Guernsey, Channel Islands

Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Pillar 2

BEPS Pillar 2 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 2 rules are due to be passed into national legislation for those countries that have committed to implementation. On 19 May 2023, the governments of Guernsey, Jersey, and the Isle of Man published a joint statement regarding their approach to the OECD’s Pillar 2 framework. Their intention is that this approach will comprise the implementation of an IIR and a domestic minimum tax from 2025. As per the Joint Statement, the three Crown Dependencies will continue to work together, monitoring implementation internationally and adapt accordingly to developments that may require adjustments to their own implementation plans.

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.

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 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.

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 (PIT) 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, where 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 Guernsey Financial Service Commission (GFSC) under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 are out of scope (if they do not meet the self-managed rules).

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. 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 will 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 would also be extended 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.

Partnerships will be required to register with the Guernsey Revenue Service, independent of whether they conduct a relevant activity or not. The Guernsey Revenue Service has issued Form 715 for partnership registrations, which is required to be submitted by 14 July after the end of the first relevant calendar year it is required to file a return. Partnerships will be required to file annual partnership returns (if required by the Director of the Guernsey Revenue Service) along with submission of financial statements.