The Guernsey government has brought in new regulations to impose an economic substance test for Guernsey tax-resident companies to meet the requirements of the EU Council's Code of Conduct Group.

The regulations, which came into force on 1 January 2019, propose the establishment of new tests for tax-resident companies carrying on relevant activities, including fund management. The tests require companies that are in scope to demonstrate that they meet the economic substance tests, including that:

  • they are directed and managed in Guernsey;
  • certain of their core income generating activities (CIGAs) are undertaken in Guernsey; and
  • the companies have adequate premises, employees and expenditure in Guernsey proportionate to the level of relevant activity carried on in Guernsey.

Notably, fund vehicles themselves are out of scope, as are limited partnerships, but it is expected that the majority of Guernsey's fund manager clients will be in scope (as they are usually structured as companies and will have gross income in relation to their fund management activities); therefore, specific consideration will need to be given to the level of activity carried on in Guernsey and to outsourcing arrangements.(1)

It is anticipated that detailed guidance in the form of FAQs or formal guidance notes will be issued soon, which is likely to include some clarity on the definition of 'adequacy' and to confirm that the definition of 'employee' includes directors and employees of any third-party administrator on which the fund manager may rely to enable it to perform its functions.

'Directed and managed' test

The economic substance requirements include a 'directed and managed' test. Fund managers must be directed and managed in Guernsey, which requires:

  • meetings of the board of directors (all of whom must have the necessary knowledge and expertise to discharge their duties as a board) in Guernsey at adequate frequencies, given the level of decision making required;
  • a quorum of the board of directors to be physically present in Guernsey at these meetings (directors do not need to be Guernsey resident);
  • minutes recording the strategic decisions of the company made at these meetings; and
  • retention of all company records and minutes in Guernsey.


Having regard to the level of fund management carried on in Guernsey, fund managers must:

  • have an adequate number of employees;
  • demonstrate adequate expenditure in Guernsey; and
  • have adequate physical presence in Guernsey.

The guidance notes are expected to clarify that 'physical presence', in the context of fund management, means access to premises.


Fund managers must conduct CIGAs in Guernsey, which includes:

  • taking decisions on the holding and selling of investments;
  • calculating risks and reserves;
  • taking decisions on currency or interest fluctuations and hedging positions; and
  • preparing relevant regulatory and other reports for government authorities and investors.

Further clarification expected

The guidance notes are expected to confirm that some, but not all, CIGAs must be carried on in Guernsey by a fund manager to satisfy the substance tests. Consideration will need to be given to ensure sufficient CIGAs are carried on in Guernsey to avoid a letter-box entity characterisation. The draft regulations anticipate that outsourcing on-island will be allowed, but that outsourcing CIGAs off-island will not satisfy the substance requirements. A detailed analysis of the business model of the role of a fund's service providers will be needed to establish whether, and to what extent, any restructuring or reworking of contracts may be required to ensure the fund manager is demonstrating sufficient substance in Guernsey for the purposes of the proposed regulations.


The new law proposes sanctions for non-compliance to include progressive financial penalties, ultimately leading to strike-off from the register of Guernsey companies, and reporting to any relevant tax or regulatory authorities in the European Union.


Fund managers should review outsourcing arrangements for Guernsey tax-resident companies that fall within the scope of the new law and consider whether the third-party service provider agreements in place meet the tests set out, particularly in relation to the provision of office space and appropriate access to sufficiently senior employees.

As the legislation also includes finance and leasing business and holding companies, consideration should be given to any intra-group financing and any holding company within the group structure with a view to determining whether any entities within the fund's structures in addition to the fund manager fall within scope.

It is anticipated that many structures will be compliant with the new requirements already; however, consideration should still be given to whether amendments and updates are required to policies and procedures as a result of the new regulation.

Further detailed guidance on the precise definition of activities to fall within the scope of the law and the definition of adequacy in respect of employees, expenditure and premises under the tests is anticipated.

For further information on this topic please contact Tim Clipstone or Marcus Leese at Ogier by telephone (+44 1481 721 672) or email ( or The Ogier website can be accessed at


(1) Further information on the briefing applied to holding, distribution and services companies is available here and the briefing for banks, insurance businesses and leasing vehicles is available here.

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