The Channel Islands have recently introduced new Economic substance laws that meet requirements set out by the EU's Code of Conduct Group (Business Taxation) (COCG). Amit Taylor, Head of Corporate Services at Intertrust in Guernsey, explains what the changes mean and why they're good news.

The substance laws that have come into force in each island (and in the Isle of Man) represent significant pieces of legislation that will require certain tax-resident companies to meet a series of economic substance tests to prove their compliance. The new laws could result in some changes to how entities operate but are ultimately good news for the Crown Dependencies and build on the substance requirements which previously existed in both islands.

Positive reaffirmation

The introduction of the laws has contributed to Guernsey and Jersey being reaffirmed as cooperative jurisdictions with respect to good governance by the Economic and Financial Affairs Council of the European Union (ECOFIN); a positive endorsement but one that the islands' governments have always maintained was inevitable.

Substance legislation is the latest in a long list of compliance and regulatory standards to which the islands' financial services industries have had to respond to so represents an evolution rather than a revolution.

A long history of being early adopters of international standards such as FATCA and CRS has established the islands' reputations as operating to the highest standards of regulation and transparency.

The next steps

Under the new laws, which came into force from 1 January 2019, tax-resident companies in either island will need to satisfy an economic substance test of three parts. Companies must: be directed and managed in Guernsey or Jersey; conduct Core Income Generating Activity (CIGA) there; and meet requirements with regard to the levels of personnel, physical presence and operating expenditure in the islands. Failure to comply could result in significant fines and, potentially, strike-off.

The laws apply to tax-resident companies in Guernsey and Jersey who carry out the following relevant activities: banking, insurance, fund management, headquarters, shipping, holding companies, distribution and service centre, finance and leasing, intellectual property.

The first thing for companies who are tax-resident in the Channel Islands to do is to determine which of their client entities could be affected. Proactive service providers will be talking to clients to explain the changes and to guide them through initial impact assessments.

Evolution not revolution

As a listed company with a long-established presence and over 500 experts across the two islands we've developed its existing client proposition to help clients to meet the new requirements.

Boards have to respond appropriately and quickly to the new laws so to help them do this we've developed an online 'substance checker' to make the initial assessment as easy as possible.

In addition to the Channel Islands, we offer a global solution to meeting substance laws across our network. Our substance offering is menu-based and can be tailored to meet individual clients' needs, including provision of office space, directors and relocation assistance governance solutions which sit alongside the established fund and corporate administration services we're known for.

We can also draw on our global resources such as our global client solutions team who constantly scan upcoming regulatory and legislative developments to ensure that we're able to respond quickly to these changes and to be able to guide our clients in the ever complex and fast-changing environment in which they operate.

A competitive advantage

In a world characterised by increased regulation and compliance, we welcome the new substance laws as it means clients are turning to proven quality and established reputation, and jurisdictions we operate in, like the Channel Islands, continue to be modern, transparent and compliant.

The substance laws not only enable the islands to continue to meet international transparency standards but mean that they stand out as having a thorough approach to compliance and transparency.

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