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Guernsey: New Substance Requirements On The Way For Guernsey Service Providers
As part of Guernsey's commitment to maintaining its standing
as a well-regulated international finance centre, Guernsey
financial services providers are readying themselves for new
legislation concerning economic substance that will come into
effect at the beginning of next year.
At a Carey Olsen-hosted seminar on the changes last week, over
160 delegates from the island's finance sector learned more
about the forthcoming legislative changes. Guernsey, along with
other finance centres, is introducing the substance requirements to
allay concerns raised by the EU Code of Conduct Group on Business
Taxation that Guernsey has appropriate provision in place to ensure
that it does not facilitate international structures which are
designed to shift profits to Guernsey which do not reflect real
economic substance in the island.
Carey Olsen senior associate Chris Hutley-Hurst, who was joined
as a speaker at the event by partner Elaine Gray and counsel Laila
Arstall, explained that businesses considered to be conducting
'relevant activities' under the new substance requirements
would be those from a banking, insurance, fund management,
financing and leasing, headquartering, shipping, and distribution
and service centres background.
"However, even within that range of sectors and industries
there will be entities that are not to be in scope of the new
substance requirements," said Mr Hutley-Hurst.
"Those out of scope entities will include the likes of
limited partnerships, limited liability partnerships and trusts,
although a general partner and a corporate trustee of a trust
structure could be classed as in scope under certain circumstances.
Similarly, it is expected that collective investment vehicles will
not be in scope."
Companies that are in scope will have to demonstrate for
substance purposes that, in relation to 'relevant
activities', they are directed and managed in Guernsey, that
they have an adequate level of employees, expenditure and physical
presence in the island and that their 'core income generating
activity' (CIGA) takes place in Guernsey. A failure to comply
with the new legislation could result in enforcement action
including substantial penalties and, ultimately, strike-off. The
Director of the Revenue Service will have new powers to enforce the
legislation, including the power to enter premises and inspect
documents, although the legislation expressly excludes from that
power of inspection any documents that are legally privileged. What
this means in practice is that advice from a law firm (in
distinction to advice or support from other types of
service-providers in this area) remains confidential and protected
from disclosure.
Mr Hutley-Hurst explained that detailed guidance was awaited on
precisely how the new regime would be applied, including in
relation to the requirements for adequate staff and physical
presence in the island.
"The test of adequacy is a question of fact and degree,
taking into account all circumstances that are relevant to the
company and the business that it operates. There will be no
'one size fits all' test and differing businesses with
differing profits will require differing levels of substance in the
island."
The event also heard from Carey Olsen partner Elaine Gray on the
impact of the new substance requirements on companies that derive
their income from intellectual property and counsel Laila Arstall
on the implications for asset and pure equity holding companies. As
part of its screening process of Guernsey and other offshore
centres, the EU Code of Conduct Group on Business Taxation
indicated that these types of companies would be subjected to
different levels of substance requirements from those that apply to
companies conducting other types of relevant activities.
Mrs Arstall said: "Given Guernsey's robust legal and
regulatory framework, its long-standing track record for delivering
corporate and trust-related services to the highest professional
standard and its well-recognised commitment to meeting global
standards of tax transparency and reporting, Guernsey's
financial sector is well-placed to meet the substance criteria set
by the EU."
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