The government has approved new regulations which impose an economic substance test on Guernsey tax-resident companies in order to meet the requirements of the EU Code of Conduct Group. These regulations were approved by the EU Council of Economic and Finance Ministers on 12 March 2019 and, as a result, Guernsey was re-affirmed as a cooperative jurisdiction in terms of tax transparency and for Base Erosion and Profit Sharing Action Plan 5.


The regulations came into force on 1 January 2019, establishing tests for tax-resident companies carrying on 'relevant activities', including fund management. The tests require companies that are in scope to demonstrate that they have economic substance in Guernsey, including that they:

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

Notably, collective investment schemes are out of scope, as are limited partnerships more generally. However, it is expected that most fund manager clients will be in scope (as they are usually structured as companies and will have income in relation to their fund management activities); therefore, specific consideration must be given to the level of activity carried on in Guernsey and to outsourcing arrangements.(1)

It is anticipated that detailed guidance will be issued soon, which is likely to:

  • clarify the definition of 'adequacy';
  • assist in interpreting the scope of delegation possible; and
  • 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.


The proposed economic substance requirements include two key tests.

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 need not 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.

Adequacy 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 an adequate physical presence in Guernsey.

The anticipated guidance is 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 and interest fluctuations and hedging positions; and
  • preparing relevant regulatory and other reports for government authorities and investors.

Further clarification expected

The anticipated guidance is 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 must be given to ensure that sufficient CIGAs are carried on in Guernsey to avoid a letter-box entity characterisation. The regulations anticipate that outsourcing on-island will be allowed, but that outsourcing CIGAs off-island will not satisfy the substance requirements.

The guidance is expected to clarify how this will work in practice.

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 that the fund manager is demonstrating sufficient substance in Guernsey for the purposes of the regulations.


The regulations impose 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 enable them to 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.


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

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