a Jersey company, an incorporated limited partnership or a corporation limited liability only) or provide a report to the Jersey Financial Services Commission (in the case of other Jersey companies or non-partnerships). In the case of partnerships that are not separate legal persons, the general partner will be liable for any failure to meet the test of economic substance.

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