GUERNSEY SUBSTANCE REQUIREMENTS: A DETAILED OVERVIEW Briefing note in respect of the recent updates to Guernsey’s substance requirements By: Belinda Hartzenberg & Gavin Farrell (Ferbrache & Farrell
1 TABLE OF CONTENT
1. INTRODUCTION AND BACKGROUND .......................................................................................
2 2. ENTITIES NOT SUBJECT TO SUBSTANCE REQUIREMENTS .......................................................... 3 3
. ENTITIES SUBJECT TO SUBSTANCE REQUIREMENTS ................................................................. 4
3.1 Definition of “tax resident” .........................................................................................................4
3.1.1 “Controlled in Guernsey or is centrally controlled and managed in Guernsey” ....................4
3.1.2 Duel resident companies exempted from tax in terms of an ordinance made under section 40A of the Income Tax Law ..............................................................................................................5
3.2 Relevant Activities .......................................................................................................................5
3.3 Income generation ......................................................................................................................7
4. SUBSTANCE REQUIREMENTS .................................................................................................. 7
4.1 Directed and managed in Guernsey ..............................................................................................7
4.2 Core income generating activities (CIGA) ......................................................................................8
4.3 Adequate level of appropriately qualified employees, expenditure and physical presence ........9
4.4 Specific substance requirements for pure equity holding companies ...................................... 10
5. DOMESTIC REPORTING .......................................................................................................... 10
6. INTERNATIONAL MONITORING .............................................................................................. 11
7. FAILURE TO COMPLY ............................................................................................................. 11
8. CONCLUSION ......................................................................................................................... 11
9. DOCUMENTATION ................................................................................................................. 12
Annexure: Checklist .......................................................................................................................... 13
2 GUERNSEY SUBSTANCE REQUIREMENTS: A DETAILED OVERVIEW
This briefing note aims to give a detailed overview of the recently adopted Substance Requirements (as set out in 4 below) by the States of Guernsey. The crux of these Substance Requirements on a global sphere is to avoid situations where corporate taxpayers move to a jurisdiction with a low or no tax rate in which the taxpayer does not have to demonstrate real economic activity and presence whilst still benefiting from the preferential tax regime.
1. INTRODUCTION AND BACKGROUND
Guernsey has implemented new substance legislation which requires Guernsey tax resident companies (Resident) carrying on ‘relevant activities’ to demonstrate, for substance purposes, that they: (i) are directed and managed in Guernsey; (ii) are conducting ‘Core Income Generating Activities’ in Guernsey; and (iii) have an adequate level of employees, physical presence and expenditure in Guernsey to support such activities. This came as a result of the EU Council’s adoption of the "Conclusions on criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes" in an attempt to counteract tax fraud, evasion and avoidance by companies in 2016, particularly in relation to offshore jurisdictions.
These conclusions followed on from the initial work undertaken by the Organisation for Economic Co-operation and Development under Action 5 of the Base Erosion and Profit Shifting (BEPS) project. The EU Council appointed the EU Code of Conduct Group1 (the Conduct Group) to undertake a screening process whereby jurisdictions, including Guernsey, were assessed against three standards in respect of: (i) tax transparency; (ii) fair taxation, and (iii) compliance with anti-BEPS measures. This was to ensure that “jurisdictions should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic substance” (the ‘2.2’ requirements). No issues were raised in respect of Guernsey's standards of tax transparency and anti-BEPs compliance. Guernsey’s status was confirmed as being a cooperative jurisdiction, however during the screening process the Conduct Group expressed concern that Guernsey did not have "legal substance requirements for entities doing business in or through the jurisdiction". This in essence means that whilst substance was factually achieved when best practice was followed, there was no Guernsey legislation requiring the substance to be applied. The Conduct Group was concerned that this lack of statutory or legislative backing increased the risk that profits registered in Guernsey were not reflecting economic activities and substantial economic presence in its jurisdiction to justify access to Guernsey’s corporate tax regime. These concerns were articulated in a letter to Guernsey in November 2017 and it was proposed that Guernsey be placed on a new list of non-cooperating jurisdictions (the so called “grey list”) unless Guernsey agreed to introduce legislative real economic activity and substance measures by 31 December 2018. The Code Group set out specific measures that they were expecting Guernsey to adopt in order to satisfy the ‘2.2’ requirements in a paper published on 22 June 2018 (the Scoping Paper) which would form the basis against which new substance requirements will be assessed. In its response and on 17 November 2017, Guernsey undertook to address these concerns in order to meet global standards of tax transparency by the end of December 2018, failing which it would run the risk of being placed on an EU blacklist of non-cooperative jurisdictions.
In order to meet the requirements set by the Conduct Group, on 1 January 2019, the Guernsey government approved new regulations, namely the Income Tax (Substance Requirements) 3 (Implementation) Regulations, 2018 and the Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2018 (the Regulations)2 which impose new economic Substance Requirements for Resident companies that undertake specified activities3 and which shall be applicable for accounting periods commencing on or after 1 January 2019. The States of Guernsey has also introduced a document, dated 21 December 2018 and labelled “Key aspects in relation to economic substance requirements, as issued by Guernsey, Isle of Man and Jersey” (Key Aspects) together with a useful flowchart which was updated by more comprehensive guidance notes on 26 April 2019 (the Guidance Notes). The Guidance Notes are a work in progress and will be updated on a regular basis through further discussions with the Organisation for Economic Co-Operation and Development (OECD) and the Conduct Group.
The Regulations were formally approved in Brussels by the EU's Economic and Financial Affairs Council (ECOFIN) on 12 March 2019 and as a result, Guernsey was re-affirmed as a co-operative jurisdiction in terms of tax transparency and for Action 5 of BEPS. The Regulations, together with further substance legislation adopted by Guernsey address the main concern that companies could be used to artificially attract profits that are not commensurate with economic activities and substantial economic presence in Guernsey.
As a result, the Council of Finance Ministers of the EU endorsed Guernsey’s corporate and governance structure and removed it from the so-called “grey list” of tax havens as published by the European Commission and the ‘2.2’ requirements.
2. ENTITIES NOT SUBJECT TO THE SUBSTANCE REQUIREMENTS
The following entities shall not be subject to the Substance Requirements:
• foundations established under the Foundations (Guernsey) Law, 2012 or equivalent or similar bodies created or established under the law of another jurisdiction (and however named);
• limited partnerships (this does not include the general partner);
• limited liability partnerships;
• trusts (this does not include a corporate trustee); and
• collective investment vehicles (mainly funds established as authorised or registered collective investment schemes).
Also, where a Resident company is a member of a limited liability partnership or a partner of a limited partnership that carries on Relevant Activities (see 3.2 below), the Resident company is treated as carrying out the Relevant Activity for substance purposes.
Although the above entities may not be subject to the Substance Requirements, they may be subject to certain of the provisions of the Regulations.
4 3. WHICH COMPANIES ARE SUBJECT TO SUBSTANCE REQUIREMENTS?
Save for those entities excluded in 2 above, a Resident company that is incorporated, controlled or centrally managed and controlled in Guernsey and that carries out a Relevant Activity, must comply with the Substance Requirements in respect of its accounting periods beginning after 31 December 2018. Pure equity holding companies are also subject to certain substance requirements as further stated in 4.4 below. IP companies are, due to the high risk, subject to more extensive substance requirement. IP companies are not covered in this briefing note.
3.1 Definition of “tax resident” In August 2018, the Policy & Resources Committee consulted on introducing changes to the definition of corporate residence provided for in the Income Tax Law in order to, inter alia, limit dual tax residency and to ensure that non-Guernsey companies which are managed and controlled in Guernsey fall within the definition of ‘tax resident’ and thereby have to comply with the Substance Requirements. These changes were approved as part of the 2019 Budget and were brought in by adopting the Income Tax (Guernsey) (Amendment) (No.2) Ordinance, 2018 (the Ordinance) and the Regulations.
With effect from 1 January 2019, a company will be treated as tax resident in Guernsey in a year of charge if it is:
(a) controlled in Guernsey or centrally controlled and managed in Guernsey; or
(b) incorporated in Guernsey and has not been granted an exemption from tax for that year of charge under any ordinance made in terms of section 40A of the Income Tax Law.
3.1.1 “Controlled in Guernsey or is centrally controlled and managed in Guernsey”
“Control” is defined in section 122 of the Income Tax Law as the power of a person to secure, by means of the holding of shares (being a loan creditor or the possession of voting powers) that the affairs of the company are conducted in accordance with the wishes of that person(s). This was the position prior to 1 January 2019 whereby control was established by determining whether the company’s affairs were conducted according to the wishes of its shareholders or loan creditors who were resident in Guernsey themselves.
As from 1 January 2019, changes have been introduced to the test for tax residency by incorporating an additional basis on which a company will be considered resident in Guernsey. In addition to the test of shareholder/creditor control and incorporation, companies that are centrally managed and controlled in Guernsey are now also regarded as being resident in Guernsey.
Central management and control pertain to where the directors of the company meet and exercise their control. In other words, should the directors’ meetings be held in Guernsey or should the directors exercise their control over the company from Guernsey, such company shall be considered to be a Resident company, irrespective of where its shareholders’ control is being exercised.
This determination will be evaluated as a matter of fact on a case to case basis by considering, inter alia, the company’s articles of incorporation, minutes of board meetings and the newly proposed tax returns that companies shall be required to complete whereby companies shall be required to confirm the jurisdiction in which their central control is exercised.
By widening the casting net for residency, a non-Guernsey incorporated company (which is tax resident in a foreign jurisdiction) that has also become Resident in Guernsey due to the fact that it is managed and controlled in Guernsey, will become dual tax resident (if it does not fall under an exemption as 5 stated in 3.1.2 below) which can have implications in respect of tax liabilities, tax filings and substance requirements.
3.1.2 Dual resident companies exempted from tax in terms of an ordinance made under section 40A of the Income Tax Law
The Ordinance came into effect on 1 January 2019 as a means to avoid dual residency and creates an exemption for certain cross-jurisdiction entities in terms of which, a company that is considered to be Resident in Guernsey due to the fact that it falls under category (a) or (b) under 3.1 above, will not be considered tax resident in Guernsey in a year of charge if sufficient proof is given to the Director of Revenue Services that:
a) the company is considered tax resident in a foreign territory under that foreign territory’s domestic law;
b) the business of the company is controlled and managed in the foreign territory;
c) either: i. the highest rate of corporate income tax or corporation tax in the foreign territory is at least 10%; or ii. both Guernsey and the foreign territory are parties to an international tax measure, such as a double tax agreements, that treats the company as being tax resident in the foreign territory over Guernsey; and
d) the company's tax resident status in the foreign territory is not motivated by the avoidance under Guernsey's Income Tax Law.
As from 2019, a Resident company will be required to submit forms to the Guernsey Revenue Service wherein it shall be required to demonstrate that it is a Resident company in Guernsey or tax resident in a foreign jurisdiction. Proof will need to be provided in the form of, amongst others, a foreign tax residency certificate.
3.2 Relevant Activities The second leg of the test to determine whether a company is subject to the Substance Requirements entails that the Resident company needs to conduct any of the following Relevant Activities:
a) banking - deposit-taking business within the meaning of the Banking Supervision (Bailiwick of Guernsey) Law, 1994 carried on by a licensed institution within the meaning of that law;
b) insurance - insurance business within the meaning of the Insurance Business (Bailiwick of Guernsey) Law, 2002 carried on by a licensee within the meaning of that law;
c) fund management - “management” within the meaning of paragraph 5 of Schedule 2 to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, when carried on in connection with a collective investment scheme within the meaning of that law under the authority of a licence issued under section 4 of that law; 4 As identified by the OECD’s Forum on Harmful Tax Practices. 6
d) financing and leasing - the provision of credit facilities of any kind for consideration to any person (a "customer"), and for the purposes of this definition:
(i) consideration includes consideration by way of interest;
(ii) the provision of credit may be by way of instalments for which a separate charge is made and disclosed to the customer in connection with – (A) the supply of goods by hire purchase, (B) financial leasing (excluding land and interests in land), or (C) conditional sale or credit sale, and
(iii) where any credit repayable by a customer to a person is assigned to another person, that other person shall be considered to be the person providing the credit facility, but any activities falling within the definitions of banking, insurance or fund management do not constitute financing and leasing for the purposes of the Regulations;
e) headquartering - the provision of any of the following services to non-resident intra group persons of the resident company –
(i) the provision of senior management,
(ii) the assumption or control of material risk for activities carried out by, or assets owned by, any of those intra group persons, and
(iii) the provision of substantive advice in relation to the assumption or control of risk for such activities or assets, but does not include – (A) any business or activity falling within the definition of banking, insurance, fund management, financing and leasing, shipping, or a distribution and service centre, or (B) the business of holding intellectual property assets;
f) shipping - the operation of ships in international traffic for income from the transport of passengers or cargo, and includes any of the following activities where directly connected with, or ancillary to, such operation –
(i) the rental on a charter basis of ships,
(ii) the sale of tickets or similar documents and the provision of services connected with the sale of tickets or similar documents, either for the enterprise itself or any other enterprise,
(iii) the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for the transport of goods or merchandise,
(iv) the management of the crew of ships;
g) a distribution and service centre6- a business the sole or main activity of which is –
(i) to purchase raw materials and finished products from other members of the same group which are non-resident and to re-sell them for a small percentage of profits, or
(ii) the provision of services to other members of the same group which are non-resident, but does not include any business or activity falling within the definition of banking, insurance, fund management, financing and leasing, shipping or headquartering;
h) intellectual property assets (an IP Company) - includes copyright, database rights, design rights (registered and unregistered), image rights, patents and biotechnological inventions, performers' rights, plant breeders' rights, and trade marks (and rights and interests therein); and
i) a pure equity holding company - a company which has as its primary function the acquisition and holding of shares or equitable interests in other companies, which carries on no commercial 5 Credit facilities that are not provided for consideration (i.e. interest free loans) shall not fall within the scope of Relevant Activity. 6 The effect of this category will mean that in addition to distribution businesses, companies, whose main or sole activity is to provide services to non-Guernsey group companies, will need to comply with substance requirements. 7 activity, and which is a holding company within the meaning of the Companies (Guernsey) Law, 2008.
Both legs of the test, being that a company must be Resident in Guernsey and undertake a Relevant Activity, will need to be satisfied before a company will be subject to the Substance Requirements as set out below. Should a company be Resident in Guernsey but not perform a Relevant Activity, it shall not be subject to the Regulations and vice versa.
3.3 Income generation
Resident companies that undertake Relevant Activities and thereby having to comply with the Substance Requirements will not be required to do so for a specific accounting period in which it does not generate an income from a Relevant Activity.
4. SUBSTANCE REQUIREMENTS Save for pure equity holding companies and IP companies (which are subject to other specific substance requirements), a Resident company that carries out a Relevant Activity has to demonstrate to the Guernsey Director of Revenue Services that it meets the following Substance Requirements, in that:
a) it is directed and managed in Guernsey;
b) it carries on core income-generating activities (CIGA) in relation to that Relevant Activity in Guernsey;
c) there is an adequate:
i. level of appropriately qualified employees in Guernsey proportionate to the level of that Relevant Activity carried on in Guernsey (whether or not employed by that company or another entity and whether on temporary or long-term contracts);
ii. level of expenditure in Guernsey proportionate to the level of that Relevant Activity carried on in Guernsey; and iii. physical presence in Guernsey (including, without limitation, offices and/or premises) proportionate to the level of that Relevant Activity.
The company must be able to demonstrate that these requirements are or were complied with in each accounting period in which the requirements apply or applied in respect of it. This is no “one size fits all” test but rather a question of fact and degree, taking into account all circumstances that are relevant to the company and the business it operates.
4.1 Directed and managed in Guernsey In order to demonstrate that a Resident company is directed and managed in Guernsey, it has to show that:
• with regards to the level of decision-making required of the board, the directors meet in with adequate frequency in Guernsey (for a majority of the meetings). It is not a requirement that the directors be Guernsey resident; 8
• a quorum of directors is physically present in Guernsey during each meeting of the board, which is held in Guernsey;
• strategic decisions (and not merely approval of decisions taken outside Guernsey) are made at the meetings of the board and minutes (or written resolutions in the case of a sole director who is physically present in Guernsey) are recorded to document those discussions and decisions;
• the directors as a whole have the necessary knowledge and expertise in relation to the Relevant Activity to discharge the duties of the board7; and
• all company documents (including the minutes) of the company, as required by the Companies (Guernsey) Law 2008, as amended, are kept in Guernsey and where such documents are kept in electronic format, they be made accessible in Guernsey.
The Guidance Notes provide that where a company is in liquidation, all powers of the directors will cease, however to meet the “directed and managed“ test, the board of directors should be taken to be the liquidator who has to demonstrate that the company is directed and managed in Guernsey.
Given the strong emphasis that is being placed on board meetings, directors are encouraged to re-evaluate their corporate governance procedures and record keeping protocols and ensure they satisfy the above requirements. They should specifically ensure that not only the final conclusions reached at meetings be documented in the minutes, but also their thought process in reaching those conclusions.
4.2 Core income generating activities (CIGA)
CIGAs are the key essential and valuable activities that generate the income of a Resident company which each Resident company is obliged to carry out in Guernsey. The Regulations set out a (non-exhaustive) list of what constitutes as CIGA for each Relevant Activity carried out by the company.
The CIGA for each Relevant Activity are as follows:
Banking: raising funds, managing risk including credit, currency and interest risk, taking hedging positions, providing loans, credit or other financial services to customers, managing regulatory capital, and preparing regulatory reports and returns;
Insurance: predicting and calculating risk, insuring or re-insuring against risk, and providing client services;
Fund management: taking decisions on the holding and selling of investments, calculating risks and reserves, making decisions on currency or interest, fluctuations and hedging positions, and preparing relevant regulatory or other reports for governmental or regulatory authorities and investors;
Financing and leasing: agreeing funding terms, identifying and acquiring assets to be leased (in the case of leasing), setting the terms and duration of any financing or leasing, monitoring and revising any agreements, and managing any risks;
Headquartering: taking relevant management decisions, incurring expenditures on behalf of group entities, and co-ordinating group activities; 7 In the case of a corporate director, the requirements will apply to the individual officers (who are actually performing the duties) of that corporate director. 9
Shipping: managing crew (including hiring, paying, and overseeing crew members), hauling and maintaining ships, overseeing and tracking deliveries/ determining what goods to order and when to deliver them, and organising and overseeing voyages;
Distribution and service centres: sporting and storing goods, components and materials, managing stocks, taking orders, and providing consulting or other administrative services.
The Guidance Notes provide that a Resident company must demonstrate that it performs all of its CIGAs that generate income in Guernsey. Income for these purposes is gross income (not taxable income/profit or accounting income/profit). Where a company outsources its CIGA to another entity, it must be able to monitor and control any of those CIGAs carried out by that entity in Guernsey. This does however allow for a company to outsource/delegate all or part of an activity outside Guernsey, and if that activity is not part of the CIGA that generates income, it will not affect the company’s ability to meet the Substance Requirements.
The Guidance Notes have also introduced, for each relevant sector (save for insurance, shipping and intellectual property companies, for which guidance is still being prepared) a summary of the scope, the applicable CIGA and some basic scenarios which meet the economic substance requirement and some basic scenarios which do not meet the economic substance requirement.
What is clear, is that it has to be demonstrated that the related fees in respect of the outsourced CIGA or other activity must be appropriately priced in that the resulting net profit attributable to Guernsey is commensurate to the CIGA undertaken in Guernsey. The company will be obliged to maintain adequate supervision and monitoring of the outsourced activity and will remain responsible for ensuring accurate information is reported on its tax return which will include precise details of resources employed by its service providers.
Whilst both the Key Aspects and the Guidance Notes clearly enable outsourcing of the CIGA in Guernsey, the situation regarding the outsourcing of CIGA outside Guernsey is less clear. Whilst the Key Aspects and the Guidance Notes provide that a Guernsey company may outsource activities outside Guernsey, should such activities not be part of CIGA, these will not affect that company’s ability to meet the substance requirements. Such activities would cover, for example, back office functions including IT support. Further clarification is hoped to be provided with regards to the oversight functions for Guernsey supporting the substance being retained in Guernsey.
In terms hereof, a company will be considered to carry on a CIGA even if it outsources such activity, provided that the outsourcing (not the outsourced activity) is performed in Guernsey under adequate supervision of the outsourced activity by the outsourcing company and that those activities must be carried out with adequate economic substance with regards to people, expenditure and premises (as further explained in 4.3 below. Where a company performs a CIGA at a meeting of directors, the majority of directors must be physically present in Guernsey. An anti-avoidance provision will be introduced to ensure that outsourcing cannot undermine the principles and purpose of the regime.
4.3 Adequate level of appropriately qualified employees, expenditure and physical presence
This is the most critical Substance Requirement as it is the central provision that will ensure that a company’s activities in Guernsey reflect the amount of profits that it books there. In order to satisfy this requirement, the company has to show that there:
(a) are an adequate level of qualified employees for that CIGA who are physically present in Guernsey, or (when outsourced), an adequate level of expenditure on outsourcing to service companies in Guernsey which are proportionate to the level of that Relevant Activity carried out in Guernsey (no double count of personnel will be allowed); 10
(b) is adequate expenditure incurred in Guernsey, or (when outsourced), an adequate level of expenditure on outsourcing to service companies in Guernsey which are proportionate to the level of that Relevant Activity carried out in Guernsey; and
(c) are adequate physical presence and premises in Guernsey, or (when outsourced), an adequate level of expenditure on outsourcing to service companies in Guernsey which are proportionate to the level of that Relevant Activity carried out in Guernsey
The Regulations refer to the term “adequate” without defining it and preliminary guidance references the dictionary definition being “enough or satisfactory for a particular purpose”. Further and more detailed guidelines are required to ascertain what is required in terms of adequacy, however it can’t be disputed that such test will involve a subjective analysis based on fact and degree, by taking into account all circumstances that are relevant to the company and the business that it operates.
The Guidance Notes give more clarity with regards to the term “employee” by adopting the definition used by the EU in relation to small to medium-sized enterprises and states that it is not restricted to individuals who are legally employed by the company and includes persons deemed to be employees under Guernsey law, as well as owner-managers and directors. The employee count will be based on the number of fulltime equivalents (FTE) during the financial year, i.e. the number of persons who worked full time within the company or on its behalf during the entire period under consideration. Directors should be counted as a fraction of an FTE commensurate with the time commitment of the role. Where a company outsources some/all of its activity, then the resources of the service provider in Guernsey will be taken into consideration when determining whether the adequate employee test is met.
Companies should actively consider the adequacy of their resources and expenditure at board level, keep clear records of their discussions and decisions and ensure they maintain appropriate records to demonstrate adequacy of the resources utilised and expenditure incurred (i.e. timesheets).
4.4 Specific substance requirements for pure equity holding companies
Due to the fact that they are of low risk, pure equity holding companies that receive an income (e.g. by way of dividends) are subject to reduced substance requirements, in that they:
(i) must comply with all obligations under applicable corporate law in Guernsey; and
(ii) must have an adequate level of people and physical presence (including premises) in Guernsey commensurate to the level of activity carried on in Guernsey, in order to hold and manage the shares. This will require each holding company to assess which functions need to be carried out in Guernsey depending on the function and purpose of the company. The second requirement requiring an ‘adequate level of people’ creates certain ambiguity, especially when compared to the requirement of ‘adequate number of qualified employees’ for other Relevant Activities. However, the level of activity of a pure holding equity will determine the level of board meetings and people required and the Guidance Notes provides that there be at least one meeting of its board of directors held in the Island in each year.
5. DOMESTIC REPORTING
In an attempt to better identify the Relevant Activities conducted by tax resident companies and ensuring compliance with the Substance Requirements (including profit shifting), the Revenue Service has amended the requirements in relation to the filing of tax returns whereby Resident companies are required to (as from 2019), when filing their tax returns, not only report on their business/income types and amount and type of gross income, but also on the amount of operating expenditure, details of operating premises, number of qualified employees, details on CIGAs conducted for each Relevant 11 Activity, financial statements and confirmation and details as to whether any CIGAs have been outsourced. This information will be monitored on a risk of profit shifting basis as well as by random selection of companies for audit each year in accordance with existing tax compliance practices.
6. INTERNATIONAL MONITORING
Whilst none of the Regulations, Key Aspects or Guidance Notes set out the obligations of the Guernsey Revenue Service to report back to any international body or organisation on the substance requirements maintained in Guernsey, Guernsey made a political commitment in its response to the Chair of the Conduct Group on 21 December 2018 in continuing a constructive dialogue with the Code Group and the EUC Commission on the effectiveness of the legal substance requirements. This would include monitoring the effectiveness of the substance regime and the enforcement efforts to ensure they remain rigorous, effective and dissuasive. The States of Guernsey also expressed their desire to contribute to the monitoring that the OECD has established in the Forum for Harmful Tax Practices and confirmed that the Code Group’s annual monitoring process of Guernsey would form part of its wider engagement strategy as a cooperative jurisdiction.
7. FAILURE TO COMPLY
Failure to comply with the Regulations may result in severe penalties being levied (£10,000 for first time offenders up to £100,000 for a fourth accounting period of default), and/or ultimately strike-off as well as spontaneous exchanges of information between the company, the Guernsey tax office and EU member states.
The Director of Revenue Services also has the power to raise further queries with companies in respect of their economic substance, including the right to enter a business premises and to inspect documents (excluding documents subject to legal privilege).
The Regulations also provide for criminal penalties for failure to provide information or for providing false information.
Penalty inflictions are not an arbitrary process and it may be appealed by a company in terms of the Regulations, provided that certain requirements are met (as set out in the Regulations).
8. CONCLUSION Even though Guernsey’s legal and regulatory regime, corporate governance principles and industry best practice have always ensured that substance requirements are factually met by entities in Guernsey, the Regulations have now enshrined and formalised the process as well as the recording of the evidence supporting such requirements being applied to Guernsey tax resident companies. Although the Guidance Notes have been welcomed in the process of evaluating the impact of economic substance legislation in Guernsey, it must be noted that the Guidance Notes were not drafted to provide definitive thresholds and to be an all-encompassing yard stick to measure each situation against, but are merely a form of general guidance which sets principles and examples in determining whether a Resident company meets the Substance Requirements. It is advised that, in order to ascertain exactly which activities are considered CIGA and which of those must be conducted in Guernsey as well as what is accepted as adequate in relation to the level of 12 employees, expenditure and premises, should always involve a subjective analysis, based on fact and degree, taking into account all circumstances that are relevant to the company and the business that it operates and there exists a great possibility that the existing law may change upon the enactments of further guidelines.
Notwithstanding the above, directors of companies should carefully evaluate their current activities and method of governance and consider the relevant substance regulations to assess whether they may be caught by it and if so, what steps may be required to evidence compliance. All relevant entities will need to undertake an internal review and analysis to determine what measures, if any they might need to take in order to achieve compliance with the Substance Requirements.
The newly implemented Substance Requirements are not burdensome for Guernsey tax resident companies, especially due to the fact that and with regards to certain type of companies (i.e. fund managers, banking and insurance), pre-existing regulatory regimes are already imposing regulatory substance requirements as part of the minimum criteria for licensing and governance requirements. These Substance Requirements will further demonstrate the fact that Guernsey, as an offshore jurisdiction is fully compliant with international tax transparency requirements which endorses Guernsey’s high standards as being a globally competitive and favourable specialist finance centre.
A brief checklist is set out as an Annexure to this briefing note which may assist directors in ensuring their companies satisfy the Substance Requirements (as the currently stand).
Companies should consider consulting their specialist tax advisers in order to ensure that the new Substance Requirements are complied with.
9. DOCUMENTATION
The Guernsey Tax Office has added a specific web page which contains all relevant documentation and updates regarding Guernsey substance. We advise that companies visit this webpage on a regular basis to ensure they are up to date with any changes to the substance legislation. Please click on the link to access the webpage.
13 ANNEXURE CHECKLIST STEP 1 – IS THE COMPANY SUBJECT TO SUBSTANCE REQUIREMENTS?
i. Resident Company
Is the company controlled, incorporated or centrally controlled and managed in Guernsey?
o Where are the wishes of the shareholders/creditors? o Where are directors ‘meetings held?
o Where do the directors exercise their control over the company?
Has the company been granted a section 40A exemption?
ii. Relevant Activities
Does the company conduct the following activities in Guernsey: banking, insurance, fund management, financing and leasing, headquartering, shipping, distribution and service centre, intellectual property assets, or is it a pure equity holding company?
iii. Income generation
Has the company generated income from a Relevant Activity for this specific accounting period? If the questions in i to iii above have been answered in the affirmative, then the company will be subject to the Substance Requirements and step 2 below should be followed.
STEP 2 – HAS THE COMPANY COMPLIED WITH ALL SUBSTANCE REQUIREMENTS?
Directed and managed in Guernsey - Board meetings
o Do the directors (as a whole) have the necessary qualifications and expertise to discharge the duties of the board?
o Has the majority of board meetings been held in Guernsey? o Were quorums physically present in Guernsey during board meetings?
o Did the board meet on adequate number of occasions relevant to its activities?
o Have all strategic decision makings by directors been conducted during board meetings?
o Have all board meetings been properly minuted to show the strategic decision-making process of the directors?
o Are the minutes of board meetings kept in Guernsey?
o Have the corporate governance procedures and record keeping protocols of the company been reviewed (in the event that the company is required to demonstrate that it is directed and managed in Guernsey)?
14 CIGA o What are the CIGAs of the company?
o Has it been established what functions need to be carried out in Guernsey in respect of the CIGA?
o Has any of the CIGAs been outsourced and are a sufficient level of CIGA’s undertaken in Guernsey?
o Where CIGA has been discharged at board meetings, has the decision making process of the board been minuted in respect thereof?
o Has all outsourcing agreements been reviewed to establish whether the relevant CIGA can be undertaken in Guernsey?
o Are outsourced CIGAs properly monitored by the company
? o Is there proper record keeping which may be relevant to demonstrate CIGA?
Adequacy o Is there an adequate number and level of qualified employees in Guernsey, or if outsourced, an adequate level of expenditure on outsourcing to service companies in Guernsey which is proportionate to the activities of the company?
o Is there an adequate level of annual expenditure incurred in Guernsey, or if outsourced, an adequate level of expenditure on outsourcing to service companies in Guernsey which is proportional to the activities of the company?
o Does the company have adequate physical offices/premises in Guernsey, or if outsourced, an adequate level of expenditure on outsourcing to service companies in Guernsey, for the activities of the company?
o Is there proper record keeping which may be relevant to demonstrate adequacy?
o Do the board minutes clearly show the discussions and decisions relating to what the board considers to be adequate?
General
Is there clarity on how the new tax returns need to be completed?
Are the company’s statutory books kept at in Guernsey?
Have all outsourcing arrangements been reviewed and all Policies and Procedures been updated in respect of the Substance Requirements (specifically with relation to office space and adequate number and level of qualified employees)?
Has further guidance been published by the States of Guernsey in relation to Substance Requirements (specifically with regards to the definition of adequacy)?
