Guernsey has passed legislation to implement the OECD's global minimum tax rate of 15%, known as "Pillar 2", which will apply for fiscal years commencing on or after 1 January 2025.
Recap – What is Pillar 2?
Pillar 2 is an OECD initiative that ensures that multinational enterprises with a consolidated annual turnover of at least €750 million (MNEs) pay a minimum blended "effective tax rate" (ETR) of 15% on their worldwide profits, no matter where those profits arise.
This 15% minimum rate is achieved through jurisdictions enacting the OECD's Global Anti-Base Erosion (GloBE) Rules. These rules allocate taxing rights amongst certain jurisdictions that are relevant to the MNE group.
There are three key features of Pillar 2:
- A qualified domestic minimum top-up tax (QDMTT) - a fundamental international tax concept is that the jurisdiction in which profits arise has primary taxing rights over those profits. Under the GloBE Rules, where the ETR in the jurisdiction where the profits arise is less than 15%, the MNE group is required to pay a "top-up tax" to bring the jurisdictional ETR up to the 15% rate;
- An income inclusion rule (IIR) - where the jurisdiction in which the profits arise does not have a QDMTT and the ETR on those profits is less than 15%, secondary taxing rights over those profits are allocated to the jurisdiction of the Ultimate Parent Entity (UPE) being the entity that holds the ultimate control over the MNE group (and is not itself under the control of another entity). However, if the UPE is located in a jurisdiction that has not implemented an IIR in line with the GloBE Rules (such as the US), then the IIR top-up tax is levied on the next highest level intermediate parent entity (IPE) entity in the ownership chain that is located in a jurisdiction has implemented an IIR in line with the GloBE Rules; and
- An under taxed profits rule (UTPR) – this is a back-up to the IIR. Under UTPR, residual taxing rights are allocated to other jurisdictions implementing Pillar 2. Where an MNE group has an ETR below 15% in a jurisdiction that has not adopted a QDMTT, and the IIR cannot be applied to the low-tax profits in that jurisdiction (e.g. because the UPE is located in a non-IIR jurisdiction) the top-up tax is collected by all jurisdictions that have implemented a UTPR (there is a mechanism that allocates the profits amongst the jurisdictions).
How is Guernsey implementing Pillar 2?
Jurisdictions are free to choose whether to adopt some, all or none of Pillar 2. Guernsey had adopted two key features of Pillar 2.
Guernsey has adopted IIR with the new Multinational Top-up Tax (MTT). MTT will be payable by a Guernsey resident entity that is the UPE of an MNE group, or is the IPE of an MNE group where the UPE is located in a non-Pillar 2 jurisdiction. Broadly, the top-up tax is triggered where and to the extent that a constituent entity in another jurisdiction has an ETR of less than 15% in relation to its income/loss calculated under the GloBE Rules (GloBE Income) (subject to certain adjustments). MTT is then calculated by reference to the amount of top-up tax that needs to be paid to bring this ETR to 15%. This MTT is payable in Guernsey by the Guernsey UPE/IPE.
Guernsey has also adopted QDMTT with the new domestic Top-Up Tax (DTT). DTT will be payable by constituent entities of in-scope MNEs which are either tax resident in Guernsey or have a permanent establishment in Guernsey (each a Guernsey Constituent Entity) charged by reference to their GloBE Income. Further details on DTT are set out below.
MTT and DTT are also applicable to certain joint venture structures that have their financial results reported in an in-scope MNE and that have entities which are either tax resident in Guernsey or have a permanent establishment in Guernsey (each a Guernsey JV Entity). Both MTT and DTT are subject to Guernsey's anti-tax avoidance rules.
Guernsey is not adopting a UTPR.
Are there any exemptions?
Yes. There are exemptions from MTT and DTT for REITs and regulated investment funds (in each case they must be the UPE) and also insurance investment entities. Securitisation vehicles are also exempt from DTT.
There is also an exemption from DTT for any fiscal year where the average GloBE revenue for Guernsey is less than €10m and the average GloBE Income for Guernsey is less than €1m (or is a loss).
For MTT, where the average GloBE revenue for a jurisdiction is less than €10m and the average GloBE Income for that jurisdiction is less than €1m (or is a loss) then that jurisdiction's profits can be excluded from the top-up tax calculation in Guernsey.
What is GloBE Income?
Both MTT and DTT are calculated by reference to GloBE Income. Broadly, GloBE Income is the financial accounting net income/loss, but various adjustments are made to include/exclude certain items, including:
- dividends/distributions received by an entity are excluded, unless they are paid on a short-term portfolio holding or if an election is in place;
- gains/losses arising from an equity holding of 10% or more are excluded;
- gains/losses arising from an equity holding of less than 10% are included; and
- gains/losses arising from the disposal of certain assets are included (there are some adjustments for reorganisations that defer the recognition of the gain/loss for Pillar 2 purposes).
This means that intra-group dividends/distributions and disposals of subsidiary companies are exempt from MTT and DTT. However, the concept of GloBE Income can include capital profits arising on the disposal of certain assets, making the scope of MTT and DTT wider than Guernsey's existing 0/10 corporate tax income system which does not tax capital profits.
DTT – further details
DTT will "overlay" Guernsey's existing 0/10 corporate tax income system. The general rate of corporate income tax for companies will therefore remain at 0% (with certain companies and income streams being subject to a 10% or 20%1 rate).
Each Guernsey Constituent Entity or Guernsey JV Entity will firstly calculate their tax liability under the existing 0/10 tax regime in the usual way. They then calculate on an aggregate basis their combined GloBE Income and related ETR in Guernsey. Broadly, the amount of the DTT due in Guernsey is the amount of additional tax needed to top-up their aggregate Guernsey ETR on their aggregate Guernsey GloBE Income to 15%. DTT is therefore designed to ensure that the aggregate ETR in Guernsey is 15%.
In calculating the DTT charge, certain items and adjustments in the GloBE Rules are disregarded (such as a credit for certain controlled foreign company taxes levied on a parent entity in another jurisdiction on some or all of the profits of a Guernsey Constituent Entity or Guernsey JV Entity). There is an allowance for a "substance based income exemption", which is a subtraction for a specified portion of costs related to tangible assets and payroll.
The aggregate DTT is then allocated amongst the Guernsey Constituent Entities and Guernsey JV Entities pro rata to their respective GloBE Income, although certain alternate allocations are possible in certain circumstances. Guernsey Constituent Entities and Guernsey JV Entities within the same group are jointly and severally liable for the DTT.
Protected Cell Companies ("PCCs")
PCCs are a single body corporate and consist of a core and one or more protected cells. The assets and liabilities of each protected cell are segregated and protected from those of the other protected cells and the core. Equally, the assets and liabilities of each protected cell are segregated and protected from those of the other protected cells2.
PCCs are used by in both the insurance and asset management industries, and in particular there are a number of captive insurance entities that are structured as PCCs, with each cell being a separate captive for a different corporate group.
It is therefore possible for two or more MNE groups holding different protected cells within the same PCC. To clarify how MTT and DTT operates in this scenario, each protected cell and the core of a PCC is treated as a separate entity for MTT and DTT purposes. Therefore, each protected cell and the core is a separate taxable entity for Pillar 2 purposes, and the accounts of the PCC are not to be treated as consolidated financial statements.
Migrations
If an entity that is subject to Pillar 2 is looking to migrate in or out of Guernsey, it should be noted that the change of tax residence caused by the migration is only effective for Pillar 2 purposes at the beginning of the following fiscal year.
Filings
Each MNE Group must appoint and authorise a Domestic Filing Entity who is responsible for making all registrations and filings with, and tax payments to, the Guernsey Revenue Service (the GRS) on behalf of each Guernsey Constituent Entity and Guernsey JV Entity.
The Domestic Filing Entity must be a Guernsey Constituent Entity, but there are various provisions for when there is no Guernsey Constituent Entity, such that a Guernsey JV Entity or a non-Guernsey member of the MNE group can be appointed the Domestic Filing Entity.
The Domestic Filing Entity must register each Guernsey Constituent Entity and Guernsey JV Entity with GRS before the later of 12 months from the start of the first fiscal year that Pillar 2 applies to Guernsey members of the in-scope MNE group or, where the entity is joining an existing in-scope MNE group, within 6 months of joining that group. The registration due date is brought forward if the entity in question is being wound up or ceases to be tax resident or have a permanent establishment in Guernsey.
The Domestic Filing Entity must also file three different returns which are summarized below.
The first is a GloBE Information Return. This is a standardized group return providing various items of information about the MNE group, including the group structure, names, tax numbers, jurisdiction of residence and Pillar 2 status of each entity, and ETR and top-up tax for each jurisdiction. The Domestic Filing Entity only need file a GloBE Information Return for any fiscal year where MTT applies in Guernsey, which is generally where the UPE or IPE is a Guernsey Constituent Entity. However, it does not need to file a GloBE Information Return in Guernsey for a particular fiscal year if that return has been filed in another jurisdiction with which Guernsey has appropriate exchange of information arrangements in place (in which case the Domestic Filing Entity must notify the GRS with details of the entity that has filed the GloBE Information Return and the jurisdiction of filing).
The second is a MTT Return, which relates to the MTT of the MNE group when MTT is due in Guernsey.
The third is a DTT Return, which relates to the DTT of all the Guernsey Constituent Entities or Guernsey JV Entities and is filed on their behalf.
The Domestic Filing Entity must also notify the GRS if, for any fiscal year, the related MNE group falls below the €750m consolidated annual turnover threshold and is not subject to Pillar 2 taxes for that year.
The above returns and below-threshold notification are due within 15 months after the end of the relevant fiscal year (18 months for the first fiscal year that Pillar 2 applies to the MNE group).
Any top-up tax under MTT or DTT is also due by the same deadline. The payment date is brought forward if the entity in question is being wound up or ceases to be tax resident or have a permanent establishment in Guernsey, in which case estimated MTT or DTT becomes due.
Walkers' commentary
It is important to bear in mind that MTT and DTT will only apply to those in scope MNEs. All other groups that are below the €750 million threshold will see no impact and will remain under Guernsey's existing 0/10 corporate income tax regime. There are exclusions for investment funds, REITs and securitisation entities.
Larger structures should now be analysing whether they are in scope and seeking to understand the impact for their respective operations.
Do get in touch with Walkers' Guernsey Regulatory and Risk Advisory team should you wish to discuss.
Footnotes
1. 10% is generally charged on certain regulated financial services businesses and 20% is generally charged on certain utility companies, large corporate retailers, companies with Guernsey property income, companies involved in the cannabis industry and hydrocarbon and gas businesses.
2. Further details of the features of a PCC can be found here: https://www.walkersglobal.com/en/Insights/2023/03/Guernsey--Protected-Cell-Companies
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.
