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18 November 2013
Over the past year, Jersey has continued to attract high-profile international structured finance work. The island remains a preferred choice for an assortment of institutions structuring complex finance transactions across Europe. These range in nature from property investment transactions through to complex securitisation transactions. Such continued success is indicative of Jersey having positioned itself well in the global capital markets.
This article examines the impact of the States of Jersey’s response to the recently adopted European Tax Package in the context of structured finance work and the Organisation for Economic Cooperation and Development’s (OECD) initiative on harmful tax competition. It also considers the impact of the Enron affair on structured finance transactions.
Although not part of the EU and so not subject to its fiscal legislation, Jersey has always been sensitive to the need for international cooperation. It cannot adopt an isolationist approach to these matters. Success in the global financial marketplace requires full access to these markets for products structured in Jersey together with the ability for capital to flow freely to and from the island. These factors require international cooperation. Therefore, in keeping with Jersey’s policy of constructive international engagement, Jersey has committed itself to adopting similar measures to those contained in the EU Directive on the Taxation of Savings Income. The island has also committed itself to phasing out those practices that have been identified as ‘harmful’ under the EU Code of Conduct on Business Taxation. In addition, the island gave certain undertakings to the OECD, which ensured it did not appear on the OECD’s blacklist of uncooperative
EU Savings Tax Directive
The directive will require each EU member state to provide to each other member state’s tax authorities details of interest and other similar payments made by a person in its jurisdiction to an individual resident in such other member state.
Rather than make disclosures as to such payments, Austria, Belgium and Luxembourg have instead opted (at least for a transitional period) to apply a withholding tax system. This means that when such payments are made, an amount will be withheld from such payments as a withholding tax. The initial amount withheld will be 15 per cent, increasing over a period of time to 35 per cent.
On the basis that Jersey wishes to operate on a level playing field with some of its principal competitor jurisdictions, it is proposed that the island introduces a similar withholding tax system in relation to the payments of interest and other similar types of payment to residents of EU member states.
Most structured finance transactions involve payments of interest by one party to another. Recipients of interest are normally anxious to receive the full amount of interest free from any withholding. So will the imposition of a withholding tax affect Jersey’s attraction for structured finance transactions?
Fortunately, the proposed requirement to withhold tax on interest payments is quite narrow. Payments of interest to companies will be exempt from the requirement, as will payments of interest to agents who pay the interest on to another party. Only payments made to individuals resident in the EU for the benefit of such peo-ple will be subject to withholding tax. Even in these cases, a mechanism will be available for them to receive payments free of any withholding, provided that details of such payments are communicated to the member state in which they are resident.
Most standard finance transactions using a company incorporated in Jersey require that company in the ordinary course to make all payments to a corporate paying agent, which in turn pays the money on to investors through the clearing systems. It would be highly unusual for a Jersey company to be required to make any payments directly to an individual.
Accordingly, the implementation of a withholding tax system along the lines proposed should not compromise Jersey’s attraction as a jurisdiction in which to undertake structured finance transactions.
Exempt companies and the Code of Conduct on Business Taxation
Exempt companies are companies that, although incorporated in Jersey or managed and controlled in Jersey, are treated as if they are not resident in Jersey for tax purposes. The exempt company is used for a wide variety of purposes – it is one of the key products of Jersey’s finance industry.
In structured finance transactions, the exempt company is used as an entity through which complex transactions and money-flows can be structured without concern as to how such arrangements may be affected by the imposition of taxation. The exempt company provides structured finance transactions with tax neutrality, which is a fundamental requirement to most of these types of transactions.
The EU Code of Conduct working group identified the Jersey exempt company as a perceived harmful tax measure. It is regarded as discriminatory in that, in most cases, exempt companies are not allowed to be owned by Jersey residents. In reality, it is only certain uses of the exempt company that are regarded as harmful. Tax-neutral companies that undertake structured finance transactions can be established in certain EU member states, and these have not been identified as harmful.
Nevertheless, Jersey’s government has indicated a commitment to phase out the exempt company by the end of 2008. Tax neutrality is to be preserved by adopting a zero rate of corporate tax for all companies, irrespective of ownership, other than companies undertaking certain activities, which necessitates a higher rate of tax. This arrangement will ensure that even after the demise of the exempt company in 2008, Jersey companies will continue to be able to offer the same degree of tax neutrality as is currently offered by the exempt company.
Jersey was listed in the OECD’s 1998 report ‘Harmful Tax Competition: An Emerging Global Issue’ as among the 47 jurisdictions that have the potential for satisfying their tax haven criteria.
However, it gave to the OECD certain undertakings (primarily relating to the provision of information to tax authorities upon specific request for the investigation and prosecution of criminal tax matters, on a reciprocal basis) which ensured that it was not on the OECD’s List of Uncooperative Tax Havens (known as the blacklist), which was published on 28 February 2002. Pursuant to its undertakings, Jersey is entering into a series of tax information exchange agreements with other countries on this bilateral basis. It has concluded the first of these with the US.
Undoubtedly, changes to Jersey’s taxation system represent a further challenge for the island’s finance industry. However, Jersey continues to improve its standing in the international marketplace.
Over the last few years Jersey has been extremely successful at demonstrating its high standards of financial regulation to regulators around the world. It has ensured that it is not on the OECD’s blacklist of uncooperative tax havens. It has emerged from the Enron affair as a jurisdiction willing to share information, unlike certain others. The reform of Jersey’s taxation system will assist the island in demonstrating that it operates a system of taxation that is compatible with others in the international community. This is a necessary process if Jersey is to continue to prove its ability as an international centre of finance, whether in relation to structured finance or other key areas of financial services.
Alan Stevens is a partner and Siobhan Riley a senior associate at Carey Olsen