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 recent seminar hosted by Carey Olsen, more than 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.
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.
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.”
