1. Pan-Channel Island developments
1.1 Economic Substance updates: Self-Managed Funds and Fund Vehicles
Two amendments to Jersey's Economic Substance legislation https://statesassembly.gov.je/assemblypropositions/2020/p.172-2020.pdf were lodged by the Minister for External Relations on 29 December.
The first is a move to include self-managed funds within scope of Economic Substance rules in terms of their fund management activities, for accounting periods that commence on or after 1 January 2021. In November 2019, the Crown Dependencies updated their joint guidance, to confirm these expectations of self-managed funds, and to confirm that legislation would be brought forward in each jurisdiction and similar amendments in Guernsey came into effect on 1 October 2020. The Government of Jersey is also reviewing the application of the directed and managed test to self-managed funds.
The second of the amendments strengthens the general exemption for other fund vehicles (i.e. those managed by other entities such as a general partner, trustee or fund manager), which currently rely on guidance, by explicitly introducing this exemption into the legislation.
It should be noted that there is a possibility that the Economic substance rules will be extended to Channel Island partnerships following the Code of Conduct Group (Business Taxation) report of 20 November 2020 recommending that those jurisdictions which had introduced Economic Substance legislation should extend the requirements to partnerships.
Our expectation is that funds that are limited partnerships will still benefit from the exemption given to non-self-managed funds, which will soon be enshrined by law.
Guernsey self-managed collective investments schemes were brought within the scope of the Income Tax (Substance Requirements) (Implementation) Regulations 2018 with effect from 1 October 2020 and will be required to demonstrate an appropriate level of substance in Guernsey. Further information in this regard can be found in our previous briefing - Channel Islands Funds Quarterly Update: Q3 2020
For more about the Economic Substance rules in Jersey and Guernsey, please see our web page here.
1.2 Brexit: updated position following the UK leaving the EU
In December the Jersey Financial Services Commission (JFSC) outlined the position it would be taking from 1 January as a result of Brexit.
Details of the JFSC position are available on its website here.
The JFSC has also created a paper that summarises the changes it has made to the Alternative Investment Fund (AIF), Fund Services Business and Certified Funds Codes. The paper reflects legislative changes in Jersey which came into effect on 1 January. It also sets out the approach that will be taken initially, based on the fact that the EU and UK AIF regimes are aligned although separate.
Read the positioning paper here: Brexit positioning paper
The States of Guernsey met on 27 December 2020 to consider the Bailiwick's participation in the trade and cooperation agreement agreed between the UK and the EU on Christmas Eve. After consideration and without limitation:
(a) the Policy & Resources Committee was authorised to agree and signal approval of an agreement or treaty made between the UK and the EU governing the future of their relationship, on behalf of Guernsey and, subject to the necessary authorisations, Alderney and Sark;
(b) it was agreed that the States of Guernsey will endeavour to establish arrangements to cooperate with the EU on the recovery of claims related to VAT, customs duties and excise duties within a reasonable timeframe and authorised the Policy & Resources Committee to negotiate and agree to enter into any protocol, agreement or other form of instrument giving effect in the Bailiwick to such arrangements;
(c) it was noted that the extension of the UK's World Trade Organisation (WTO) membership to the Bailiwick of Guernsey will take effect at the end of the Brexit transition period and to agree that there shall be implemented such measures as the various committees in Guernsey, Alderney and Sark think fit to ensure that each jurisdiction remains compliant with the obligations that arise from the extension of the UK's WTO membership to the Bailiwick;
(d) it was noted that the inclusion of the Bailiwick in various free trade agreements (which had previously had effect in the Bailiwick by virtue of the Bailiwick's relationship with the EU, and the operation of which has been "rolled over" by the UK) and agree that there shall be measures implemented by the various committees in relation to Guernsey, Alderney and Sark for the purpose of ensuring that each jurisdiction remains in compliance with the obligations that arise from the inclusion of the Bailiwick in such agreements; and
(e) directed the preparation of such legislation as may be necessary to give effect to the above decisions.
2 Jersey developments
2.1 Guidance on COVID-19 Economic substance concession
The economic substance requirements under the Taxation (Companies – Economic Substance) (Jersey) Law 2019 (the Substance Law) apply to Jersey tax-resident companies, including (but not limited to) companies that are 'managed and controlled' in Jersey, wherever registered. One such requirement is that in-scope companies must demonstrate that they are directed and managed in the Island.
The coronavirus (COVID-19) pandemic resulted in extensive travel disruption into and out of Jersey, requirements for social distancing and mandatory self-isolation upon entry into the Island, all of which sparked concern for in-scope companies regarding their ability to meet the economic substance requirements under the Substance Law.
In March 2020 and in response to the travel interferences and public health implications arising as a result of the pandemic, the Comptroller of Revenue issued guidance stating that where companies had to alter their operating practices to compensate for the coronavirus outbreak, the Comptroller would not determine that such company had failed the economic substance tests under Article 6 of the Substance Law. This concession only applied to adjustments to normal operating practices to minimise the impact of the outbreak. Similarly, the Comptroller reassured companies that are deemed tax resident in Jersey as a result of being 'managed and controlled' in the Island that their corporate tax residency would not be disturbed by temporary adjustments to their operation.
As the impact of the coronavirus pandemic is continuing to affect the Island, the Comptroller has recently issued further guidance relating to the above concession. The Comptroller has stipulated that its concession only applies to the 'directed and managed' limb of the economic substance test, and it is still expected that companies should be able to satisfy the other substance requirements, such as demonstrating adequate employees, expenditure and physical assets in Jersey (Article 5(2)(b) of the Substance Law). Additionally, companies seeking to rely on the concession are urged to keep sufficient records evidencing the adjustments that have been made as a result of the pandemic and specifying the reasons for these changes. These records will have to be made available to officers of Revenue Jersey in the event that it is investigated whether the concession was correctly applied. The fact that a company has relied on the concession must be disclosed in the company's 2020 tax return.
The Comptroller emphasised that this concession is temporary and will be withdrawn as soon as the circumstances in Jersey permit. You can read the full guidance here. The March 2020 guidance can be found here: Economic_Substance_-_Corona_Virus.pdf (ogier.com)
2.2 Financial Services (Disclosure and Provision of Information) (Jersey) Regulations 2020
These new regulations in relation to beneficial ownership and controlling interests requirements came into force on 6 January 2021. The new legislation implements in Jersey the requirements set out by the Financial Actions Task Force (the FATF), the inter-Governmental body that sets standards for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
The regulations set out the information kept in the register under Article 2 of the Financial Services (Disclosure and Provision of Information) (Jersey) Law 2020 (which can be made available for public inspection by the JFSC), prescribe the fee payable on provision of an annual confirmation statement and set out the process by which application may be made to the JFSC to make information unavailable for public inspection. The regulations also provide for appeals against decisions of the JFSC and make certain consequential amendments.
Read our updated briefing on the Financial Services (Disclosure and Provision of Information) (Jersey) Law 2020
2.3 Minor amendment to the JFSC's Outsourcing Policy and Guidance Note
Whilst the JFSC has confirmed that a full review of the Outsourcing Policy and Guidance Note is planned for 2021 (where there will be a particular focus on Information Technology providers), it has made a small amendment to one of the FAQs relating to general issues. An extract of the change is shown below.
5.4.1 The Outsourcing Policy is premised on an understanding that, amongst other things, Registered Persons remain fully responsible and accountable to the JFSC for any Outsourced activity. Since the Governing Body is ultimately responsible for the management and conduct of a Registered Person's affairs; the JFSC would expect to see, upon request, board meeting minutes of the Governing Body evidencing that it had carefully considered any Outsourcing arrangements it implemented. The Governing Body should also receive reports regarding any issues of non-compliance with the Outsourcing Policy (i.e. exceptions) identified as a result of the monitoring and assessment required by Core Principle No. 3 and the JFSC would expect to see these recorded and considered in the board meeting minutes.
A link to the JFSC announcement can be found here
2.4 Jersey tax return deadline extended by one month to 31 January
The Comptroller of Revenue has confirmed that there will be no late-filing penalties for companies that file their tax returns by 31 January, instead of the usual 31 December deadline. This may be a relief to some, but a one month grace period is not long and for those companies who have not yet filed a tax return this must be prioritised.
2.5 JFSC consultations on proposals to increase fees
The JFSC issued a number of consultations in September, October and November in relation to proposed changes to fees from sectors of the financial services industry.
(a) Banking Fees
The JFSC published a consultation in October on the proposal to increase Banking Fees in Jersey. The proposals affect any person applying for, or having already been granted a registration to undertake deposit-taking business under Article 9 of the Banking Business (Jersey) Law 1991. The consultation closed on 11 November 2020.
(b) Trust Company Business
The JFSC has invited responses on four strategic options for different methods of generating revenue in the TCB sector in order to raise sufficient income to meet its liabilities, cover its expenses and provide a reserve.
(c) Designated Non-financial Business and Professionals Fees
The JFSC also invited responses on three options for proposed changes to Designated Non-financial Business and Professionals Fees in order to raise sufficient income to carry out its functions under and to provide a reserve.
(d) General Insurance Mediation Business (GIMB) and Money Service Business (MSB) Fees
Insurance sector members were invited to indicate whether they agree with the new fee schedules proposed for the respective sectors. The consultations closed in mid-December.
(e) Insurance Business
In September 2020 the JFSC issued a consultation paper on Insurance Business Fees, which sought views on proposals to change fee rates. No responses to the consultation were received and JFSC is therefore proceeding to implement the fee rate changes as consulted on.
All consultation papers are available on the JFSC website: Consultations — Jersey Financial Services Commission (jerseyfsc.org).
The JFSC has also published a consultation setting out the proposed fees for Registry related services from 1 January 2021, including the introduction of new fees and a new fee structure and fee rates to apply from 1 January 2022. This consultation is made in conjunction with the launch of the new digital registry which went live on 6 January 2021.
2.6 Feedback and further consultation on Investment Business regime
The JFSC has published a report on responses received to its consultation on legislative proposals to enhance Jersey's Investment Business regime. It now seeks further consultation on three amendments to the Financial Services (Jersey) Law 1998 in response to the feedback. The further consultation period closes on 26 February 2021.
2.7 JFSC Thematic examinations for early 2021
There will be two thematic examinations during 2021 covering:
(a) Enhanced due diligence and simplified due diligence; and
(b) Wire transfers – Banks
Businesses will be notified in advance if they are selected for these examinations.
2.8 Jersey Finance – Funds Masterclass
A reminder that the first Jersey Finance Funds Masterclass of 2021 is coming up on Thursday 4 February – a one hour session starting at 11am focussing on fund domiciliation and with a Brexit update. Register here.
2.9 Third quarter investment statistics
The total net asset value of regulated funds under administration in Jersey funds increased in the third quarter of 2020 by £4.0 billion to £365.5 billion, which represents an increase of approximately £20 billion over the past year (with figures at £345.7 billion as at 31 December 2019).
Currently, figures for the increasingly popular Jersey Private Fund are not included, meaning the actual net asset value figure is much higher. As at 30 June, there were 347 JPFs registered.
3 Guernsey developments
3.1 GFSC consultation on increasing Private Investment Fund options
The Guernsey Financial Services Commission (the GFSC) published a consultation paper on 9 December 2020 seeking feedback on proposals to allow different investor categories to take advantage of an appropriately regulated fund structure. Whilst the current approach to registering a Private Investment Fund (a PIF) will continue under the proposals, other paths would be introduced to compliment this, including:
(a) enabling a PIF to be created without an attached Protection of Investors Law licensed manager; and
(b) placing the PIF as a bespoke private wealth structure. Using this route, there would be a family relationship between investors and no capital raising from investors outside this relationship.
It is proposed that all currently registered PIFs would continue to be registered in accordance with the existing approach under the new regime, and to be treated as having submitted a new PIF application with a corresponding application fee being payable, where such existing PIFs seek to change the basis of their registration.
If the proposals are implemented, new guidance on PIF promoter due diligence would be provided and a standardised declaration form introduced.
The closing date for comments on the proposed alternative approaches to PIF registration is 1 February 2021.
3.2 GFSC consultation on deregulation of Non-Guernsey Fund Scheme Rules
On 8 December 2020 the GFSC published a consultation paper seeking feedback on proposals for changes to the Non-Guernsey Fund Scheme regime. The proposals revoke the existing rules and any entity undertaking a restricted activity in or from within the Bailiwick in connection with a collective investment scheme (wherever domiciled) will still be required to be licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).
The closing date for feedback on the changes to the GFSC's Non-Guernsey Scheme regime is 27 January 2021.
3.3 Guernsey Revenue Services updates guidance on tax treatment of investments in funds by Guernsey residents
The Guernsey Revenue Services (GRS) has made changes to their guidance regarding the tax treatment of Guernsey residents investing in funds, in particular holdings in 'accumulation funds'.
The GRS has held the position that the disposal of 'accumulation funds' may give rise to an income tax charge, however, clarification was required on how this should be reported given that the amount of income may not be determined until sometime after the disposal has taken place.
The updated guidance, which can be accessed at CHttpHandler.ashx (gov.gg):
(a) sets out what information the GRS requires investors to report on their tax return regarding investments into 'accumulation funds' (both annually and in years disposals are made);
(b) explains an alternative approach to taxing rolled up income from accumulation funds other than on disposals; and
(c) provides guidance on what does and does not constitute a disposal so as to provide a relief similar to that introduced by HMRC in light of changes in fee charging structures that came about from the Retail Distribution Review.
3.4 Handbook on Countering Financial Crime and Terrorist Financing
On 30 October 2020 the GFSC updated the Handbook on Countering Financial Crime and Terrorist Financing (the Handbook) as a result of the outcomes of the Financial Action Task Force plenary held between 21 and 23 October 2020. Iceland, Bhutan and Saudi Arabia have been removed from Appendix I of the Handbook, whilst the North Sinai region has been added to the list. Firms are encouraged to review the updated Appendix I to assess the impact that these changes may have on their business.
The GFSC is also undertaking a short consultation on the changes proposed to rules and guidance in Chapters 3 and 7 of the Handbook on the risk-based approach and on legal persons and legal arrangements. In summary:
(a) when establishing a trust or entering into a business relationship or occasional transaction with a trust, a firm is required to identify any beneficiary in a trust (whether his or her interest under the trust is vested, contingent or discretionary). The GFSC is proposing rules confirming that a firm must at a minimum identify the beneficiaries' full name and date of birth, however the extent to which the other identification data is obtained by a firm will depend on the likelihood of that person benefiting from the trust, with such an assessment documented;
(b) when undertaking customer due diligence on a customer which is a trust, a firm is required to understand the ownership and control structure of the trust and identify and take reasonable measures to verify the identity of beneficial owners, including any natural person who is the beneficial owner of the trustee. The GFSC is proposing guidance that for low or standard risk scenarios, where the corporate trustee or its parent is subject to the same or equivalent provisions of the Handbook in the jurisdiction from which its business is conducted and where it is supervised for compliance with those provisions, it may be possible to rely on information provided by the corporate trustee regarding the identity of its ownership and on its control structure by way of a summary sheet and/or structure chart, without the need to gather identification data on those individuals who hold a qualifying ownership interest; and
(c) firms are required to regularly review any relationship risk assessment and the extent to which a business relationship will be monitored must be on the basis of risk. The GFSC is proposing some additional guidance on when these reviews should occur.
The closing date for comments on the proposed changes to the Handbook is 18 January 2021.
3.5 GFSC guidance on remote working
Over the past year licensees have had to rapidly adjust their business working practices as a result of COVID-19 and for most licensees and their staff this has involved moving to home working. The GFSC is aware that following these changes, some firms are considering whether a permanent office is required and, whilst this is a decision for the senior management of a licensee to make, the GFSC would expect a licensee to ensure that its controls, policies and procedures are updated accordingly.
The GFSC has published guidance on remote working for GFSC licensees to help inform the decision-making process considering to adopt such measure which can be found here:
3.6 GFSC guidance on custodians' duties
On 7 December 2020 the GFSC published new guidance in an attempt to provide greater regulatory clarification in respect of the duties of Designated Custodians.
The guidance sets out the standards of conduct that are expected of Designated Custodians when they are acting for open-ended collective investment scheme and where the assets are held indirectly, for example, where assets are held in a separate legal structure. The guidance presents different ways of complying with the current rules although a Designated Custodian may also adopt other appropriate and effective measures to those contained in the guidance, as long as such measures achieve compliance with the existing rules.
3.7 Third quarter investment statistics
The total net asset value of Guernsey funds increased in the third quarter of 2020 by £9.3 billion to £236.1 billion, which represents an increase of £7.7 billion over the past year.
Guernsey domiciled open-ended funds experienced an increase over the quarter by £0.2 billion. Also Guernsey domiciled close-ended funds experienced a quarterly increase of £9.1 billion, which represents an annual increase of £7.9 billion.
Within the totals for Guernsey funds, Guernsey Green Funds held a total net asset value of £3.3 billion at the end of the quarter and non-Guernsey open-ended schemes, for which some aspect of management, administration or custody is carried out in the Bailiwick of Guernsey, had a net asset value of £37 billion at the end of the first quarter.
3.8 Changes to GFSC distribution of annual fee invoices to licensees and registrants
The GFSC will no longer be distributing annual fee invoices by paper copy. Annual fee invoices will be sent by generic email addresses for 2021 annual fees onwards. Licensees and registrants should check email address records stored with the GFSC by contacting [email protected]. A notification will be published on the GFSC website when the invoices have been issued.
Emailed invoices will be distributed by Intuit, the GFSC's invoicing service provider, but contain the GFSC logo and details. Email invoices contain a link to a portal hosted by Intuit, giving further detail on the invoice to be paid and the payment status. One email will be sent out per invoice. The GFSC noted that its newly updated generic email addresses should be used as the first point of contact for regulatory matters of a non-confidential nature.
3.9 Data Protection registration in Guernsey from January 2021
The Office of the Data Protection Authority (ODPA) in Guernsey has introduced a new registration and levy regime from January 2021. This new regime requires all entities, including local organisations, business and sole-traders established in the Bailiwick of Guernsey who process personal dated to register with the ODPA.
Entities who process personal data will need to complete an annual return during the course of January and February each year and pay an annual levy to the ODPA. The ODPA has ensured that its funding model be as cost effective as possible and have created a two-tier cost structure comprising of:
(a) £2,000 per year for organisations with 50 or more full-time equivalent staff; or
(b) £50 per year for all other organisations.
Registered charities and not-for-profit organisations are required to register with the ODPA and renew their registration annually but are not required to pay an annual fee.
For further information, please refer to our briefing: Data protection registration in Guernsey from January 2021
4 Other developments
4.1 UK to consult on implementation of OECD's Mandatory Disclosure Rules
The conclusion of the UK and EU negotiations on the Trade and Cooperation agreement and the subsequent HMRC advice on its approach to cross border tax arrangements brings both welcome news and challenges for Channel Island businesses.
HMRC has advised that reporting under DAC6 will continue for a limited time for arrangements hallmarked as category D, which applies to CRS avoidance arrangements and opaque ownership structures, while work continues on the implementation of the OECD's Mandatory Disclosure Rules (MDR) which are intended to replace DAC6 in time.
The good news for CI businesses is that Guernsey and Jersey have already adopted the OECD's MDR, under which category D hallmarks are aligned, providing them with greater scope to align policies and procedures and ensure compliance with both local MDR and EU DAC6.
However, given that interim UK rules aren't currently fully aligned with OECD MDR,CI regimes businesses can't assume that local MDR procedures will meet the UK requirements.
Organisations also still need to consider applicable reportable arrangements in other EU Member States under DAC6 either as an intermediary or a relevant taxpayer. The UK remains the main trading partner for many CI firms but those entering into transactions across the EU may still require appropriate DAC6 procedures to ensure reportable arrangements are identified and disclosed.
Please see further information about DAC6 and arrangements hallmarked as category D here: IEIM645000 - International Exchange of Information Manual - HMRC internal manual - GOV.UK (www.gov.uk)
4.2 AIFMD review consultation - deadline 29 January 2021
A reminder that the European Commission has published a public consultation on its review of the Alternative Investment Fund Managers Directive. The deadline for responses is 29 January 2021 and a link to the consultation is here.