Overview: the legal framework for economic substance requirements in Guernsey
What legislation defines the economic substance requirements in your jurisdiction?
The economic substance requirements are set out in the Income Tax (Substance Requirements) (Implementation) Regulations 2021 (the Substance Regulations), which were first implemented December 2018, came into force on January 1, 2019 and was subsequently amended on June 15, 2021. The Substances Regulations are issued pursuant to the Income Tax (Guernsey) Act 1975, as amended .
The Guernsey Revenue Service publishes the Substances Regulations on the following website Economic substance – States of Guernsey (gov.gg).
The Act also specifies that the Director of the Guernsey Revenue Service (the Director) may issue directives on the administration, implementation and enforcement of the Substances Regulations, including any term used therein.
What types of entities are subject to economic substance requirements in your jurisdiction?
The following items fall within the scope of the Substances Regulations:
- companies considered to be tax resident in Guernsey and generating gross income from relevant activities. The term “corporations” includes all vehicles treated as corporations for tax purposes. An incorporated cell will be treated separately from its incorporated cell company and other incorporated cells. By comparison, a protected cell company and its cells will be treated as a single entity.
- partnerships – all types of partnerships potentially fall within the scope of the Substances Regulations to the extent that they derive gross income from certain specified activities, including general partnerships, limited partnerships and limited liability companies. Foreign partnerships formed outside Guernsey may also be required to comply to the extent that they have their “place of effective management” in Guernsey and carry on business in Guernsey.
The following partnerships are not covered by the Substances Regulations:
- partnerships consisting solely of individual members subject to income tax in Guernsey on their share of the profits of the partnership;
- wholly domestic partnerships, i.e. where a partnership carries on substantially all of its business in Guernsey and is not consolidated (for financial reporting purposes) under a multinational group; and
- partnerships whose place of effective management is located in an eligible jurisdiction outside of Guernsey. The term “eligible jurisdiction” means a jurisdiction where (1) the partnership is subject to substance requirements substantially similar to those of the Substance Regulations, or (2) the highest rate of income tax of any person in that jurisdiction is at least 10 percent.
Collective investment vehicles are outside the scope of the substance unless they are self-managed.
What activities trigger the economic substance requirements in your jurisdiction?
Under the Substances Regulations, there are specific categories of “relevant activities” that bring an entity within scope and are further defined in the Substances Regulations. By way of overview, these “relevant activities” are:
- bank – “banking business” means a deposit taking business within the meaning of the Supervision of Banking (Bailliage of Guernsey) Act 2020 carried on by an approved institution within the meaning of that Act;
- distribution and service center – means the company of:
- purchase parts, materials or goods from other members of the same group who are not resident in Guernsey and resell them for a percentage of the profits;
- provide services to other members of the same group who are not resident in Guernsey; Where
- except in each case where such activities fall within another relevant category of activity with the exception of the holding company and the intellectual property enterprise;
- financing and leasing – means providing credit facilities of any kind for consideration, except where such activities are in the nature of banking, fund management or insurance;
- fund management – means the provision of management services (i.e. the performance of any management function in relation to an investment or in relation to the assets underlying an investment) when carried out in the context of a collective investment scheme within the meaning of the Investor Protection (Bailliage of Guernsey) Law, 2020 by an entity approved for this purpose;
- registered office – means the business of providing certain services to non-resident persons within the Guernsey resident body’s group, including the provision of senior management, assumption or control of material risk to persons activities carried on by, or assets held by, any of such persons within the group, and the provision of substantive advice regarding the assumption or control of risk for such activities or assets, in each case except where such activities fall under other definitions of relevant activities and ownership of intellectual property;
- insurance – means insurance business carried on in or from the island as an insurer (in the long term and general sectors, and this includes reinsurance) within the meaning of the Insurance Business Act 2002 ( Bailiwick of Guernsey) (as amended) operated by a licensee under this Act; and
- maritime transport – the operation of ships in international traffic for income from the carriage of passengers or goods, and includes (where directly related or incidental to such operation) the chartering, the sale of tickets, the use , maintenance or rental of containers (including trailers and related transport equipment) and crew management. There are exclusions for fishing vessels, pleasure craft, harbor craft and certain small vessels.
Two other activities also fall within the scope:
- Pure capital holding body – meaning a body which is a body corporate within the meaning of the Body Companies Beneficial Ownership (Guernsey) Act 2017 or (as the case may be) the equivalent law of Alderney:
- whose main function is the acquisition and holding of shares or interests in other organisations;
- who does not carry out any commercial activity; and
- which holds a majority interest in these organizations.
- intellectual property organization – derives revenue from intellectual property assets.
The activities of externally managed collective investment vehicles under Guernsey law are exempt from substance regulation. However, “self-managed funds” (i.e. funds without a separate manager) will have to satisfy a test of economic substance with regard to their activities insofar as these generate gross income during a financial period .
Tax residency requirements
Do entities have to be tax resident (or deemed tax resident) in your jurisdiction to be subject to economic substance requirements? If so, what are the tax residency rules and requirements? If not, do the economic substance requirements in your jurisdiction differ from non-resident entities?
The substance requirements apply to companies which are tax resident in Guernsey whether or not incorporated in Guernsey.
Under Guernsey law, a company is considered to be tax resident in Guernsey if it is either a company incorporated in Guernsey which is not centrally managed and controlled and recognized as tax resident in another jurisdiction where the highest corporate tax rate is at least 10%; or a company not incorporated in Guernsey which is centrally managed and controlled in Guernsey. Guernsey is also party to a number of double taxation agreements, which may apply.
Partnerships are fiscally transparent entities, which means that there is no tax residency test as there is for a company.
Accordingly, partnerships formed in Guernsey and deriving gross income from relevant activities or carrying on business as the holding of intellectual property assets or outright participation fall within the scope of the substance requirements.
Partnerships formed outside Guernsey may fall within the scope if they carry on business within the scope for gross income and have a ‘place of effective management’ in Guernsey. The place of effective management is the place “where the management and business decisions necessary for the conduct of all of that person’s affairs are substantially made taking into account all relevant facts and circumstances”. It is therefore important for partnerships to understand where their place of effective management is, as well as to assess whether the partnership is carrying out activities within the scope. In the context of limited partnerships, it is likely that the place where the general partner carries on business will be the place of effective management of the limited partnership itself.
Has the government issued guidance on economic substance requirements?
Yes. The main guidance at the time of writing is that published jointly with Jersey and the Isle of Man on 22 November 2019 in respect of businesses. Further joint guidance was issued on December 21, 2021 regarding the application of economic substance rules to partnerships. It should be noted that, as joint guidance, the text is written generically to explain the scope and application of the legislation in the three jurisdictions. It is expected that new guidelines will be released shortly to cover partnerships.
The Guernsey Revenue Service maintains links to relevant advice online at Economic Substance – States of Guernsey (gov.gg).