Submission - Enveloped Property Transaction Tax Review - Corporate Partner of Carey Olsen (Jersey) LLP - 24 January 2022

Our ref: DST/1039119/0140/J19436829v2

Scru ny Office

FAO: Corporate Services Panel (the "Panel") Morier House

St. Helier

Jersey JE1 1DD

By email only to: scru ny@gov.je

24 January 2022

Dear Panel Members

Dra Taxa on (Enveloped Property Transac ons) (Jersey) Law 202- (the "Dra EPTT Law") (Link)

1. Introduc on

I am wri ng in response to the Panel's call for evidence concerning the Dra EPTT Law (Link).

I am a Jersey advocate and a partner in the corporate department at Carey Olsen. My day-to-day prac ce is concerned with corporate law, mergers & acquisi ons and the crea on and reorganisa on of investment holding structures u lising Jersey vehicles – most commonly, Jersey private companies incorporated under the Companies (Jersey) Law 1991 (as amended) (the "Companies Law").

The purpose of this le er is to address one specific aspect of the proposed Dra EPTT Law, being the proposed changes to the Companies Law which, in my view, will, if adopted, create uncertainty and complexity around the transfer of shares in a Jersey company. This uncertainty and complexity is for no real benefit and increases the risk of, and administra ve burden a ached to, using a Jersey company in investment holding structures. This creates a risk that the Jersey company (and therefore Jersey as a jurisdic on) will become less a rac ve to interna onal investors which will, in turn, may have a nega ve effect on Jersey's economy.

2. Proposed changes to the Companies Law

Aside  from  the  introduc on  of  the  new  tax  itself,  adop on  of  the  Dra  EPTT  Law  will  also  effect a consequen al amendment to the Companies Law. Specifically, Ar cle 42 (Transfer and Registra on) of the Companies Law will be amended (as per Schedule 3 of the Dra EPTT Law) so as to provide that a Jersey company may not register a transfer of shares which is a "relevant transac on" (in summary, a transac on which is within the scope of the new taxa on regime) unless a receipt for payment of the relevant tax as issued by the Tax Office is produced.

In my view, this proposal is concerning and unwelcome as it creates uncertainty and complexity around such a transfer of shares for no real benefit.

By way of further detail:

1. In the event that a transfer of Jersey shares is recorded in breach (even innocent or mistaken breach) of the Companies Law then the status of that transfer and, accordingly, the tle to the shares of the relevant transferee is uncertain. It may be void (in summary, invalid and unenforceable as if it had never happened) or voidable (in summary, poten ally invalid at the op on of an interested party) – the Dra EPTT Law is not clear on this important issue.
2. A prac cal example where such a breach situa on could arise is a transac on which involves the transfer of shares in a Jersey holding company of a group which happens to have relevant Jersey real estate held further down the corporate structure. Such real estate may not be material to the group as a whole and/or the overall transac on which could lead to a risk that the liability to the EPTT tax may not be iden fied in me for comple on of the transfer. In that event, the purported transfer of shares at comple on would be in breach of the Companies Law. In most cases, if the transac on par es are properly advised, it should be that the issue would be iden fied and resolved in me but the risk remains. Given the prevalence of Jersey companies in corporate holding structures, including those interna onal groups which hold indirect interests in Jersey real estate, this is, in my view, a real concern.
3. Crea ng this uncertainty around tle to shares brings no real benefit. In fact, it prejudices investors using a Jersey company as compared to companies from other jurisdic ons. In the above example, were a company from any other jurisdic on to be transferred then a failure to pay the tax would not invalidate that transfer (since the Companies Law amendment above would not apply to companies incorporated outside Jersey). The tax remains payable in both scenarios but, in the case of a Jersey company, there is also the added complexity and uncertainty of a defec ve transfer and/or ques ons around tle.
4. Another prac cal issue could arise in the context of certain secured lending transac ons, in par cular where, as is commonly the case, debt is used to fund the acquisi on of a Jersey company and, in that connec on, the Jersey company shares are to be pledged/secured by the new owner as collateral for that debt. Customarily, that security takes effect at comple on of the transac on. While there are various methods to create such security under the Security Interest (Jersey) Law 2012 (as amended) ("Security Interests Law"), the usual approach is for secured par es to take possession of the share cer ficate and thereby cons tute "control" security under the Security Interests Law. Post-adop on of the Dra EPTT Law, this approach will not be possible in respect of Jersey companies with an interest in Jersey real estate since the share cer ficate will not be available un l the register of members is updated following payment of the tax. It is not clear whether this issue (and any consequent amendments to the Security Interests Law) were considered when the Dra EPTT Law was dra ed. While I expect prac ce will adapt reasonably quickly to account for this change, the result, given most secured par es will s ll likely require the security to be cons tuted on such terms, is an increased administra ve and costs burden on transac on par es as there will then be a post-closing series of events to deal with. In my experience, this extra burden will be very unwelcome to prac oners and transac on par es.
5. A final prac cal issue relates to the Tax Office itself. The Tax Office presumably will be properly resourced to deal with the addi onal workload which will result from these changes. However, if that is not the case, or the Tax Office otherwise suffers unexpected capacity or process issues, then the result could be a material delay between the effec ve comple on of a sale transac on and that being recorded legally in the records of the Jersey company. This is very likely to cause further uncertainty in the context of a sale transac on which will be very unwelcome. The Tax Office staff are already under pressure to assist with a number of tasks ancillary to corporate transac ons (for example, clearances in the event of demergers, mergers or migra ons of Jersey companies) and this could add to its workload materially.

3. Conclusion

Overall, the effect of all of the above, in my view, may be to discourage investors from using Jersey companies as their investment vehicles – either at all, or at least to structure capital and sale transac ons to occur at a level other than the Jersey company. Investors in the interna onal capital markets now typically and rou nely analyse in granular detail the risks and benefits of using one corporate form or jurisdic on over another. In my view, the above factors make the use of a Jersey company less a rac ve. This may, in turn, have a nega ve effect on Jersey's economy.

I would be pleased to discuss any of the above in further detail should the Panel consider that to be of assistance.

Yours faithfully

David Taylor

Partner

CAREY OLSEN JERSEY LLP

Telephone:  +44 1534 822339

Email:   david.taylor@careyolsen.com