Covid-19 has undoubtedly had a significant impact on working practices and the requirement to self-isolate and work from home is resulting in some unusual anomalies.
Despite the recent emergence of the second wave in Guernsey and subsequent lockdown, the early relaxation of lock down rules last year has made the Island attractive to friends and relatives who were able to move to Guernsey and live “en famille” whilst continuing to work remotely for overseas employers. This article highlights some of the taxation implications for individuals who were taking advantage of the freedoms Guernsey offered when compared to other jurisdictions and the potential implications for their employers.
Guernsey tax residence
An individual is regarded as tax resident in Guernsey in a calendar year if they spend 91 days or more in Guernsey during the year*. In general, such an individual will be liable to pay Guernsey tax on worldwide income subject to the availability of double taxation relief in respect of any overseas tax paid.
It may be that a person may be tax resident in Guernsey but also remain tax resident in their original country. Such a person is classed as “dual tax resident” and the ultimate tax residence may be determined under the terms of a double taxation agreement on the basis of where that individual’s centre of vital interests is situated.
A person who is in Guernsey for 90 days or less in a calendar year is non-resident for taxation purposes. However, a non-Guernsey resident (or a resident person who is treated as non-tax resident as described in the above paragraph) will remain liable to Guernsey taxation on Guernsey source income (other than bank deposit interest).
*In light of Covid, the Guernsey tax authorities have published a statement of practice providing the Director of Revenue Services with discretion to ignore days spent in Guernsey due to an inability to leave the Island because of travel restrictions. This discretion is only available in limited circumstances and cannot be relied upon for anyone who is not required to self-isolate or shield but simply chooses to remain in Guernsey when it is possible for them to travel because there are no prohibitions on non-essential travel.
Individuals working in Guernsey for an overseas employer
Regardless of tax residence status, there is a question over the status of what may be a significant number of individuals who are currently in Guernsey due to travel restrictions caused by Covid-19. Many of these individuals will in general be living en famille with family and friends and employed by overseas (largely UK based) companies. These companies may not have a presence in Guernsey and will no doubt continue to operate PAYE and deduct UK National Insurance from their employees’ salaries regardless of whether the work is performed in Guernsey or overseas.
The Guernsey Tax Law (s.8(5)) states:
An office or employment shall be treated as held or exercised in Guernsey where the whole or part of the duties thereof are performed in Guernsey, but if the duties thereof are performed mainly outside Guernsey it shall be so treated only to the extent to which the duties are performed in Guernsey.
A strict interpretation of this section means that, where work is carried on remotely in Guernsey, albeit for an overseas employer, the remuneration paid will be treated as a Guernsey source of income to the extent that those earnings arose as a result of the work carried on in Guernsey. Taking this to the extreme, if most or all of the work is carried on in Guernsey, then the whole of the remuneration would, under Guernsey tax rules, be treated as arising from a Guernsey source.
Social Insurance obligations
Employees resident in Guernsey are liable to pay Class 1 (employed persons) Social Insurance contributions (“SI”) currently at the rate of 6.6%. The Social Insurance Law is administered by the Guernsey Revenue Service (“GRS”) along with taxation. The employer is also liable to pay employers Class 1 contributions based on the employee’s remuneration, also at the rate of 6.6%, so not an insignificant cost.
Where UK NI contributions are payable by the employee in Guernsey, it may be possible to gain exemption from the requirement to pay Guernsey SI contributions for a limited period under a reciprocal agreement between Guernsey and the UK.
Obligations of the overseas employer
If the whole or part of the remuneration is treated as a Guernsey source, it then falls within scope of the Employee Tax Instalment (“ETI”) regime and the employer is obliged to register with the GRS. Once registered, the overseas employer would deduct income tax and Guernsey Social Insurance contributions from the salary paid, in a manner similar to PAYE and NI.
Clearly this would be an inconvenience for many overseas employers who may be reluctant to comply with the requirements, particularly if this is only a temporary arrangement while travel restrictions persist. As overseas employers are outside of the jurisdiction of Guernsey tax regulation, it is expected that there would be little the Guernsey authorities could do to enforce this requirement and the resulting tax liability may then rest on the Guernsey based employee to settle personally.
Double taxation arrangement
There is little protection for employees afforded under the Guernsey/UK Double Taxation Arrangement (“DTA”) which seeks to clarify jurisdictional taxing rights. Article 14 of the agreement provides that:
…….salaries, wages and other similar remuneration derived by a resident of a Territory in respect of an employment shall be taxable only in that Territory unless the employment is exercised in the other Territory. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Territory.
This makes it clear that remuneration earned in Guernsey from a UK employer may be taxed in Guernsey and, as noted above, Guernsey tax regulation means that such income will be taxable.
Employees on secondment
There may be an exemption for employees working in Guernsey but paid by an overseas employer provided the individual is not physically present in Guernsey for more than 90 days in a calendar year. Provided the individual working in Guernsey does not create a permanent establishment in Guernsey (see below), the remuneration will remain subject only to UK PAYE and NI.
A significant concern for overseas employers with employees working from Guernsey is the risk of creating a permanent establishment (“PE”) in the Island. The implications of having a PE in Guernsey are that the company potentially becomes liable to Guernsey taxation in relation to any profits attributed to the PE. In general, the company standard rate of tax of 0% (zero) will apply** so the company would be in no worse a financial position. However, a PE means that the company would have the inconvenience of being required to file an annual Guernsey tax return and would of course be exposed to a tax liability should a positive rate of tax be applied in the future.
Article 5 of the Guernsey/UK DTA defines the meaning of “permanent establishment”. It means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes amongst other things a place of management, branch and office.
This article does not go into great depth on the definition of a PE but important points to consider are that the maintenance of a fixed place of business as referred to above does not include a place used solely for the purposes of carrying on any activity of a “preparatory or auxiliary character”. So, a person carrying on a junior administrative non-client facing role will not necessarily cause the company to have a PE in Guernsey. In addition, any place of business of a clearly temporary and short-term nature is also unlikely to create a PE.
Conversely, where a person (other than an independent agent) is acting on behalf of an overseas business and has authority to conclude contracts on its behalf, and habitually exercises that authority, the overseas business is deemed to have a PE in Guernsey in relation to the activity of that person. Of course, the attribution of any revenue (and therefore taxable profit) in relation to the activity of the Guernsey PE would need to be established on a case-by-case basis.
** Some business activity carried on in Guernsey is subject to higher rates of tax, for instance income arising from regulated activity such as financial services which is taxable at the company intermediate rate of 10% and income from Guernsey property ownership taxable at the company higher rate of 20%. A business carrying on a regulated activity in Guernsey through a PE should also consider whether it needs to register with the GFSC or other regulatory body.
Clearly there are potential concerns for anyone in this situation and for their overseas employers and it is recommended that specific advice is sought by employers and individuals impacted, to understand how the tax rules will apply in their circumstances and any action that should be taken.