The Guernsey government is due to bring in new regulations which impose an economic substance test for Guernsey tax-resident companies to meet the requirements of the EU Code of Conduct Group.

The draft regulations which are set to come into force on 1 January (subject to States approval) propose the establishment of new tests for tax resident companies carrying on "relevant activities", including holding companies, and companies carrying on headquarters, distribution and service centre activities. 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, that certain of their "core income generating activities" are undertaken here, and that the companies have "adequate" premises, employees and expenditure in Guernsey proportionate to the level of relevant activity carried on in Guernsey.

"Relevant activities" for the purposes of this briefing includes:

  • Companies carrying on holding company activities
  • Companies headquartered in Guernsey
  • Companies carrying on business as distribution and service centres

Please see here for Ogier's briefing applicable to fund managers and here for Ogier's briefing in respect of banks, insurance businesses and finance and leasing vehicles.

Our view, set out below, is that specific consideration should be given to outsourcing arrangements of company within a relevant structure, and to updating Policies and Procedures. Further consideration also needs to be given in respect of the detailed guidance on the definition of "adequacy" that we anticipate soon, and in respect of companies generating income from intellectual property, which will be subject to more stringent tests.

The Direction and Management Test

The proposed regulations provide that the Direction and Management test would be met if the following are adherred to:

  • There must be meetings of the Board of Directors in Guernsey at adequate frequencies given the level of decision making required;
  • During these meetings, there must be a quorum of the Board of Directors physically present in Guernsey (note that the Directors do not have to be Guernsey resident);
  • Strategic decisions of the company must be set at meetings of the Board of Directors and the minutes must reflect those decisions;
  • All company records and minutes must be kept in Guernsey; and
  • The Board of Directors, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board.

Core Income Generating Activities

Guernsey tax resident entities which carry on relevant activities will need to demonstrate that they carry out core income generating activities (CIGAs) in Guernsey. The nature of the CIGAs varies by industry sector and are summarised below.

CIGAs for Holding Companies

The law requires holding companies to carry out "all activities related to their business" in Guernsey. This will require each 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.

CIGAs for Companies Headquartered in Guernsey

Companies headquartered in Guernsey will need to demonstrated that the following "core income generating activities" take place in Guernsey:

  • taking relevant management decisions;
  • incurring expenses on behalf of group entities; and
  • co-ordinating group activities.

CIGAs for Companies carrying on distribution and services centres

Companies providing distributions of products and services centres must have the following taking place in Guernsey:

  • transporting and storing goods, products and materials;
  • managing stocks;
  • taking orders; or
  • providing consulting or other administrative services.

What is the impact of carrying on a "relevant activity"?

This is a very broad area. Each 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.

Companies carrying on a "relevant activity" must be able to demonstrate:

  • An adequate level of (qualified) employees in Guernsey, or adequate level of expenditure on outsourcing to service companies in Guernsey proportionate to the activities of the company.
  • An adequate level of annual expenditure incurred in Guernsey, or adequate level of expenditure on outsourcing to service companies in Guernsey, proportionate to the activities of the company.
  • Adequate physical offices and/or premises in Guernsey, or adequate level of expenditure on outsourcing to service companies in Guernsey, for the activities of the company.

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

  • Affected companies should review outsourcing arrangements (where relevant) in respect of Guernsey tax-resident companies that fall within the scope of the new law and whether the third-party service provider agreements in place meet the tests set out therein.
  • It is anticipated that many structures will be compliant with the new requirements already – consideration should still be given to whether amendments and updates are required to any Policies and Procedures as a result of the new law.
  • IP income generating companies (ie tax resident companies with income from intellectual property) will be subject to enhanced requirements, which will be the subject of a separate briefing in due course.
  • We anticipate further detailed guidance on the precise definition of activities to fall within the scope of the proposed regulations, and the definition of adequacy in respect of employees, expenditure and premises under the "Core Income Generating Activities" test.