In June of this year, the EU published details as part of the ongoing negotiations between the EU Code of Conduct Group and the Crown Dependencies (CDs) on the future “economic substance” requirements for companies resident in Jersey, Guernsey, and the Isle of Man.

As we explained in our client bulletin of 12 June, a guidance document on the steps generally required to demonstrate economic substance was agreed by the European Council’s High-Level Working Party on Tax Matters (and subsequently endorsed by ECOFIN on 22 June). This was the first public communication since the publication in December 2017 of the EU Code of Conduct Group’s findings on non-cooperative jurisdictions which saw the CDs (along with Bermuda, Cayman Islands, and Vanuatu) as jurisdictions with “tax regimes that facilitate offshore structures which attract profits without real economic substance” (Criterion 2.2 of the EU Council’s conclusions published in December 2017).

At this stage, it is too early to predict what the final requirements for economic substance will look like, although we understand from the guidance document that the focus is on companies that have “core income-generating activities” which are regarded as geographically mobile such as for example banking, insurance and fund management. What is certain is that the timings between now and 31 December 2018 are very important to ensure that legislation is in place to give effect to the new rules by the end of the year.

Our view is that, as soon as further detail is available, companies which are resident in the CDs should start considering the possible implications both in terms of the immediate timetable and likely events in 2019 and beyond.

August to October

We expect the detail of the proposals to be finalised between the Crown Dependency Governments

The Governments of the CDs will continue to work closely together and to have dialogue with the European Commission and the EU Code of Conduct Group to ensure that each has developed a response which can be implemented within the necessary timeframe.

  • Within days from now, the Governments of Jersey and Guernsey are expected to issue public consultation documents to explain more about the background behind the new requirements and to seek feedback which may assist in the finalisation of their proposals for new economic substance requirements.
  • In September, we would expect the results of the consultation to be reviewed and considered, to enable the Governments of the CDs to finalise their proposals for new economic substance requirements. The turnaround is important to allow sufficient time for the relevant law to be drafted and passed through the usual legislative process in each of the CDs.
  • It is expected that the CDs’ proposals will be shared with the EU, in all likelihood in October, although whether any further dialogue is anticipated at that point is unclear.

October to December

More detail should be available so that companies may start to assess whether their existing business models will be adequate from the expected start date of the new rules of 1 January 2019

In particular, we expect:

  • Legislation giving effect to the new requirements to be drafted (which is anticipated to be primarily tax legislation) and considered as part of the usual parliamentary process in each CD;
  • Legislation to be in place by 31 December 2018 in accordance with commitments made by the CDs to the EU; and
  • Practical guidance to be drafted and consulted upon.

2019 and beyond

If, as we expect, the new economic substance requirements come into effect from 1 January 2019, companies resident or operating in the CDs should be considering whether their operating models will be sufficient to comply with the new substance rules. Information is likely to be captured as part of tax returns for accounting periods starting on or after 1 January 2019. In other words, even if a company’s tax return filing date falls in 2020, the relevant period from which the new requirements will apply to that company is expected to be 2019.

Deloitte comment

The timetable is very tight and, due to the complex and sensitive nature of negotiations and deliberations, it is only within the last few weeks that detail has begun to emerge. Deloitte will continue to monitor developments closely and work together with industry groups and the taxpayer communities in each island to evaluate the full implications of these changes and the appropriate level of response by companies in particular sectors. Based on the guidance document produced by the European Council’s High-Level Working Party on Tax Matters and endorsed by ECOFIN in June, it seems that the desire is for proportionate requirements to be introduced which should ensure that the practical impact on local companies and the finance industry, in general, is reasonable.

In our view, the relevant time for companies to start conducting reviews will be Q4 of this year, when more is known about the anticipated legislative economic substance requirements but before the new regime in each CD commences at the beginning of next year.

We will be using further bulletins with more detail as it becomes available.

Please do get in touch with your usual Deloitte contact and let us know your views and questions:

Jo Huxtable: 01481 703 308 or

Alison Vine: 01481 703 264 or

Martin Popplewell: 01481 703 229 or

Adam Hart: 01481 703 321 or