Guernsey, Channel Islands
Changes to economic substance regulations in respect of self-managed funds
Where a Collective Investment Vehicle (CIV) has no other person or body conducting fund management in respect of it, that CIV will be considered a self-managed fund.
As a self-managed fund, that CIV will be subject to the substance requirements as if it carried on the relevant activity of fund management and received income from that relevant activity.
Self-managed funds will be required to demonstrate they have substance in Guernsey with effect from 1 October 2020, the date the amending regulations come into operation. This will not change the tax position of such entities
Economic substance regulations
After concerns were raised by the European Union (EU) Code of Conduct Group that companies in Guernsey could be used to shift profits that do not correspond to their economic activities or presence in Guernsey, legislation was introduced, effective from 1 January 2019, that requires companies with geographically mobile activities (or ‘relevant activities’) to prove their economic substance in Guernsey. To satisfy the substance requirements, companies must show that they are directed and managed in Guernsey, that they conduct core income generating activities in Guernsey, and that there are adequate qualified employees, premises, and operating expenditure in Guernsey. The ‘relevant activities’ are as follows:
- Fund management (this does not include companies that are collective investment vehicles).
- Finance and leasing.
- Distribution and service centres.
- Holding company (a pure equity holding company).
- Intellectual property (IP) holding companies, for which there are specific requirements in high risk scenarios.
Changes to economic substance regulations in respect of partnerships
Economic substance requirements that apply to companies will be extended to partnerships. The reason is to fully meet commitments the States of Guernsey gave to the EU Code of Conduct Group (Business Taxation) in 2018.1
The term “partnerships” includes:
- General partnerships formed in Guernsey
- Limited partnerships (both with and without legal personality) formed under the Limited Partnerships (Guernsey) Law, 1995
- Limited liability partnerships formed under the Limited Liability Partnerships (Guernsey) Law, 2013
- Foreign partnerships (including limited partnerships and limited liability partnerships) formed outside of Guernsey which have their place of effective management in Guernsey and carry on business activity in Guernsey.
These requirements will come into force for accounting periods commencing on or after 1 January 2022 for partnerships existing as at 30 June 2021. New partnerships (being those partnerships formed on or after 1 July 2021) will be in scope for accounting periods commencing on or after 1 July 2021.
The economic substance framework will apply to all partnerships carrying on a relevant activity, other than where it can be demonstrated to the Code Group and EU Member States that risks do not exist. The following exemptions are currently under discussion with the EU Commission:
- Partnerships that are comprised solely of individual partners – where all the income of the partnership will be subject to personal income tax in Guernsey.
- Partnerships that are wholly domestic – where a partnership is neither conducting activities outside of Guernsey, nor part of a group of multinational enterprises, and as such it can be considered to be wholly domestic.
- Partnerships with a nexus (place of effective management) in another jurisdiction – the economic substance regime for companies is applied to those companies that are tax resident in Guernsey. As there is no international concept of tax residence for partnerships, an approach is being developed that, if considered to be sufficiently robust, would lead to a similar outcome.
Collective investment schemes regulated by the GFSC under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 are out of scope.
Any person who is a partner of a partnership carrying on a relevant activity is not required to meet the economic substance requirement in respect of the partnership (i.e. the economic substance requirements will be considered at the level of the partnership).
These economic substance developments will require some changes to the reporting requirements of partnerships, which will include:
- A requirement for all partnerships (including relevant foreign partnerships) to register with the Revenue Service.
- An annual filing requirement for all partnerships confirming whether they need to file economic substance information.
- The tax return filing deadline will coincide with the annual tax return filing date for companies.
- Mandatory online filing of partnership tax returns, accompanied by financial statements.
The economic substance return for partnerships would be substantially similar to the economic substance return for companies. Existing sanctions for failing to comply with economic substance requirements would also be extended to partnerships (with relevant adaptations).
An industry working group has been formed to provide feedback on the draft legislation.
The Revenue Service is also working closely with the tax authorities in the other Crown Dependencies on these changes.
Corporate tax residence
From 1 January 2019, the Guernsey tax residence law was amended to include a central management and control test, as well as provisions to reduce the incidence of dual tax residence. From 1 January 2019, a company is tax resident in Guernsey if:
- it is controlled in Guernsey, or is centrally managed and controlled in Guernsey in that year of charge, or
- it is incorporated in Guernsey and has not been granted tax-exempt status.
A company is not deemed resident in Guernsey, even if it is incorporated, controlled, or centrally managed and controlled in Guernsey, if the company can demonstrate that it satisfies the following conditions:
- the company is tax resident in another jurisdiction under its domestic law
- the company is centrally managed and controlled in this jurisdiction, and
- the company is tax resident in this jurisdiction by reason of a double taxation treaty (DTT) where a tie-breaker clause applies, or
- the highest rate of tax on a company in this jurisdiction is at least 10%.
The company must also show that its residency status in the overseas jurisdiction is not motivated by the avoidance, reduction, or deferral of the liability of any person to tax.
Extension of 10% and 20% income tax rate
Income may be taxable at a 0%, 10%, or 20% rate. There has been an extension of the 10% and 20% income tax rate to include the following sources of income:
- From 1 January 2019, income derived from the regulated activity of operating an investment exchange and income from compliance and other related activities provided to regulated financial services businesses (e.g. advising on corporate governance, risk management, and compliance with the regulatory framework) is taxable at 10%.
- From January 2020, income arising from the activity of operating an aircraft registry is taxable at 10%.
- From 1 January 2020, income arising from the cultivation of cannabis plants and income from the use of those cultivated cannabis plants or parts of those cultivated cannabis plants or licensed production of controlled drugs is taxable at 20%.
Mandatory Disclosure Regime (MDR)
The Government of Guernsey, along with the governments of Jersey and Isle of Man, has pledged to introduce legislation by the end of 2019 in response to the EU Code of Conduct Group (Business Taxation) ('Code Group') review, which suggested the MDR as a further transparency measure for jurisdictions involved in the Code Group's work on economic substance.
The preference of the Government of Guernsey is to implement the MDR based on the Organisation for Economic Co-operation and Development (OECD) model, which requires disclosure in two areas, Common Reporting Standard (’CRS’) Avoidance Arrangements and Passive Offshore Vehicles in Opaque Structures.
Guernsey-United Kingdom (UK) DTT
The revised DTT between Guernsey and the United Kingdom, which entered into force on 7 January 2019, takes effect for Guernsey income taxes from 1 January 2020. The DTT took effect for the following taxes during 2019:
- 1 March 2019 for taxes withheld at source in Guernsey and the United Kingdom.
- 1 April 2019 for UK corporation tax.
- 6 April 2019 for UK income tax.