Earlier today, the tax authorities of Guernsey and Jersey (along with the Isle of Man) released revised joint guidance on the application of each island's economic substance legislation. This guidance updates the previous joint guidance issued by the Crown Dependencies on 26 April 2019.
Economic substance legislation has effect in both Guernsey and Jersey and applies to companies that are tax resident in those jurisdictions and generating gross income from relevant activities in a financial period commencing on or after 1 January 2019. In Guernsey, certain exempt companies have also been in scope since 1 August 2019.
The revised joint guidance provides welcome details for aiding compliance for current and future periods. In particular, it has been expanded to cover insurance, intellectual property, high-risk intellectual property and shipping. Existing sections on the directed and managed requirement, fund management, distribution and services centres and (pure equity) holding companies have also been updated.
Of the more notable updates, the guidance includes confirmation that:
- regulated funds are generally out of scope (although their subsidiaries could still be within scope depending on their activities);
- a future legislative change is planned that would bring self-managed corporate funds within the scope of fund management business;
- isolated decisions constituting "core income-generating activities" (CIGA) may be taken outside the relevant island provided it can be shown that the CIGA decisions taken on-island clearly outweigh those taken outside;
- a protected cell company (PCC) is regarded as a single legal entity and will be required to satisfy the economic substance requirements at a whole entity level covering the activities and resources of all its protected cells; and
- an incorporated cell company (ICC) is regarded as a legal entity and will only have to satisfy the economic substance test in relation to any activities it conducts itself. The incorporated cells (ICs) of an ICC are also separate legal entities and each IC will have to satisfy the economic substance test in relation to its own activities and referring to its own resources.
The revised guidance is a significant update, particularly in respect of the clarifications on funds and CIGA. However it remains a developing document that could be updated in future. Carey Olsen will also be monitoring the proposed legislative changes.
Compliance with the legislation by a company for any given financial period will be reviewed by the tax authorities following submission of its annual tax return and financial statements. Given the potential severity of sanctions for non-compliance, including a progressive penalty system and the risk of being struck-off, care should therefore be taken to ensure compliance on an ongoing basis.
Carey Olsen's taxation and economic substance services
For specific advice on the application of economic substance requirements and how the guidance could apply, please get in touch with a member of our taxation and economic substance team.
Along with providing advice on the implications of the legislation, we can conduct audits on existing structures, procedures and documents to help identify and remedy any gaps or issues that could prevent compliance with economic substance requirements.
We advise clients across all sectors on various tax matters, including tax residence, economic substance requirements, income tax, FATCA, the OECD's Common Reporting Standard (CRS) and tax disputes.
We have also developed a set of economic substance tools to help businesses establish whether the economic substance requirements apply to specific entities:
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.