1. Up to 1994 limited partnerships based in Jersey have been accommodated within an unchanged tax system. Registered abroad, mostly in Delaware, they have been vehicles set up to allow overseas investors to participate in venture capital funds.
2. The only income arising has been overseas investment income or local bank deposit interest. The non-resident partners have not been liable to income tax on this income. In the absence of trading profits no assessments have been required to be made in the partnership's name.
3. From 1995, the Limited Partnership Law permits the registration of limited partnerships in Jersey. This will lead to an increase in the numbers and scope of limited partnerships. The Income Tax Law has been revised in order to take account of this new development
Limited partnership - general
4. The statutory provisions with regard to the limited partnership are found in Article 76A of the Income Tax Law. They apply not only to a limited partnership registered in Jersey but also to a limited partnership registered abroad. A limited partnership is defined as - "a partnership consisting of one or more persons who are general partners and 1 or more persons who are limited partners."
5. The limited partnership is not itself a subject for assessment to income tax. The partners in the limited partnership are assessed in their own names as follows:
- resident partners are charged to Jersey income tax on the whole of their share of the income arising to the limited partnership
- non-resident partners' liability to Jersey income tax is limited to Jersey-source income (see, however, paragraph 10) but excluding, by longstanding concession. bank deposit interest
6. The general partner or, if there is more than 1, the first-named general partner, is responsible for making a return of income liable to Jersey income tax, namely:
- in the case of a non-resident partner, Jersey-source income, including trading profits which are derived other than from international activities, but excluding bank deposit interest
- in the case of a Jersey resident partner, the share of income of that partner
7. There is no entitlement or obligation to deduct tax from interest etc. under Articles 86 or 87 of the Income Tax Law if the general partner responsible for making the payment is either:
- a non-resident, or
- an International Business Company
8. In general, interest receivable by a non-resident partner from a loan made to a limited partnership is not Jersey-source income.
9. Profits of a capital nature are not liable to Jersey income tax. It follows that gains made on the disposal of investments by, for example, venture capital funds are not liable to Jersey income tax.
Limited partnerships: as a vehicle for non-residents
10. As mentioned, a non-resident's liability to Jersey income tax is limited to Jersey-source income, other than local bank deposit interest. "Jersey-source income" includes profits from a trade carried on in the island. However, Article 76A excludes the non-resident partner from tax on profits derived from international activities, being business activities carried on outside the island.
11. In practice this will result in no tax being paid by overseas investors on their share of trading profits of the limited partnership, except in the case where an identifiable part of the trade is carried on in Jersey.
12. This latter situation is expected to occur infrequently but it is necessary in all cases where the limited partnership is carrying on a trade (as opposed to holding investments) to obtain clearance from the comptroller on the question of whether the trading profits of the limited partnership are derived from international activities. The initial submission to the comptroller should include an assessment of the impact of the trading activities on the Island's resources, such as staff and / or accommodation.
13. As a general rule, the trading profits will be fully assessable to Jersey income tax in the event of the limited partnership's activities requiring a permit under the Regulation of Undertakings and Developments (Jersey) Law 1973, as amended. That law calls for a licence for any business undertaking carried on in the island but it does not extend to an undertaking administered in the island, that is to say an undertaking not involving the employment of any staff or the occupation of floor space, and whose trading activities are carried on outside the island.
14. To summarise the position in the case of a limited partnership set up as a vehicle for non-residents:
- where the limited partnership's income consists wholly of investment income the non-resident partner will not be liable to income tax (except in the unusual circumstance that the income includes Jersey-source investment income other than bank interest)
- in the case where a trade is carried on wholly outside the island the non-resident partner's share of the profits of that trade will not be liable to income tax
- where the trade is partly or wholly carried on in the island the non-resident partner will be liable to income tax in respect of his share of the profits arising from the Jersey source
15. Although the vehicle may be intended for overseas investors there is no bar to a local resident becoming a partner. The resident partner is liable to income tax on his share of the income whenever, and from whatever source, it arises and is under an obligation to report any such income when making his annual return.
Limited partnership: as a vehicle for local traders
16. Aside from its role as a vehicle for the international investor, the limited partnership may be used (perhaps in place of an "ordinary" partnership) to carry on a local trade.
17. If a limited partnership takes over an existing trade there has been a succession within the meaning of Article 75(2) of the Income Tax Law. The consequences are that -
- the cessation basis of assessment will apply to the former proprietor, and
- the commencement basis of assessment will apply to the limited partnership
18. As mentioned in paragraph 5, assessments are made in the name of the individual partners. The limited partnership itself is not charged to tax. For local trades, this represents the main difference between a limited partnership and an "ordinary" partnership.
19. Registration of a limited partnership is notified to the Income Tax Department which issues a questionnaire aimed at establishing the nature of the vehicle.
20. A limited partnership set up for non-residents is asked to sign an undertaking that the Comptroller will be notified of
- the admission of any Jersey resident partner; and
- the existence of Jersey-source income (excluding local bank deposit interest) arising to non-resident partners
21. For so long as all the income arises outside of Jersey, or is local bank deposit interest, and the partners are all non-resident, no returns of income will be required.
22. In the case of a limited partnership carrying on a trade partly or wholly in Jersey, a copy of the accounts is to be sent annually to the Comptroller, together with a computation of the taxable profits.