24 November 2003
This article summarises the current Jersey tax treatment of limited partnerships and their partners. It also demonstrates the tax advantages of establishing limited partnerships as investment fund vehicles in Jersey, and establishing general partner and carried interests partner vehicles on the island.
A Jersey limited partnership is not a legal entity and is not, therefore, subject to assessment to income tax in its own name. The Income Tax (Jersey) Law 1961, as amended (the Jersey Tax Law), was amended in 1995 following the introduction of the Limited Partnerships (Jersey) Law 1994, to cater for the taxation of the profits or gains arising to the partners in a limited partnership, who are assessed for income tax in their own names. Article 76A of the Jersey Tax Law contains the statutory provisions relating to limited partnerships. It should be noted that these provisions apply to non-Jersey-registered limited partnerships as well as to those registered in Jersey.
Taxation of non-Jersey resident partners
Article 76A of the Jersey Tax Law will not apply to a non-Jersey resident partner where the limited partnership’s activities are solely of an international nature – that is, those activities are not carried out in Jersey. Essentially, what this means is that a non-Jersey resident partner will only be liable to Jersey income tax on Jersey-source income, other than Jersey bank deposit interest (by concession), including profits from a trade (or profession) carried on in Jersey. In addition, where a non-Jersey partner has made an interest-bearing loan to the limited partnership, that interest will not generally be classified as Jersey-source income.
Where a limited partnership has been established for investment rather than trading purposes, it will be most unusual for any investment profits or income to arise to the limited partnership from Jersey sources. Furthermore, any profits of a capital nature arising from a disposal of an investment by a limited partnership will not be liable to Jersey tax, as there is no tax on capital gains in Jersey. This makes such vehicles very attractive for non-Jersey resident investors as their tax liability will be zero.
An exception is where a trade is carried on wholly or partly in Jersey. If so, it will be necessary to obtain a ruling from the Comptroller of Income Tax in Jersey as to whether the trading profits arise from international or Jersey-based activities. Generally, profits from a trade will be treated as arising from activities carried out in Jersey where a licence under the Regulation of Undertakings and Development (Jersey) Law 1973, as amended, has been obtained for the limited partnership, because that limited partnership employs staff or occupies office space in Jersey. Where a limited partnership carries on a trade wholly or partly in Jersey, a computation of the taxable profits of the limited partnership, accompanied by a copy of the limited partnership’s accounts, must be filed with the Comptroller of Income Tax each year.
To summarise, non-Jersey resident partners will be subject to Jersey income tax as follows:
- Where the limited partnership has been established as an investment vehicle, the non-Jersey resident partner will only be liable to income tax on Jersey-source income other than bank deposit interest.
- Where the limited partnership has been established as a trading vehicle and such trade is carried on wholly or partly in Jersey, the non-Jersey resident partner will only be liable to Jersey income tax on profits arising from activities carried out in Jersey.
- In both of the above cases, a non-Jersey resident partner will not be liable to Jersey income tax in respect of income arising from international investment activities or profits from a trade carried on wholly outside Jersey.
- No Jersey income tax liability will arise on profits from the realisation of a limited partnership investment.
Taxation of Jersey resident partners, general partners and carried interest partners
Jersey resident partners may participate in a limited partnership even though the limited partnership may have been established for investment primarily by non-Jersey resident investors. A Jersey resident partner will be liable to Jersey income tax on the whole of its share of the income arising to the limited partnership, regardless of whether this arises from international or Jersey sources. Any such income should be disclosed in the Jersey resident partner’s annual income tax return. The same applies where a Jersey resident partner has made an interest-bearing loan to the limited partnership, whereupon that interest will be taxable in the hands of the Jersey resident partner.
Upon the establishment of a limited partnership, where the general partner and carried interest partner are exempt tax companies for the purposes of the Jersey Tax Law, clearance will typically be obtained from the Comptroller of Income Tax to the effect that a Jersey resident general partner and Jersey resident carried interest partner will not be subject to Jersey income tax on their income arising outside Jersey or on Jersey bank deposit interest. Similarly, where relevant, clearance will normally be obtained to the effect that the payment of profits of the limited partnership by the general partner to the carried interest partner (by way of carried interest) will not be treated as income or profits arising in Jersey, and will not, therefore, be subject to Jersey income tax.
To summarise, Jersey resident partners will be subject to Jersey income tax as follows:
- A Jersey resident partner will be liable to Jersey income tax on all income arising to the limited partnership, whether from Jersey or international sources.
- A Jersey resident general partner and carried interest partner, which are exempt tax companies, will not be liable to Jersey income tax on the income or profits of the limited partnership to the extent that they comprise income or gains arising outside Jersey or bank deposit interest arising in Jersey.
- A Jersey resident carried interest partner which is an exempt tax company will not be liable to Jersey income tax on any carried interest payments made to it out of the profits of the limited partnership by the general partner.
- No Jersey income tax liability will arise on the profits of a realisation of a limited partnership investment.
The Jersey general partner, who is responsible for making the limited partnership’s annual income tax return, must declare:
- Whether any Jersey resident partner has been admitted to the limited partnership.
- The share of Jersey-source income including profits from a trade carried on in Jersey, but excluding bank deposit interest, attributable to non-Jersey resident partners.
- The share of the income of the limited partnership from whatever source, attributable to Jersey resident partners.
Where the income of a limited partnership arises wholly outside Jersey or is Jersey bank deposit interest and the partners are all non-Jersey residents, there is no obligation on the general partner to make Jersey income tax returns.
Emily Haithwaite is a senior legal assistant in the investment funds and private equity group at Jersey law firm Bedell Cristin