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UK-Jersey Double Taxation Agreement (DTA): Provisions and Implications

Published by Susan Basnet
Posted Date: June 18, 2024 , Modified Date: July 10, 2024

On 2nd July 2018, the governments of the United Kingdom of Great Britain and Northern Ireland and Jersey signed a landmark agreement to eliminate double taxation on income and capital gains and to prevent tax evasion and avoidance. This Agreement was formalised through an exchange of letters and came into effect on 19 December 2018.

Here, we will examine the articles of the Agreement and the implications for the taxation of various types of income in both jurisdictions, commencing with its scope and application.

Scope and Application

The first two articles in the Agreement outline the scope and applicability of its provisions, detailing the persons and types of taxes it covers. Specifically, they define who is affected by the Agreement and the various taxes that fall under its guidelines.

Article 1: Persons Covered

Article 1 of the document explains that the Agreement applies to persons who are residents of one or both of the territories, i.e. the UK and Jersey. For this Agreement, income earned through an entity or arrangement considered fiscally transparent under the tax laws of either Territory will be regarded as income of a resident of that Territory, but only if that income is treated as the income of a resident for tax purposes in that Territory.

Article 2: Taxes covered

This Agreement applies to taxes on income and capital gains imposed by a Territory or its local authorities, regardless of how they are applied. It includes all taxes on total income or parts of income, such as gains from selling movable or immovable property.

Specifically, the taxes covered are income tax ("Jersey tax") in Jersey and income tax, corporation tax, and capital gains tax ("United Kingdom tax") in the United Kingdom. The Agreement also extends to any similar taxes introduced after its signing, whether they replace or supplement the existing taxes. The tax authorities of both territories will notify each other of any major changes in their tax laws.

General Definitions

Article 3 of the document to provides definitions to relevant subjects for the interpretation of the Agreement.

  • The term "Jersey" defines the Bailiwick of Jersey, including the territorial sea.
  • The term "United Kingdom" is used to indicate Great Britain and Northern Ireland.
  • The terms "a Territory" and "the other Territory" mean Jersey or the United Kingdom, as the context requires.
  • The term “competent authority” means the Minister for Treasury and Resources or his authorised representative in Jersey and, the Commissioners for Her Majesty’s Revenue and Customs or their authorised representative in the United Kingdom.
  • The term “person” includes an individual, a company and any other body of persons.
  • The term “enterprise” applies to the carrying on of any business.
  • The term “company” means a corporate body or any entity that is treated as a body corporate for tax purposes.
  • The term “offshore activities” refer to those conducted in a Territory concerning seabed exploration or exploitation.

Residency Status

Article 4: Resident

Article 4 of the tax agreement establishes the residency status of a person, whether an individual or a company. As per the article, any person is resident in the UK for tax purposes if they are liable to tax in the UK due to the reason of their domicile, residence, place of management, place of incorporation or any other criterion of a similar nature. However, the term 'resident' does not apply to persons who are liable to tax in the UK with respect to only income or capital gains from sources within the UK.

Resident Double taxation Agreement

The same definition applies to determining the residency status for individuals from Jersey.

Moreover, where an individual becomes a resident of both Jersey and the UK as per the above definition, his residency status will be established based on other factors, including:

Permanent Home: An individual is deemed to be a resident of the Territory in which he has a permanent home. In cases where the person has a permanent home in both territories, his residency will be established on the proximity of his personal and economic relations to the territories. 

Habitual abode: If the above test fails, whether due to the permanent home not being available or due to the failure to establish the proximity of relations, a person will be the resident of the Territory in which he has a habitual abode, i.e. the period an individual resides in a particular Territory.

If both of these tests fail, a mutual agreement between the competent authorities shall settle the question.

Specific Tax Provisions

Article 5: Income from Immovable Property

Article 6 of the Agreement makes it clear that if a resident of a Territory derives income from immovable property situated in the other Territory, it may be taxed in that other Territory. For instance, a UK resident with rental income from Jersey shall be subject to taxes in Jersey on that income.

For the context, the income from immovable property includes income derived from the direct use, letting, or use in any other form of immovable property, whether held by an individual or an enterprise.

Article 6: Permanent Establishment

Article 6 of the Agreement focuses on when an enterprise is deemed to have a permanent establishment in other territory.

For the purposes of this Agreement, "permanent establishment" refers to a fixed place of business where an enterprise conducts its activities either fully or partially. This includes places like a management office, branch, office, factory, workshop, or sites for natural resource extraction such as mines and oil wells. A construction project becomes a permanent establishment if it lasts more than twelve months.

Lastly, an enterprise does not have a permanent establishment merely by conducting business through an independent broker or agent, and the relationship between parent and subsidiary companies does not automatically create a permanent establishment.

Article 7: Business Profits

The applicability of tax on the profits of an enterprise is explored in Article 7 of the Agreement. As per Article 7, such profits shall be taxable only in that Territory where the profit is generated. However, where the enterprise carries on business in the other Territory through a permanent establishment, the profits that are attributable to the permanent establishment may be taxed in that other Territory.

The profits attributable to the permanent establishment means the profits it might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions.

Article 8: Profits from International shipping and air transport businesses

Article 8 addresses the taxation of an enterprise's earnings on international shipping and air transport.

Such profits are only taxable in the Territory in which the income is generated. For this article, the profits include,

  • Profits from rental on a bareboat basis of ships or aircraft, and
  • Profits from the use, maintenance or rental of containers used for the transport of goods or merchandise.

Article 9: Associated Enterprises

Article 9 of the Agreement deals with the taxation of associated enterprises. It applies in two scenarios:

  • When an enterprise from one Territory is directly or indirectly involved in the management, control, or capital of an enterprise in the other Territory.
  • When the same persons are directly or indirectly involved in the management, control, or capital of enterprises in both Territories.
 Associated Enterprises

If the conditions between these associated enterprises differ from those between independent enterprises, any profits that should have accrued to one enterprise but did not because of these conditions can be included in the profits of that enterprise and taxed accordingly.

Additionally, if a Territory taxes profits of its enterprise that have already been taxed by the other Territory—and those profits would have accrued to the first enterprise under independent conditions—the other Territory will adjust the tax amount appropriately. This adjustment will consider the other provisions of the Agreement, and the competent authorities of both Territories will consult each other if needed.

Article 10: Dividends

Dividends paid by a company in one Territory to a resident of another Territory are generally taxed in the resident's Territory. However, dividends paid by a company in one Territory can also be taxed in that Territory based on its laws. But if the person receiving the dividends lives in the other Territory:

a)

Normally, these dividends will not be taxed in the Territory where the company is located.

b)

If the dividends come from income earned from real estate (as defined in Article 6) by an investment vehicle that distributes most of its income annually and is tax-exempt, then the tax in the company's Territory cannot be more than 15% of the dividends unless the recipient is a pension scheme in the other Territory, in which case the exemption in (a) applies.

This rule does not change how the company's profits, from which the dividends are paid, are taxed.

Article 11: Interest

The taxation on the interest is dealt with in Article 11 of the document.

Interest arising in a Territory and beneficially owned by a resident of the other Territory may be taxed in that Territory as well as the other Territory, according to the laws of that Territory. However, suppose the beneficial owner of the interest is a resident of the other Territory, and at least one of the following conditions is met. In that case, the interest shall be taxable only in that other Territory.

The conditions include,

  • The interest is beneficially owned by an individual, a pension scheme, a bank or building society, etc.  
  • The interest is paid by a Territory, one of its political subdivisions, local authorities or statutory bodies.

Article 12: Royalties

Taxation on the royalties arising in territories is dealt with in Article 12 of the Double Taxation Agreement (DTA). For the purposes of DTA, the term “royalties" refers to payments for the use of copyrights, patents, trademarks, designs, plans, secret formulas, or industrial, commercial, or scientific information.

Primarily, royalties arising in one Territory and beneficially owned by a resident of the other Territory may be taxed in the resident's Territory and in the Territory of origin. However, if the beneficial owner is a resident of the other Territory and meets specific conditions, they are taxable only in the resident's Territory. Conditions include ownership by government entities, individuals, publicly traded companies, companies with less than 25% foreign ownership, or approved persons, etc.

It's worth noting that if the beneficial owner has a permanent establishment in the Territory of origin, and the royalties are connected to it, Article 7 provisions apply instead.

Article 13: Capital Gains

Article 13 of the Agreement covers the provisions for capital gains tax. The tax treatment of capital gains depends on various factors, such as the type of assets and the seller's residency. The provisions can be summarised as follows:

Immovable Property: If a resident of one Territory sells immovable property located in the other Territory, the gains from the sale may be taxed in that other Territory.

Shares and Interests: Gains from selling shares or similar interests that derive more than 50% of their value from immovable property in the other Territory can be taxed in that other Territory.

Business Property: Gains from selling movable property that is part of the business property of a permanent establishment in the other Territory may be taxed in that other Territory.

Ships and Aircraft: Gains derived by a business from selling ships or aircraft operated in international traffic or from movable property related to the operation of such ships or aircraft will be taxed only in the Territory where the business resides.

Other Assets: Gains from the disposal of assets not described above will only be taxed in the Territory where the seller is a resident.

Article 14:  Income from Employment

The provisions for taxation on income from employment are covered in Article 14 of the Agreement. Under this article, the salaries, wages, and other similar remuneration derived by a resident of a Territory with respect to employment are taxable only in that Territory. However, if employment is exercised in another Territory, such remuneration may be taxed in that other Territory.

Income from Employment Double taxation Agreement

For the remuneration derived by a resident of a Territory from the employment exercised in the other Territory to be taxable only in the Territory where he is resident, all of the following conditions must be met:

  1. The person is in the other Territory for 183 days or less in any twelve-month period that overlaps with the fiscal year.
  2. The employer is not a resident of the other Territory.
  3. The employer does not have a permanent establishment in the other Territory that covers the payment.

Importantly, if a resident works on a ship or aircraft operated in international traffic (not just within the other Territory), their earnings will only be taxed in their home Territory.

Article 15: Directors' fees

Directors' fees and other similar payments derived by a resident of a Territory in his capacity as a member of the board of directors of a company which is a resident of the other Territory may be taxed in that other Territory. The provision on the director’s fee is explored in Article 15.

Other Provisions

Articles 16 to 21 cover topics such as income for entertainers and sportsmen, pensions, government service, and students, etc. These provisions can be summarised as follows:

Article 16: Income as artists and sportsmen

The income earned by a resident of a Territory as an entertainer, such as a theatre, television artist, or as a sportsman, from his personal activities in the other Territory, may be taxed in that other Territory.

Article 17: Pensions

Article 17 clarifies that pensions paid to an individual shall only be taxable in the Territory where he is resident.

Article 18: Government Service

Remuneration, including pensions, paid by the Government of one of the territories for services rendered to that Government shall be exempt from tax in the other Territory if the individual is not ordinarily resident in that other Territory.

Article 19: Students

Payments received by a student or business apprentice for the purpose of education and training are exempt from taxes in the Territory where they are studying if they were a resident of the other Territory and the payments come from outside the Territory where they are studying.

Article 20: Other Income

Article 20 of the Agreement document specifies that income not dealt with in the previous articles, regardless of its source, are taxable only in the Territory of residence.

However, there are exceptions, notably when income is paid to a resident of one Territory from sources controlled by trustees or personal representatives who are residents of the other Territory. In such cases, the income is treated as arising from the same sources and in the same proportions as the income received by the trustees or personal representatives, with any tax paid by them on behalf of the beneficiary being treated as paid by the beneficiary.

Article 21: Miscellaneous Rules Applicable to Offshore Activities

An enterprise conducting offshore activities in a different Territory is treated as having a permanent establishment there, unless the activities last less than 30 days in a fiscal year.

Profits from specific offshore services, like transportation or ship operations, are taxed solely in the resident Territory of the income recipient. Income from exploration rights or related property sales may be taxed where the activities occur.

Salaries from offshore-related employment are typically taxed where the work is done, except for those earned aboard ships or aircraft engaged in offshore operations, which are taxed only in the resident Territory.

The definition of offshore activities is given in the Article 3 of this document.

Article 22: Elimination Of Double Taxation

The primary reason of the Double Taxation Agreement (DTA) is to make sure that individuals are not taxed in two separate territories. Article 22 of the Agreement explains how this is worked out in both of the territories.

In Jersey, double taxation is avoided by:

  • Including income items eligible for UK taxation in the taxable base when taxing Jersey residents.
  • Allowing a deduction from a Jersey resident's income tax equal to the UK income tax paid, limited to the portion of income tax attributable to UK-taxable income before deduction.

Likewise, Under UK law, UK residents can get a tax credit for taxes paid in Jersey on income, profits, or gains from Jersey.

  • Jersey tax paid on income or gains from Jersey can be credited against UK tax on the same income or gains, except for taxes on profits from which dividends are paid.
  • Dividends paid by a Jersey company to a UK company are exempt from UK tax if UK exemption conditions are met.
  • Profits from a permanent establishment in Jersey of a UK company are exempt from UK tax if UK exemption conditions are met.
  • For non-exempt dividends paid by a Jersey company to a UK company (which controls at least 10% of the voting power), the UK tax credit also includes Jersey tax paid on the profits from which the dividend is paid.

Article 23: Entitlement to Benefits

An important disclaimer, in regard to the entitlement of tax benefits is provided on Article 23 of the Agreement. The article explains that a benefit will not be given for income or capital gain if it's reasonable to think that getting that benefit was one of the main reasons for any arrangement or transaction leading to it. Unless it's proven that giving that benefit would align with the purpose of the relevant provisions of this Agreement.

Entitlement to Benefits Double Taxtation agreement

If someone is denied a benefit under this Agreement because of the above, the authority that would have granted it can still give it or provide different benefits for that income or gain if, upon request, they determine that the benefits would have been given even without the arrangement or transaction mentioned earlier. The authority receiving the request will consult with the authority of the other Territory before denying the request.

Article 24: Non-Discrimination

Article 24 of the Agreement document addresses that a person, partnership, or association recognised as such under the laws of one Territory should not face different or more burdensome taxes or related requirements in the other Territory than those faced by similar entities in that other Territory, especially regarding residency.

Similarly, the taxes on a permanent establishment of a business from one Territory, located in the other Territory, should not be less favorable than the taxes on businesses from the other Territory engaging in the same activities.

Article 25: Mutual Agreement Procedure

Article 25 of the Agreement outlines the Mutual Agreement Procedure (MAP) for resolving taxation disputes between the involved territories. Unresolved cases are decided via arbitration between the competent authorities, provided that the cases are presented in time.

Suppose a person believes they are facing taxation contrary to the Agreement's provisions. In that case, they can present their case to either Territory's competent authority within three years of the taxation issue's notification.

The competent authorities will endeavour to resolve the case mutually, and if unsuccessful, will seek resolution with the other Territory's authority. Any agreement reached supersedes domestic law time limits.

Arbitration Process for Unresolved Cases:

If a taxation dispute remains unresolved after two years of the initial presentation, the case can be arbitrated upon the person's request. The arbitration decision becomes binding unless a directly affected person rejects the implementing mutual Agreement.

The application of the arbitration process is determined through mutual Agreement between the competent authorities.

Article 26: Exchange of Information

The necessity to exchange the information in between the competent authorities of two territories (defined in Article 3) is addressed in Article 26 of the Double Taxation Agreement (DTA). The relevant information will be exchanged for enforcing the provisions of the Agreement. The article also stresses that the information received by a Territory must be treated as secret, similar to domestic tax information.

If a Territory requests information, the other Territory cannot refuse to supply it, and must use its measures to obtain it, even if it doesn't need it for its own tax purposes.

However, the territories are not obligated to do the following:

  • Carry out administrative measures that violate the laws or administrative practices of either Territory.
  • Supply information that is not obtainable under the laws or normal administrative practices of either Territory.
  • Provide information that would reveal trade secrets or contravene public policy.

Article 27: Assistance in the Collection Of Taxes

Under Article 27 of the Agreement, the territories agree to help each other collect revenue claims, including taxes, interest, penalties, and collection costs, as long as this cooperation aligns with their laws and the Agreement. If a revenue claim is enforceable in one territory and the debtor cannot prevent its collection, the other territory will collect it as if it were their own tax.

Double taxation agreement Collection Of Taxes

Similar to Article 26, Article 27 highlights that the territories are not obligated to certain practices, such as:

  • Perform actions against its laws or administrative practices.
  • Undertake actions contrary to public policy.
  • Assist if the requesting territory has not used all reasonable collection measures.
  • Assist if the administrative burden outweighs the benefit.
  • Assist if the taxes in question are considered contrary to generally accepted taxation principles.

Article 28: Entry Into Force

The final two articles of the Agreement, Articles 28 and 29, outline the relevant dates and procedures for its commencement and termination. The Agreement was formalised through an exchange of letters signed in London on 12 July 2018, and it entered into force on 19 December 2018.

The Double Taxation Agreement (DTA) took effect in:

  • Jersey: for income tax on 1 January 2019.
  • United Kingdom: for income tax on 6 April 2019, and for corporation tax on 1 April 2019.

Article 29: Termination

As the Agreement has already commenced, the Agreement will stay in effect until one of the Territories decides to terminate it. Either Territory can end the Agreement by giving a written notice at least six months before the end of any calendar year, but only after the Agreement has been in force for five years. Upon termination, the Agreement will cease to have effect:


In Jersey:

  • Taxes withheld at source: For amounts paid or credited after six months from the notice date.
  • Income tax: For any assessment year starting on or after January 1st following the notice date.


In the United Kingdom:

  • Taxes withheld at source: For amounts paid or credited after six months from the notice date.
  • Income tax and capital gains tax: For any assessment year starting on or after April 6th following the notice date.
  • Corporation tax: For any financial year starting on or after April 1st following the notice date.

Conclusion

With its entry into force in 2018, the Agreement has already made a tangible impact on cross-border taxation, providing clarity and certainty for taxpayers and tax authorities alike. As both territories continue to evolve their tax systems and policies, the Agreement stands as a testament to the commitment to fair and effective tax administration, benefiting individuals, businesses, and the broader economy.

In essence, the Double Taxation Agreement (DTA) between the United Kingdom and Jersey represents a cornerstone of international tax cooperation, facilitating economic growth, investment, and prosperity for both territories while ensuring fairness and integrity in the global tax system.

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Susan Basnet
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