The introduction of Limited Liability Companies (“LLC”) legislation will enhance Guernsey’s competitive position with an attractive vehicle for international finance business, especially from the US.
LLCs are commonly used for private equity, trading businesses, holding structures and special purpose vehicles, providing legal personality and limited liability similar to a company, but offering the tax transparency like a partnership if so elected at the point of establishment.
The LLC is well known and is probably the most popular form of business entity used by US investors. Using LLCs for both fund and fund management vehicles in Guernsey will provide opportunities for US Managers to domicile in a well-regulated, politically stable and established international finance center whilst continuing uncertainty exists with the UK and the EU over Brexit and the impact of government finances after the pandemic.
The anticipated increase of private equity transactions expected in 2021, due in part to the amount of uninvested capital or ‘dry powder’ that exists, is further buoyed by the attractive valuations of assets that have been impacted by the pandemic. Timing is excellent for US Managers looking for a suitable cross-border jurisdiction such as Guernsey to domicile their fund. This trend of transactions was seen in 2020 with the number of UK listed companies being acquired by the private equity sector jumping from £2.3bn in 2019 to £21.1bn in 2020 with attractive valuations being stated as a key driver. (BDO UK)
Whilst this provides a clear opportunity for US Managers, there is also the opportunity for non-US managers choosing an LLC structure in order to target US investors.
What are the key features of the Guernsey LLC?
It will have a separate legal personality and it will be a body corporate.
It will provide members with limited liability.
There must be at least one member and it can have an external management company, or the management may be by its own members.
The LLC Agreement is the key constitutional document that sets out the rights and duties of members, administrative procedures, contributions, allocation of profits and losses, distributions and the overall operation of the LLC.
Unlike a company, where the memoranda and articles are a matter of public record, the LLC will share similarities to the existing Limited Partnership (LP) and Limited Liability Partnership (LLP) as the LLC agreement will not be publicly available.
Something relatively new to LLCs will be the ability to create segregated series, each with its own assets and liabilities with different members and/or managers from the other series and maintaining separate legal personality. This is typically for private equity structuring and is similar to the Protected Cell Company ring-fencing cells.
The LLC would be required to maintain a registered office in Guernsey similar to other Guernsey entities.
Whilst being a body corporate, the intention for LLCs is not to be taxed in the same way as a company but would have similar treatment consistent with the existing Guernsey partnerships. The proposals for Guernsey LLCs are to be tax transparent by default in which case the profits will be taxed in the hands of the members such that if there are no Guernsey resident members, there will be no Guernsey tax liability. There will also be an option to make an irrevocable election at the point of formation to be taxed as a company instead. In this case the LLC will be taxable at the prevailing Guernsey company tax rate which is currently 0%. However other rates of company tax may apply to certain regulated activities carried on by a company in Guernsey.
It is important to note that, irrespective of whether they are tax transparent or taxed as a company, LLCs may be subject to the Economic Substance regulations that were introduced in Guernsey (and the other Crown Dependencies) with effect from January 2019. Under these regulations, LLCs receiving income from certain specified activities will be required to demonstrate that they have economic substance in Guernsey by being directed and managed in the Island and conducting core income generating activities with adequate people, premises and expenditure in Guernsey.
In terms of US federal income tax, for US investors, unincorporated entities such as LLCs and Partnerships are permitted to choose whether they will be treated for US income tax purposes as a partnership or a corporation. This election (referred to as a “check the box” election) should be made by filing an Entity Classification Election with the IRS within 75 days of formation. There is late election relief, a period that extends for 3 years and 75 days from the date of formation, however the implications for making this type of election as well as other global tax matters such as substance (as noted above), CRS and FATCA are significant, so seeking proper tax advice planning at the outset is vital to ensure the correct filings are made.
For more information on how BDO can assist, contact André Trebert.