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Guernsey Economic Substance Draft Regulations and Initial Guidance

As announced by the President of the Policy and Resources Committee in his Budget Speech on 6 November 2018, Guernsey has today published, in draft, The Income Tax (Substance Requirements) (Implementation) Requirements, 2018 (“the Regulations”) which it is intended will impose increased substance requirements on certain Guernsey resident companies (the ‘economic substance tests’).

Two other documents have been published to facilitate interpretation of the draft Regulations: a Key Aspects Document issued jointly by the governments of Guernsey, Jersey and the Isle of Man and a flow chart.  It is worth noting that more comprehensive guidance notes are to be issued in due course.

The Regulations, if passed by the States at their meeting on 8 December, will apply with effect from 1 January 2019 and impact Guernsey resident companies with accounting periods commencing on or after 1 January 2019 that undertake ‘relevant activities’.

In his Budget Speech, Gavin St Pier, President of the Policy and Resources Committee, said that he is confident “that these proposals will dispel the concerns of the EU’s Code of Conduct Group for Business Taxation” raised during a review of tax co-operation of third countries.  He also points to the potential upside of the new requirements which will “put beyond any doubt that we are an economy that relies on real economic activity and where businesses have a substantial presence within our jurisdiction”.

The Regulations are broadly as expected as being in line with the information set out in the Guernsey 2019 Budget proposals. We have summarised below some of the key points relating to:

  1. the scope of the economic substance tests and their application to companies undertaking relevant activities (the ‘in-scope’ companies);
  2. the requirements imposed on in-scope companies to demonstrate that they are directed and managed in Guernsey, have Guernsey core income generating activities (‘CIGA’), and meet the necessary ‘adequate’ tests; and

iii.        next steps in terms of ensuring compliance with the economic substance tests for affected companies and administrative matters, including potential sanctions and penalties.

A full copy of the Regulations can be found here.

A full copy of the Key Aspects Document can be found here

Relevant Activities

Regulation 2(1) of the Regulations provides confirmation that the eight relevant activities detailed in the States of Guernsey’s Budget proposals on the introduction of substance requirements for companies tax resident in Guernsey have remained in scope, being banking business, financing and leasing, income from intellectual property assets, fund management, shipping, headquarter activities, insurance, and pure equity holding company activities. The Regulations also provides for a ninth category of relevant activity – “distribution and service centre business”.

As anticipated, the draft Regulations includes definitions of each relevant activity.  In the case of banking, insurance and fund management, these reflect the appropriate Guernsey regulatory regime to which they are subject.  The definition of a pure equity holding company is that it should have ‘as its primary function the acquisition and holding of shares or equitable interests in other companies’, it carries on no commercial activity and it is a holding company within the Companies (Guernsey) Law 2008.

The new category of distribution and service centre business is defined as:

“… the business the sole or main activity of which is:

  1. a) to purchase raw materials and finished products from other members of the same group which are non-resident and to re-sell them for a small percentage of profits; or
  2. b) the provision of services to other members of the same group which are non-resident;

but does not include any business or activity falling within the definition of banking, insurance, fund management, financing and leasing, shipping or headquartering”

This new category will mean that in addition to distribution businesses, companies, whose main or sole activity is to provide services to (non-Guernsey) group companies, will need to comply with substance requirements.

There are two particular points to note where the substance requirements will not apply in relation to certain activities:

  • The definition of financing and leasing is the provision of credit facilities of any kind for consideration – indicating that where credit facilities are not provided for consideration (such as interest-free loans) this should not give rise to a relevant activity.
  • Regulation 6 states that the substance requirements do not apply if a company carrying on relevant activities has no income from its business or activity in that period.

Substance Requirements

As with the classification of relevant activities, the substance requirements themselves are in line with those set out in the Guernsey 2019 Budget proposals; companies that carry out relevant activities being required to demonstrate that they:

  1. i) are directed and managed in Guernsey;
  2. ii) carry on core income generating activities (CIGA) in Guernsey; and

iii)      have adequate staff, expenditure and physical premises in Guernsey
proportionate to the level of the relevant activity carried on in

The Regulations provides for specific substance requirements for pure equity holding companies in recognition that what is expected is likely to be less than for the other categories.  A pure equity holding company must comply with all applicable company law requirements and ensure that it has an adequate level of persons and physical presence in Guernsey for holding and managing the shares of equitable interests.

This definition differs from the legislation in Jersey which does not prescribe specific reduced requirements for holding companies although it is not unreasonable to conclude that what may be considered to be sufficient in terms of both a company’s direction and management, and adequate staff, expenditure and physical assets, is likely to be different for an entity that only holds equity investments compared to an entity which carries out any one of the other relevant activities.


The Regulations make clear that outsourcing CIGA to another Guernsey entity should be sufficient to allow a company to meet its CIGA substance requirements, as long as the company outsourcing the work is able to demonstrate adequate supervision of the outsourced activity.

There is no specific prohibition on outsourcing certain activities to non-Guernsey entities, but this would need careful consideration depending on the specifics of the company and the typical practice within that industry.

Section 6 and 7 of the Key Aspects document provides further guidance on this point.

Penalties and Sanctions for Non-Compliance

The Regulations includes further detail on the penalties that will be applied in cases of non-compliance.

For the first year of non-compliance, the financial penalty will be up to a maximum of £10,000.  The next penalty would apply to a default in the third year (due to the time which would have elapsed by the time the second year had passed) up to a maximum of £50,000. The penalty for failure to comply in the fourth year would be up to £100,000. Furthermore, where the company is registered in Guernsey the Director would give notice to the Registrar of Companies to impose legislation to have the company struck off from the Register of Companies.

Spontaneous exchange of information will also be imposed in each year of non-compliance with the EU Member State competent authority where the immediate parent company, ultimate parent company and/or beneficial owner is resident.

In addition to the above, the Regulations provides for financial penalties within section 193 of the Income Tax Law (Guernsey) 1975 where a person fails to deliver information as requested, and/or provides inaccurate information.

As expected, the Regulations confirms that where a company meets the definition of a ‘high-risk IP company’ the economic substance tests will be assumed not to be met, unless sufficient information is provided to satisfy the Comptroller that the tests are met. Even in such cases, the spontaneous exchange of information in relation to the high-risk IP company will be applicable.

Next Steps

As highlighted during our recent Breakfast Seminar, companies need to address the application of the Regulations to them now and, where appropriate, plan and take any necessary steps from both a practical and a procedural perspective to ensure compliance with the requirements of the Regulations when they go live on 1 January 2019.

We recommend that companies/groups:

  1. Classify their structures on a company by company basis so as to flag those which undertake a relevant activity and are therefore within the scope of the requirements;
  2. For those entities that undertake relevant activities, consider current and future compliance with:
  3. The directed and managed requirements;
  4. The adequate staff, expenditure and physical assets tests; and
  5. Demonstrating the existence of Guernsey CIGA;
  6. Consider the means by which compliance with the economic substance tests will be documented and evidenced;
  7. Review outsourcing arrangements to ensure that these do not contravene the economic substance tests, in particular, the requirement to evidence CIA carried on within Guernsey; and
  8. Consider the increased tax return disclosure requirements arising from the Regulations, which will be effective for the 2019 year of charge onwards (this tax return to be filed by 30 November 2020).


Jo Huxtable: 01481 703 308 or email

Martin Popplewell: 01481 703 229 or email

Adam Hart: 01481 703 321 or email


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