Guernsey and Jersey (along with the Isle of Man) have published joint guidance on the application of economic substance requirements to partnerships (the "Partnership Guidance") which can be found here.
Both Guernsey and Jersey implemented legislation extending economic substance to partnerships earlier this year. The legislation, effective from 30 June 2021, brought partnerships into scope of economic substance requirements for accounting periods commencing on or after 1 January 2022, although partnerships formed on or after 1 July 2021 are in scope immediately on formation where they conduct activities that trigger the economic substance requirements. Walkers' briefing on the Guernsey legislative changes can be found here.
This briefing focuses on what the Partnership Guidance covers and how it provides further clarity on the extension of economic substance requirements to partnerships.
What does the Partnership Guidance cover?
The Partnership Guidance provides useful clarity and detail on the following key points of the Guernsey/Jersey economic substance regimes.
Place of Effective Management ("POEM")
Economic substance requirements apply in Guernsey/Jersey where a partnership is treated as being "resident" in Guernsey/Jersey (as they case may be). Partnerships are generally fiscally transparent and so are typically not treated as tax resident entities (although some jurisdictions have election regimes to allow taxation at the partnership level, such the US "check-the-box" regime).
Guernsey/Jersey substance legislation therefore needs to deem a partnership to be "resident" somewhere in order to apply economic substance requirements where appropriate, and adopts the concept of POEM to achieve this.
Broadly, a Guernsey/Jersey law partnership is "resident" in Guernsey/Jersey for substance purposes, unless its POEM is located in a "qualifying jurisdiction" (see further below on this concept). Equally, a foreign law partnership is "resident" in Guernsey/Jersey for substance purposes if its POEM is located in Guernsey/Jersey.
POEM is an internationally recognised tax concept. POEM is defined in the economic substance legislation in Guernsey/Jersey, and the Partnership Guidance helpfully confirms that the Guernsey/Jersey substance legislation follow OECD guidelines on POEM, being "the place where key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made." POEM is therefore very much a question of fact. For LPs, this will typically be where the board of the general partner make their decisions in relation to the LP
The Partnership Guidance also confirms that a partnership may only have one POEM at any one time, even if there are multiple places of management – the core issue being, taking everything into account, where the partnership is actually managed. POEM is therefore ultimately a question of fact and degree, and as there is no set test, the Partnership Guidance provides some useful examples varying in complexity, to help businesses ascertain POEM.
The Partnership Guidance also contains a helpful set of relevant factors which can help ascertain the POEM in cases of uncertainty.
As stated above, a Guernsey/Jersey law partnership is "resident" in Guernsey/Jersey for substance purposes, unless its POEM is located in a "qualifying jurisdiction".
A "qualifying jurisdiction" is a jurisdiction where:
- either the partnership is subject to economic substance requirements in that jurisdiction which are substantially the same as Guernsey/Jersey's economic substance requirements; or
- the highest rate of tax on the income of any person in that jurisdiction is at least 10%.
The Partnership Guidance contains a list of jurisdictions that are considered to have substantially similar substance requirements, which include Bermuda, BVI, Cayman Islands, Guernsey, Jersey and UAE. The full list of qualifying jurisdictions in the Partnership Guidance will be kept under review and jurisdictions will be added/removed as appropriate.
The Governing Body
Under legislation, the requirement that the activities of the resident partnership (that trigger substance) must be directed and managed in the relevant Island falls on the "governing body" of the partnership (as opposed to the board of directors, in the case of a company). The Partnership Guidance provides further details on that governing body, confirming that it is the person or group of persons responsible for making the partnership's strategic and management decisions. The Partnership Guidance also confirms that:
- for a limited partnership ("LP"), the governing body will generally be the board of directors of the corporate general partner – in our view this applies to all forms of limited partnership including a Jersey incorporated limited partnership and a Jersey separate limited partnership;
- for a limited liability partnership ("LLP"), the governing body will be its management committee or team as mandated pursuant to the LLP agreement (if the LLP agreement is silent on such a committee or team, our view is that the governing body will be the members of the LLP who have management powers);
- for a limited liability company ("LLC"), the governing body will be the members unless management of the LLC has been vested in another person, in which case it will be that other person – this will apply to LLCs in Guernsey/Jersey when they are introduced; and
- for a general partnership, the governing body very much depends on the facts and circumstances and how the partnership is regulated – if there is a group of "senior" partners who are essentially a management committee they will be the governing body, but the governing body could be all the partners if there is no such committee.
However, the governing body is ultimately a question of fact and so the above may not be the case in all circumstances, especially where there is evidence of substantive decision making taking place by other persons.
The Partnership Guidance also provides useful further details, including examples, on the three exemptions applicable to Guernsey/Jersey resident partnerships, being:
- the "collective investment vehicle" exemption for regulated funds;
- the "individual exemption" for partnerships where all the partners/members are individuals subject to income tax in the relevant Island in respect of their share of the partnership profits; and
- the "domestic exemption" for partnerships which are not part of a multinational group and only carry out their activities in the relevant Island.
The Partnership Guidance provides useful further clarity on the extension of economic substance requirements to partnerships, especially in relation to POEM and the identity of the governing body. By confirming that Guernsey/Jersey substance legislation follows OECD guidelines on POEM, businesses can benefit from OECD guidance and commentary on this concept.
As some partnerships are already subject to economic substance requirements, businesses should be taking steps now to check whether or not they are in-scope of the economic substance requirements, and if so, to ensure that they can readily comply.
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.