One of the main reasons why tax-exempt institutional investors invest through vehicles based in Jersey is tax neutrality.
So what is tax neutrality?
The concept of tax neutrality is simple; that by not imposing additional layers of tax, decisions can be made on their economic merits alone.
Company A invests in Company B. Company B pays tax on its profits in its home jurisdiction. Company A then pays tax, in its home jurisdiction, on the distributions it receives from Company B.
If Company A wanted to invest jointly with a partner, Company C, they may wish to pool their funds in an intermediary vehicle. This vehicle can reduce the administrative burden for all parties, provides an independent platform which treats each investor fairly and can be based in a stable jurisdiction to reduce country risk concerns.
In the above example, some jurisdictions would tax the intermediary vehicle, meaning the investment entity itself is no longer tax neutral, potentially putting the whole investment at risk.
A tax neutral jurisdiction such as Jersey would not tax the intermediary vehicle. Tax would continue to be paid by the ultimate investors (Company A and Company C) in their home jurisdiction, and also by the underlying investment (Company B) in its home jurisdiction. Therefore, the use of a tax neutral international finance centre (“IFC”) such as Jersey should result in no more or less tax being payable. This is a simplified example, as withholding taxes, double tax agreements and other matters would also be taken into account.
In this report, tax neutrality was seen a critical requirement for Jersey’s success. Tax neutrality is not tax evasion and it doesn’t make it easier to avoid paying tax either. Tax neutrality is, in fact, transparent and well-regulated, providing investors with the opportunity to use Jersey’s services without having to pay an additional layer of tax and is a clear and simple way of allowing vital capital between countries. It is also the responsibility of individuals and companies to pay any taxes they may owe in their home country.
So, to make sure the Jersey system isn’t being taken advantage of, it uses an independently-approved series of checks – one of the strictest in the world – to clarify where funds come from. Jersey has also signed 31 information sharing agreements with other countries, to help prevent multinationals from avoiding paying taxes due there.
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