Economic Substance Requirements
15 May 2019
On 29th April 2019 the Guernsey Revenue Service issued detailed guidance on economic substance requirements in Guernsey. The economic substance legislation came into effect on 1 January 2019 and will affect many companies administered in the Bailiwick of Guernsey.
Companies that are tax resident in Guernsey and receive income from a core income-generating activity (“CIGA”) will be considered to have economic substance in the island if they are directed and managed in Guernsey and:
- employ an adequate number of qualified staff whilst showing adequate expenditure proportionate to the level of activity carried on in Guernsey, and;
- have sufficient physical presence on the island to conduct the CIGA in Guernsey.
For further background information please see our previous economic substance briefing note.
It is important to note, however, that further guidance is yet to be released by the Guernsey Revenue Service.
What are the CIGAs?
Company directors will be required to evidence the company’s economic substance in the island if it generates income in one of the following sectors:
- Fund management (not including Collective Investment Vehicles)
- Finance and leasing (including intra group lending where interest is charged)
- Distribution and Service Centres
- Operation of a Holding Company (possible reduced requirements)
- Holding intangible property (including “high risk” Intellectual Property)
If a company does not generate income from activities in any of these sectors then it will not be subject to the economic substance requirements.
Currently the guidance notes do not address the Insurance, Shipping and Intellectual Property Company sectors and we await further details regarding this from the Guernsey Revenue Service.
What’s next for companies with CIGAs?
Where a company is tax resident in Guernsey and receives gross income from one of the CIGA sectors, directors will need to review activities, procedures and resources to
ensure the company has an active presence in Guernsey.
In some cases, it may be necessary to consider restructuring or reallocate company activities to ensure directors can evidence the company has economic substance in Guernsey. Where CIGA companies involve relevant decisions, the majority of those making those decisions should be present in the island. If they are not, then the decision will be deemed to have not been made in the island.
All or some of the CIGAs can be outsourced provided that the company can demonstrate that they have adequate supervision over the outsourced activity and it is undertaken on the island.
In order to meet the premises and people test, consideration must be given to the resources of the service provider and there can be no double counting if services are provided to more than one company.
Guernsey is such a well-regulated jurisdiction that most companies will already have genuine roots in the island. As an example, most local fiduciary firms will direct and manage companies in Guernsey, make business decisions in Guernsey, hold bank accounts here and have dedicated employees administering the company. These factors will contribute towards proving evidence of economic substance.
The impact of non-compliance with economic substance
If a company does not meet the economic substance requirements and makes no attempt to rectify that situation, it may be subject to sanctions and penalties, ultimately leading to the company being struck off the Companies Register.
How does this work in practice?
A company subject to economic substance requirements will be required to provide a tax return annually, starting with calendar year 2019, to the Guernsey Revenue Service. This will be submitted together with a range of supporting documentation, including Financial Statements and details of premises, to evidence the company’s economic substance in Guernsey.
Some Intellectual Property (“IP”) companies are designated as “high risk” as they are presumed to be guilty until proven innocent such that they will have enhanced economic substance requirements to meet. It is not yet clear exactly what additional evidence will be required compared to other companies but business plans explaining why the company is based in Guernsey and comprehensive information on employees and their relevant experience will need to be submitted.
Guernsey Tax Residence
It is worth noting that a company may now be tax resident in Guernsey by virtue of being managed and controlled in the island following changes to Guernsey’s corporate tax regime. See our briefing note of January 2019 which contains further details regarding this. This means, regardless of whether a company is subject to the new economic substance requirements, if it is incorporated elsewhere but managed and controlled in Guernsey it may be necessary for a company to be registered with the Guernsey Revenue Service and submit a tax return each year.
How we can help you
We have a dedicated Tax Team of highly qualified and experienced professionals who help clients meet their local tax compliance requirements. Whilst the guidance does provide more clarity in connection with the sectors that are affected, a thorough analysis of the exact nature and work of clients and their business is required.
Our staff are available to talk through any questions you may have from this briefing note and can discuss how we’re able to assist with the preparation of the Annual Tax Return as required by the Guernsey Revenue Service. We can also offer advice and other services to suit your economic substance needs. Our Liquidations Team can also provide support if these changes result in restructuring of a client’s affairs.