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Revised Economic Substance Guidance Published by Guernsey, Jersey and the Isle of Man

25 November 2019

Mark Savage , Tax Director |
André Trebert , Executive Director |


On 6 November 2018, during its deliberation over the 2019 Budget Report, the States of Guernsey approved the introduction of economic substance requirements for companies regarded as tax resident in Guernsey which applies to accounting periods commencing on or after 1 January 2019.

This note provides additional guidance to the business activities that were not covered in the first publication, along with further clarification of the original guidance notes.

The Guidance on Economic Substance Regulations

Intellectual Property (IP) holding activity

Insurance Activity

Shipping Activity

The Guidance on Economic Substance Regulations

As part of the introduction of these regulations, the Governments of Guernsey, Jersey and the Isle of Man worked together to draw up detailed guidance to enable industry to engage with the process and to provide feedback for further development of the technical aspects.  As such the guidance was considered to be a work in progress.

The first guidance notes were published on 25 April 2019. At that time, guidance on certain industry activities had not been agreed and was not therefore included. For this reason extended (version 2) guidance notes were released on 22 November 2019. The update also includes clarification on the application of certain elements of the rules.

The revised guidance identifies and differentiates the treatment of Protected Cell Companies (PCCs) and Incorporated Cell Companies (ICCs).

A PCC, consistent with taxation treatment in other areas of the Tax Law, is treated as a single entity that includes the core and all cells. A PCC will be required to satisfy the substance requirements taking into consideration the activities and resources of all of its cells such that each cell will be required to demonstrate that it conducts CIGA in the island.

An ICC will only have to satisfy the economic substance test in relation to any activities it conducts itself and not for any activities conducted by its incorporated cells (IC) or taking into account any resources of its ICs. Each IC will be required to satisfy the economic substance test in relation to its own activities and referring to its own resources, without taking into account any resources of any other ICs or the ICC itself.

The updated guidance also provides clarification in relation to the actions the Tax Authority will take where a company fails the substance tests and sanctions are imposed. This includes the exchange of relevant information with competent authorities where the immediate parent and ultimate beneficial owners are resident, the imposition of financial penalties and ultimately strike off from the Register of Companies.

The original (April) guidance contained industry specific guidance for the following sectors:

  • Banking
  • Fund Management
  • Finance and Leasing
  • Distribution or Service Centres
  • Pure Equity Holding Companies
  • Headquartering Companies

The additions to industry specific guidance in the new publication include:

Intellectual Property (IP) holding activity

The guidance identifies Core Income Generating Activities (CIGA) for an IP company as :

  1. Research & Development for patents and similar assets and includes inter alia, advancing the understanding of scientific relations or technologies, addressing known scientific or technological obstacles, increasing knowledge or developing new applications.
  2. Marketing, branding and distribution for intangibles such as trademarks and brands. This may include advertising, seeking endorsements, artistic design, developing consumer awareness and customer loyalty. In addition, securing market access allowing IP to be exploited efficiently, for instance on-demand services, and in business to business sectors, integrating into complex IT systems. Exceptionally, an IP company may be able to demonstrate that it is undertaking certain alternative CIGA to meet economic substance requirements.

The guidance also includes a number of examples explaining the different types of IP and the various forms of associated CIGA and notes that a company is not required to undertake all of the CIGA listed in the legislation in each accounting period although a company will be required to demonstrate that it was undertaking in Guernsey the CIGA relevant to the type of IP asset it held throughout the accounting period. However, credit will be given for research and development, or marketing, branding and distribution undertaken in Guernsey by the company in earlier periods, the value of which is being realised by the exploitation of the IP asset in the relevant period.

It should be noted that there is a statement indicating that where companies seek to manipulate their income to fall outside of scope this will be addressed and clarification is provided that where, for accounting purposes, IP assets are aggregated within “goodwill”, the company will still be treated as undertaking IP holding.

The guidance also refers to “high risk” IP companies. Broadly a high risk IP company is defined as one that:

  • acquired the IP asset from a connected entity or through funding research and development outside the Island and licenses it to a non-resident group company; or
  • does not carry out research & development, branding or distribution as part of its CIGA.

Companies will need to consider whether they hold high risk IP. High risk IP companies are presumed to fail the substance requirements and as a result, the Tax Authority will exchange all of the information provided by the company with the relevant jurisdiction where the immediate and ultimate parent company/beneficial owner is resident.

The presumption referred to above is rebuttable and in doing so the company will be required to provide:

  • detailed business plans setting out the commercial rationale for holding the IP in the Island;
  • firm evidence that the decision making is taking place in the Island and not elsewhere; and
  • details of employees in the Island their experience, contractual terms, their qualifications, and their length of service.   

Periodic decisions by non-resident directors or board members, or local staff passively holding intangible assets will be insufficient to rebut the presumption that a high risk IP company fails the substance requirements.

Insurance Activity

This includes companies undertaking insurance business as an insurer, in both life and non-life sectors, including reinsurance. Insurance brokers, intermediaries and managers that are not insurers are not within the definition for these purposes.

The guidance identifies two key areas, life insurance and non-life insurance and both are required to demonstrate that they undertake CIGA relevant to their business area in the Island. In this respect the CIGA is described as:

  • Predicting and calculating risk including oversight of determination of the level of risk and likelihood of an event occurring, the potential costs and ensuring an appropriate level of premiums is charged for the risk accepted
  • Insuring or reinsuring against risk, which includes insuring policyholders against specific risks and providing reinsurance to insurers that are insuring policyholders against risks.
  • Providing client services including taking strategic decisions regarding the commissioning of client services relevant to insurance and ensuring oversight of systems and processes put in place for the provision of support services. 

The guidance includes some helpful examples where companies will meet or not meet substance requirements.

Shipping Activity

Guidance in relation to shipping activity identifies that to be within the scope the company must operate one or more ships in international traffic. The definition of “ships” excludes fishing vessels, pleasure craft and any vessel under 24 metres in length.

If within scope, then additional activities such as the rental on a charter basis of other ships, the sale of tickets or similar, the use, maintenance or rental of containers and the management of crew of other ships are included within the sector and assessed against the substance requirements.

CIGA for shipping businesses include:

  • Managing crew including crew sourcing, recruitment, selection, deployment, scheduling, training and on-going management of seafarers engaged on vessels and administrative aspects, such as payroll services, travel arrangements, insurance etc.
  • Hauling and maintaining ships involving lifting vessels for maintenance and the general maintenance of ships.
  • Overseeing and tracking deliveries which includes logistics in the transportation of cargo.
  • Determining what goods to order and when to deliver them, determining how a ship is to be used, the nature of the cargo, scheduling voyages and ensuring contingencies are in place.
  • Organising and overseeing voyages, for instance determining routes and logistical aspects of the operation of ships.

Again, the guidance includes some helpful examples where companies will meet or not meet substance requirements.