Guernsey corporate tax and economic substance

sailing boats docked at the shore

A year has passed since the economic substance and new corporate residence legislation came into effect in Guernsey and, whilst 2019 was the year to review company activities and ensure they align with economic substance requirements, now is the time to consider the practical implications.

With this in mind, this article looks at what information will need to be collated and reported under this new regime. The Guernsey Revenue Service have helpfully provided a demonstration of the new corporate tax return on its website and it is recommend this is viewed.

Calendar year tax return

The days of the simple “alternative certificate” tax return have passed and all companies tax resident in Guernsey will have to complete a more detailed online corporate tax return. This includes companies incorporated outside Guernsey but claiming to be tax resident here under the change in corporate residence legislation in January 2019. If this applies to your company but you’ve not already completed Form 706 (Registration of a Foreign Incorporated Company as Tax Resident in Guernsey) then this should be completed and submitted to the Guernsey Revenue Service as soon as possible.

The tax return for calendar year 2019 is due to be submitted by 30 November 2020. It is important to have good procedures in place now to ensure all relevant data is collated well before that date ready to use when completing the return.

Economic substance requirements

The main additions to the corporate tax return are, unsurprisingly, a number of questions relating to economic substance. The return will now serve a secondary purpose as the document which proves a company has adequate economic substance in the Island.

Employees, expenditure and premises

According to local guidance, each company that needs to meet economic substance requirements must have “an adequate number of (qualified) employees” and “expenditure proportionate to the level of activity carried on in the island” together with “an adequate physical presence in the island”.

Employees do not have to be legally employed by the company itself, but they must have worked for it or on its behalf. The number to be declared on the tax return is calculated on a basis of “full time equivalents” so it may be necessary to state a fraction of a number for part time individuals. The new tax return specifically asks for the number of employees to be shown to two decimal places.

An employee cannot be double-counted if they carry out work for, or on behalf of, more than one company. This may result in some unusual numbers of full time equivalent employees, particularly within a trust company setting where it is not unusual for an employee to work on multiple companies throughout the year.

A figure for the adequate amount of expenditure can be extracted from the company’s financial statements and declared in the relevant field in the tax return.

The new corporate tax return explicitly asks for a yes or no answer as to whether the company has an adequate number of employees and adequate physical premises in Guernsey in relation to the activity undertaken. The company’s premises are determined to be where its core income generating activities (CIGA) are conducted in Guernsey.

It is possible to outsource activities to an external party although it should be noted that details of the entity used, and its employees, will need to be declared on the corporate tax return.

Decision making

The new “directed and managed” test is defined in The Income Tax (Substance Requirements) (Implementation) Regulations, 2018 and is made up of a number of factors, separate from the “management and control” test used to determine tax residence.

It can be summarised simply in terms of whether a quorum of the board of directors meet regularly in Guernsey to discuss and make strategic decisions. According to local guidance, “the board of directors, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board and all minutes and company records must be kept in the island”.

The corporate tax return explicitly asks for a yes or no response to the question of whether the company is directed and managed in Guernsey. Helpfully, where there is uncertainty on this question, the online tax return permits the user to answer additional questions in order to determine whether the directed and managed test is sufficiently met.

Financial statements

It will now be necessary for the majority of Guernsey tax resident companies, whether subject to economic substance requirements or not, to submit financial statements online as part of the tax return submission. It seems a PDF version will be an acceptable file format and Guernsey is not requesting a specific file format, unlike the UK’s corporation tax regime.

Some financial data will need to be extracted from the financial statements and declared on the tax return itself. There is a requirement to state which individual or firm prepared the accounts and what qualification they hold.

Additional information or reduced requirements

This article has not covered all the CIGAs determined by the economic substance legislation but there are two areas which are given special treatment within the new corporate tax return.

Where a company is classified as an intellectual property (IP) or high risk IP company then further information must be provided as part of the return submission. In the case of a high risk IP, the company directors are required to state whether they wish to rebut the presumption that the company fails the economic substance requirements. In order to do this, comprehensive evidence must be uploaded and submitted as part of the tax return which may include detailed business plans and details of employees and their qualifications to prove the company meets the economic substance requirements. There is also a need to provide detailed information relating to the ultimate beneficial owner of a high risk IP company.

At the opposite end of the scale, there are reduced requirements for pure equity holding companies where it is only necessary to answer questions on whether the company has adequate expenditure, number of employees and physical premises in Guernsey.

How we can help

We have a dedicated Tax Team in Guernsey with over 40 years’ experience helping clients meet local tax compliance requirements. Our Liquidations Team can also help if these changes result in restructuring of a client’s affairs. Should you require any assistance completing the new corporate tax return, or would like to discuss any of these points in more detail please contact us.