No Content Set
The Income Tax (Substance Requirements) (Implementation) Regulations, 2018 (the Regulations) came into force on 1 January 2019, requiring all Guernsey tax-resident companies to confirm, for tax periods commencing on 1 January 2019 or later, whether they are in scope of the Regulations and, if so, how they meet the substance requirements set out in the Regulations. Italicised words in this note are terms used in the Regulations.
The Regulations were approved by the EU's ECOFIN council on 12 March 2019 and as a result, Guernsey was re-affirmed as a co-operative jurisdiction in terms of tax transparency and for action 5 of BEPS.
The substance requirements apply to Guernsey tax-resident companies that carry on certain specified geographically mobile activities, including the following relevant activities, which are the subject of this article:
The Crown Dependencies issued joint Guidance Notes on aspects of the Substance Requirements on 26 April 2019 which were updated on 22 November 2019 (the Guidance Notes).
Limited substance requirements apply to companies that are solely carrying on pure equity holding company activities. Where such companies are carrying on other commercial activities, they will fall out of scope of being a pure equity holding company, but could be in scope if they carry on any relevant activity.
Companies carrying on the relevant activities of headquartering or a distribution and service centre will be subject to the substance requirements in full, unless their activities are already subject to such requirements under other relevant activities, such as banking, insurance, fund management or finance and leasing.
A company tax-resident in Guernsey will only be required to comply with the substance requirements for the tax period in relation to which it is reporting where it receives income for undertaking a relevant activity or for being a pure equity holding company or IP Business during the relevant tax period.
The Substance Requirements
Guernsey tax-resident companies carrying on headquartering or distribution and service centre activities and receiving income for such activities will be required to demonstrate that, for the relevant period:
The directed and managed Test
The regulations provide that the test as to whether a company was directed and managed in Guernsey would be met if the following are adhered to:
While it is not necessary for all of the company's meetings to be held in Guernsey, the Guidance Notes state that it is expected that the majority of board meetings will be held in the Island. It is acknowledged that it may be necessary for certain meetings to be held outside Guernsey, with the revised Guidance Notes providing a welcome confirmation that isolated decisions may be taken outside Guernsey provided "it can be evidenced that the decisions taken and the CIGA undertaken in the Island are of a quality and quantity to clearly outweigh the question that the CIGA involving the decisions is undertaken outside the Island."
Core Income Generating Activities (CIGAs)
Guernsey tax-resident companies which carry on relevant activities will need to demonstrate that the core income generating activities that they carry on are carried out in Guernsey, either directly or through outsourced entities in Guernsey.
Where the CIGA comprises the company undertaking an act, that act must be undertaken in Guernsey. Where the CIGA comprises the company making a decision, then the majority of those making the decision must be in Guernsey at the time that decision is taken for the CIGA to be determined as having occurred in Guernsey.
CIGAs for Headquartering
Guernsey tax-resident companies undertaking headquartering activities will need to demonstrate that, where it is undertaking one or more core income generating activities in connection with their headquartering activities, those CIGA take place in Guernsey. The following comprise the list of CIGAs specified for Headquartering:
CIGAs for distribution and service centres
This relevant activity relates to two distinct areas:
The CIGAs relevant to distribution centres are:
The CIGAs relevant to service centres are:
Each Guernsey tax-resident company carrying on such operations or providing such services will need to analyse what functions need to be carried out in Guernsey to demonstrate adequate substance in Guernsey.
Adequate persons, expenditure and presence
All Guernsey tax-resident companies will be required to submit a tax return for periods commencing 1 January 2019 or later. Companies carrying on the relevant activities of headquartering and distribution and service centres must be able to demonstrate on their tax returns:
Further detail of the items required to be identified on the tax returns are out of scope of this briefing.
Requirements for Pure Equity Holding Companies
The law requires pure equity holding companies to have adequate persons and physical presence in Guernsey to hold and manage the shares and equitable interests and requires the company to comply with the relevant companies legislation applicable to it (noting that certain companies may be tax resident in Guernsey but domiciled outside Guernsey). This will require each pure equity holding company to carry out an analysis as to what functions need to be carried out in Guernsey, which is likely to vary depending on the function and purpose of the holding company. It should be noted that holding companies that carry on other commercial activities fall out of scope of the definition of pure equity holding company, but may, then, fall into scope of a relevant activity pursuant to which it will need to comply with the substance requirements.
The new law proposes sanctions for non-compliance to include financial penalties, strike-off from the register of Guernsey companies, and reporting to any relevant tax or regulatory authorities.
The Ogier view
If you require further information or would like to discuss how the proposals may impact your business, please get in touch with your usual Ogier contact.
Bulletin on the 2020 Guernsey Substance Amendment Regulations and the treatment of funds under the substance regime can be found here.
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
Sign up to receive updates and newsletters from us.Sign up
No Content Set