In 2017, the EU Code of Conduct Group (the Group) reviewed the tax policies of various non-EU countries, including Guernsey. The Group deemed Guernsey a cooperative jurisdiction but concerns were raised due to a lack of statutory substance requirements which may result in the profits registered in Guernsey not accurately reflecting the economic activities being undertaken.
The States gave a commitment to address the Group's concern by the end of 2018 and, after close engagement with the other Crown Dependencies and international bodies, published the Income Tax (Substance Requirements) (Implementation) Regulations, 2018 (the 2018 Regulations). The legislation is effective for accounting periods commencing on or after 1 January 2019.
WHO DOES IT APPLY TO?
Substance requirements apply only to corporate taxpayers that are resident companies who are carrying on business of any of the following classes or descriptions:
- Fund management
- Financing and leasing
- Distribution and service centre
The 2018 Regulations also apply to a resident company which is a pure equity holding company (albeit there are reduced requirements for pure equity holding companies) and has income from that activity and also apply to resident companies with income from intellectual property assets.
3 REQUIREMENTS APPLICABLE TO ALL RELEVANT SECTOR COMPANIES
To satisfy the 2018 Regulations by demonstrating that relevant sector companies have substance in Guernsey, there are three requirements that such companies (excluding pure equity holding companies) must adhere to:
1. Directed and managed in Guernsey
A resident company carrying on a relevant activity is directed and managed in Guernsey if:
- the directors meet in Guernsey with adequate frequency having regard to the level of decision-making required of the board,
- during each meeting of the directors in Guernsey, a quorum of the directors is physically present in Guernsey,
- strategic decisions of the company are made at meetings of the directors and the minutes of the meetings record those decisions,
- the directors, as a whole, has the necessary knowledge and expertise to discharge the duties of the board, and
- all minutes and company records must be kept in Guernsey.
2. Physical substance
A relevant sector company must have an adequate:
- level of appropriately qualified employees in Guernsey,
- level of operating expenditure in Guernsey, and
- physical presence in Guernsey.
3. Core-income Generating Activities (CIGA)
The third requirement is that a relevant sector company must undertake CIGA in Guernsey. The 2018 Regulations set out a non-exhaustive list of potential CIGA in respect of each relevant sector. A company is not required to undertake all of the CIGA listed for a relevant sector in order to demonstrate substance but it must perform the CIGA that generates its income.
Further guidance issued on 22 November 2019 (the Guidance) suggests that decision making outside of Guernsey would suggest performance of CIGA outside of Guernsey. Whilst isolated decisions may be taken outside of Guernsey, decisions and CIGA that are undertaken in Guernsey must outweigh those that are not on both a quality and quantity basis.
HOW TO ENSURE COMPLIANCE
Below are examples of practical steps that can be taken to assist relevant sector companies in complying with the 2018 Regulations:
- hold director board meetings in line with the levels of actions it conducts,
- hold and attend an adequate number of board meetings in Guernsey,
- ensure the board has the necessary skills, knowledge and experience and that decisions are taken by the board as a whole,
- take minutes of all board meetings and ensure that all decisions are noted, including any actions that are considered but rejected, and
- include all supporting documents with the minutes of the board meeting so that the board can make informed decisions.
Where a company has a sole director, that sole director will conduct the board business by way of written resolution. The sole director must be physically present in Guernsey when they consider the points and sign each resolution.
WHAT CONSTITUTES AN ADEQUATE NUMBER OF MEETINGS IN GUERNSEY?
This will be determined on a case by case basis. Whilst it is not necessary for each and every board meeting to be held in Guernsey, guidance suggests that the majority of board meetings should be held here and at the very least, it is necessary to hold at least one meeting per year in Guernsey. However, given the sanctions for non-compliance, as discussed below, it would be advisable to hold all board meetings in Guernsey.
A company will be subject to sanctions if it does not meet the economic substance requirement. Sanctions include exchange of information with a competent authority in other jurisdictions, financial penalties and, ultimately, in cases of repeated failure to comply, striking off the companies register.
The Guidance is to be treated as a work in progress and it is expected that further guidance, applicable to the Crown Dependencies, will be issued on a periodic basis. It is also expected that Guernsey specific guidance will be issued in due course which will assist those relevant sector companies in Guernsey in achieving compliance with the 2018 Regulations.
First published by Guernsey Press, December 2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.