The EU Strategy for External Taxation includes standards to encourage good tax governance as part of the EUs efforts to evaluate Third Countries. While having been recognised for being fully aligned to tax transparency standards and for its compliance with BEPS, Guernsey has had to map out its commitment to refining its corporate income tax approach. This will be achieved through new laws coming into place on 31 December 2018 and here, BDO explains their potential implications for the island’s funds industry.
To meet EU standards on corporate taxation, Guernsey, working alongside Jersey and the Isle of Man, committed to a three stage approach:
- Identify resident companies pursuing “relevant activities”, which include: banking, insurance, shipping, fund management (not including Collective Investment Schemes themselves), finance and leasing, leasing headquarters, intellectual property, pure equity holding companies and distribution and service centres.
- Imposing economic substance requirements on affected companies
- Enforcement of the economic substance requirements.
To address the EU concerns over the lack of minimum substance requirements for resident companies, The Income Tax (Substance Requirements) (Guernsey) (Amendment) Ordinance, 2018 will be considered by the States of Deliberation on 28 November and a copy of the draft law is now available on the gov.gg website. This also accompanies a high level guide “Key aspects in relation to economic substance requirements” and a flowchart to assist with categorising companies.
Assuming that the Ordinance is passed, the draft Income Tax (Substance Requirements) (Implementation) Regulations, published on 9 November, are designed to ensure companies demonstrate they have sufficient substance by:
- being directed and managed
- conducting Core Income Generating Activities (“CIGA”) in the island
- there being adequate people with appropriate skills, premises and expenditure.
Implications for the Funds Industry
In the guidance, there is no requirement to have Guernsey resident directors, or to hold all board meetings on the island, however it does expect the majority of board meetings to be held on the island. Furthermore, it does not stipulate the number or frequency of board meetings, stating that it would expect an adequate number of meetings dependent on the relevant activities of the company. In terms of meetings, BDO would always recommend holding decision making meetings on the island to avoid any challenge to the company’s place of tax residence as well as the new direction and management test.
What is also now important is being able to demonstrate CIGA in the jurisdiction of incorporation. This is not a prescriptive test but will need to be adequate depending on the activities of the company. It is not necessary for the company to perform all the CIGA listed activity as it does allow for the outsourcing of some or all of the activity. So, most management companies can use the outsourced functions to the administrator to meet these substance requirements. It does make clear in the people and premises test that no double counting is allowed if the provider offers services to more than one company, so detailed timesheets and reporting will need to be held from the 1st January 2019 against each entity.
All resident companies will be expected to provide more information on their 2019 (and subsequent) tax returns than they do at present and this is particularly true for IP Companies. We expect there to be a requirement for individual returns for each company, rather than relying on bulk returns. We also know that returns must be supported with precise details of the resources employed by service providers and costs, but await further clarification from the Revenue Service. It must also be considered that outsourcing has additional tests to ensure the company monitors and controls the CIGA being carried out by any third party. Anti-avoidance provisions will be introduced to ensure that outsourcing does not undermine the new regime. This would raise issues with administrators who themselves outsource a number of activities outside of the island, as the draft regulations provide that only outsourcing that is performed in Guernsey counts as CIGA.
The term “adequate” is used throughout and only goes to explain what is adequate for each company will be dependent on the particular facts and activity. It’s important to be mindful then that;
- There is an adequate level of qualified employees in the island, or an adequate level of expenditure on outsourcing to service companies proportionate to the activities of the company.
- There is an adequate level of annual expenditure incurred in the island, or an adequate level of expenditure on outsourcing to service companies proportionate to the activities of the company.
- There are adequate physical offices or premises in the island, or an adequate level of expenditure on outsourcing to service companies for the activities of the company.
For many Guernsey management entities, these regulations should have zero impact beyond the additional reporting requirements.
BDO will continue to provide updates as more material is published, however in the meantime, we recommend all administrators carry out an assessment of their clients to identify those companies that are likely to be affected by the rules given the short notice until the new legislation is in force.
If you wish to discuss any aspect on these new regulations, then please do not hesitate to contact Andre Trebert, Mark Savage or your usual BDO contact.