Zero Ten - What is it all about?

Basic Structure

The mantra for GST was "let's keep it simple".

When it comes to Zero-Ten Taxation, however, there is something of a nightmare of complexity.

The background comes from the removal of exempt companies, who paid £600 a year, and did not trade in Jersey, and had non-resident ownership. Clearly these companies were not having to apply the same rules as locally owned companies, taxed at 20%. So a system was devised whereby all companies pay the same rate of tax, regardless of whether they are trading here or not. This is (roughly) how it works:

0% - This is the company rate for all trading companies. No tax. But it is not quite as simple, and the labyrinth below explains how.

10% - This is the rate levied on finance companies, basically those entities regulated and licensed by the Jersey Financial Services Commission.

12% - This is the current minimum "effective rate of tax". Bear with me, and you'll see where it comes in later.

20% - This is tax on schedule A - rental income, now to include property development gains on land in Jersey (i.e. if an outside Island company buys a property /land, develops it, and sells it, this profit will be taxed).

Now let us return to 0% company rate.

For the simple case of an investment company (income from dividends on shares, interest and the like), there is a full deemed attribution of the profits of the company to the shareholders at 20%. That is, the shareholders are taxed as if they had taken out the profits as their income, so that it would appear on their tax return.

For your bog standard simple trading company (assume it has no "mixed bag" of rental and investment income as well), let us assume the directors take out a salary. That is subject to ITIS, and is taxed at the appropriate rate. At the end after that come the profits of the company, less any capital allowance.

Now the shareholders may made a distribution to themselves, which might amount to 40% of those profits. But regardless of that, they have attributed to themselves a "deemed distribution" of at least 60%. That is, the local shareholders (not the UK ones) are taxed proportionately as if they had taken out the 60% of these net profits (adjusted for capital allowances) as their income, so that it would appear on their tax return.

How they take these profits in accounting terms does not matter for tax (dividends, shareholder's bonus etc does not matter), they are treated alike for tax purposes.

They can decide to go for the full 100%, but they don't have to. But if they do go for 60%, the 40% profits is stored up, and will suffer tax on any "trigger event", which would include the disposal of shares, leaving the island, the dissolution of a company, or the death of a shareholder. On that basis the accumulated stored up profits are deemed to have been distributed to that shareholder, either in full (or in part with the disposal of some shares). This leaves the possible nightmare of a deferred tax liability growing year by year. Also small shareholders with shares greater than 5% may be stuck with the decisions made by the directors.

The rationale behind the 60% appears to be that cash flow problems might arise otherwise, but that is just a reasonable speculation; I don't know the exact reason. The 20% x 60% gives the 12% current minimum effective rate mentioned above on which is suffered.

With regard to shareholdings, there is a de minimis limit below which shareholdings are not subject to deemed distribution, which is currently 2%.

Complications

Of course, complications arise if the company is a "mixed bag" - i.e. a mix of investment company, rental company and trading company. There are obviously provisions for commencement of trading, and cessation of trade. There are special provisions for a group of companies, and equally if a company owns shares in another company, the deemed distribution is investment income in that company subject to those rules. There are also special treatments relating to profits on which tax has already been suffered (revenue reserve), and changes in the shareholders loan accounts are also scrutinised for taxable income.

Oddities

As trading companies are zero tax, there would appear to be no need to file accounts with the comptroller! However, company law still requires the preparation of accounts. Also the comptroller will almost certainly request accounts from trading companies who trade locally and/or have local shareholders. Moreover, the company secretary will be obliged to file a return regarding the actual distribution to shareholders, who and this will probably trigger the request from the comptroller regarding the accounts.

http://www.gov.je/TreasuryResources/IncomeTax/ZeroTen/