Guernsey, Channel Islands

Corporate - Significant developments

Last reviewed - 20 December 2023

Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Pillar Two

BEPS Pillar Two focuses on ensuring a minimum level of taxation and is centred around the following two rules:

The income inclusion rule (IIR) based around existing controlled foreign company (CFC) rule principles.
The undertaxed payments rule (UTPR), which acts as a backup to the IIR by making a top-up tax adjustment in relation to profits of a constituent entity that is not in scope of the IIR.

Together, the IIR and UTPR are known as the global anti-base erosion (GloBE) rules. They would apply to certain multinational enterprise (MNE) groups with 750 million euros (EUR) or more in annual revenues and would by necessity rely on a common tax base. In essence, the GloBE rules would provide jurisdictions with the right to ‘tax back’ up to an agreed minimum rate of tax, where other jurisdictions have not fully exercised their primary taxing rights.

The Pillar Two rules are due to be passed into national legislation for those countries that have committed to implementation. Guernsey and Jersey have not yet issued any draft legislation but have issued a joint statement committing to implement the IIR and a domestic top-up tax from 2025 at the earliest. Applying the rules and determining the impact are likely to be very complex and pose a number of practical challenges.

Changes to economic substance regulations in respect of partnerships

Economic substance requirements that apply to companies now apply to partnerships. The reason is to fully meet commitments the States of Guernsey gave to the European Union (EU) Code of Conduct Group (Business Taxation) in 2018.

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 that have their place of effective management in Guernsey and carry on business activity in Guernsey.

These requirements entered into force for accounting periods commencing on or after 1 January 2022 for partnerships existing as of 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.

Certain specific partnerships are exempt from the economic substance regime, including:

Guernsey registered partnerships with a place of effective management in a 'qualifying jurisdiction'.
Collective investment schemes regulated by the Guernsey Financial Service Commission (GFSC) under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (if they do not meet the self-managed rules).
Wholly domestic partnerships (i.e. partnerships with activities only within Guernsey and not part of a multinational group).
Partnerships made up of only Guernsey tax resident individuals subject to personal tax on the income from the partnership in Guernsey.

'Qualifying jurisdiction' has been defined to mean a jurisdiction other than Guernsey where:

the partnership is subject to the application of substance requirements under the law of the jurisdiction that are substantially the same as the Guernsey regulations, or
the highest rate of tax on income of any person in that jurisdiction is at least 10%.

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 Guernsey Revenue Service by 14 July after the end of the first relevant calendar year it is required to file a return. Penalties of up to 10,000 British pounds sterling (GBP) (for negligence) and GBP 20,000 (for fraud) may apply where the partnership fails to register with the Guernsey Revenue Service.
Mandatory online filing of partnership returns similar to company tax returns, accompanied by financial statements.
Deadline for filing partnership returns is the same as for filing company tax returns. Similar penalties for late filing of return for companies apply for partnerships where the returns are filed late.

The economic substance return for partnerships is substantially similar to the economic substance return for companies. Existing sanctions for failing to comply with economic substance requirements also apply to partnerships (with relevant adaptations).

The Regulations were passed on 22 June 2021 and came into force on 30 June 2021.

On 21 December 2021, Guernsey, the Isle of Man, and Jersey published joint guidance relating to economic substance for partnerships.