Jersey’s ‘zero/ten’ income tax regime became effective on 3 June 2008, bringing with it a substantial change in the taxation of Jersey company profits. David Picot, Senior Partner, wrote the following article for the Jersey Evening Post Business Review March 2009, to provide some timely guidance
“Here at Alex Picot we firmly believe in the importance of providing guidance and advice to our clients to help them through the many challenges that they face. The introduction of the zero/ten tax regime presents important changes for many Islanders, and this article highlights some of the key issues.”
The new regime affects all companies incorporated since 3 June 2008 and all other Jersey companies whose financial year-end falls after 31 December 2008 and beyond.
“We recommend that that all Shareholders, Company Secretaries and Directors become fully aware of these changes, the impact they will have on their own financial affairs and their duties arising from them.”
David continued: “Under ‘zero/ten’ there will, in future, be three rates of corporate income tax. The first will be 0%, applied to the majority of trading companies and investment holding companies. The second rate will be 10%, which will apply to certain regulated financial institutions; the taxation rules relating to these financial institutions are not referred to in this brief article. The third rate is 20%, which applies to rental income and property development profits, and the tax arising will be paid by the company in the usual way.
With the exception of the above mentioned rental income, property development profits and financial institutions, for income tax years of assessment 2009 onwards, companies will be assessed to 0% income tax. To guard against the depletion of the Island’s income tax revenues, Jersey resident shareholders who own more than 2% of the issued shares in a local company will have company profits attributed to them. They will then receive an assessment on their share of the profits subject to rules of a ‘deeming provision’.
This may seem relatively straight forward so far, but these deeming provisions require some explanation so that shareholders may gain an understanding of the impact of the zero/ten issues.”
How do the deeming provisions work for shareholders owning more than 2% of a Jersey trading company?
David explained: “The Comptroller of Income Tax will deem 60% of the company’s trading profits to have been distributed to shareholders, and will assess each shareholder on their share of 60% of the company’s trading profits, regardless of whether or not it is actually distributed.”
The new legislation also means that any dividends paid by the company to shareholders will be taken into account and subtracted from the 60% deeming provision. However distribution of profits from taxed reserves arising prior to the zero/ten regime will not form part of this calculation.
“Going forward, it might seem that the Comptroller of Income Tax is receiving income tax on only 60% of the company’s trading profits by virtue of the deeming provisions, leaving the remaining 40% untaxed. However, that is not the case, and the taxation of the remaining 40% is somewhat more complex,” David said.
The onus is placed on the Company Secretary to maintain a detailed schedule of each shareholder’s portion of the remaining 40% of the profits on a year-by-year basis. This is because at some time in the future a ‘trigger event’ will crystallise payment of the tax due on the previously untaxed profits.
The two principal ‘trigger events’ are:
a) the death of a shareholder; and
b) the transfer/sale of shares to another person.
“It is worth mentioning that in respect of the death of the shareholder, the tax liability will need to be paid prior to beneficiaries receiving distributions from the Estate.”
What is the effect on those shareholders who own less than 2% of a trading company?
David explained: “Shareholders in this category are only taxed on dividends they receive. If the company does not pay a dividend, these shareholders will not be assessed to income tax on the company’s profits.”
And Investment holding companies and Personal service companies -
how are they affected?
“Investment holding companies are subject to full attribution and the individual shareholders will be assessed in full on the company’s profits as deeming provisions do not apply,” he said.
“Personal service companies are companies that supply the personal services of the owners or persons connected with them to a third party. The total of the company’s relevant profits are assessed on these individuals as if the profit was their own, and the 60% deeming provisions do not apply,” he explained.
Will more detailed records be required?
David said: “From the above outline of the new legislation, it is apparent that there are several different ways in which Jersey residents owning shares in local companies will be taxed in the future. The new deeming provisions will require comprehensive records of previously untaxed profits to be maintained as these will suffer tax in the future.”
It will be the Company Secretary’s duty in every case to file a return each year with the Comptroller of Income Tax. Some of the items to be included on this return will be:
- the amount of the company’s taxable profit;
- a record of any dividends paid to shareholders, noting from which financial year’s profits the dividends have originated;
- a list of shareholders at the beginning and end of the year, detailing any changes in shareholdings during the year; and
- details of any shareholders loans due to the company.
“To be forewarned is to be forearmed, and I would recommend that Shareholders, Company Secretaries and Directors seek professional advice now so as to avoid difficulties in the future,” David concluded.
The above synopsis is intended as a brief guideline and does not cover all issues arising from the new legislation.