Changes to Guernsey corporate tax reporting regime result in practical issues

Ivor Bisson and Andrew Walters of Trust Corporation International look at Guernsey’s corporate tax reporting regime and how the last year has impacted the practicalities of its requirements.

In this article we review how Guernsey’s rules on corporate tax residency changed on 1 January 2019, widening the definition of residency to include foreign companies centrally managed and controlled in the island, whilst at the same time implementing Economic Substance requirements.

The Substance Regulations were designed to address concerns raised by the EU Council and the Code of Conduct Group that companies could be used to artificially attract profits that are not commensurate with economic activities and substantial economic presence in the relevant jurisdictions. Guernsey, Jersey and the Isle of Man worked closely together to introduce legislation aligned to their existing Income Tax laws and to produce common guidance.

The historic position

Previously a company was treated as resident for tax purposes in Guernsey if it was incorporated in the island and not granted tax-exempt status, or was ‘controlled’ in Guernsey. Control looked at whether a company’s affairs were conducted in accordance with the wishes of its Guernsey resident shareholders or loan creditors. The changes introduced an additional residency test of whether a company is centrally managed and controlled in Guernsey. The Director of the Guernsey Revenue Service (GRS) has indicated that this additional test generally considers where the directors of a company meet and exert control.  Conversely, the change in law provided welcome clarification for Guernsey incorporated companies tax resident both in Guernsey and elsewhere as it enabled those centrally managed and controlled elsewhere to apply for non-resident status.

The changes / the new regime

The impact of the legislation resulted in foreign companies having to register their tax residency with the GRS for the first time. Whilst this was a relatively straightforward process, each company had to individually register, and tax residency brought additional obligations and responsibilities.

Many companies were previously entitled to submit a composite tax return but now all relevant companies were required, for the first time, to submit a tax return several pages long and to file financial statements with the tax return, by the deadline of 30 November 2020. 

Whilst this had been normal practice for trading companies, this was completely new for non-trading companies and required the financial statements to be prepared by a UK Chartered Accountant or equivalent qualification as approved by the Director of the GRS. The timeframe for having accounts signed-off by the board and ready for submission within 11 months from the financial year-end was challenging in some cases, particularly for companies that form part of a larger group.

The tax return included declarations that only the board were in a position to make and this created certain difficulties when submitting the tax return on behalf of a company. Where the corporate service provider (CSP) was not represented on the board, the CSP was required to seek confirmations and prior approval from an external board, prior to submission.

As with any new tax regime, there was some uncertainty and difference of opinion in the interpretation of the rules. Where required, further guidance was helpfully provided by the GRS.

Substance requirements had to be met

Companies falling within the scope of Guernsey’s Economic Substance regime had to ensure that that they met the strict Substance regulations that define the key types of income generating activity that need to be conducted in the island. The requirements are numerous and include evidencing that the company is directed and managed in Guernsey and that a full quorum of the board meets in Guernsey with adequate frequency during the period. Furthermore, strategic decisions must be made at board meetings held in Guernsey and detailed minutes fully reflecting these must be kept in the island.

CIGA and adequacy

For companies falling within scope, the regulations introduced the concept of Core Income Generating Activities (CIGA). These are the key essential and valuable activities that generate the income of the company. They must be conducted in the island, including any that are outsourced, otherwise the test will not be met. Any activities undertaken outside the island must not be CIGA. For example, certain IT and HR functions which are necessary activities but do not generate income, are not affected by the on-island requirement.

A number of adequacy tests have to be met. These include a company having an adequate number of locally based qualified employees, adequate physical presence (although this can be met by virtue of premises provided by the CSP) and an adequate level of operating expenditure within the island relating to the in-scope activity. “Adequate” is not defined and therefore has its ordinary meaning – “enough or satisfactory for a particular purpose”.  What is adequate for each company is a question of degree and fact considering the circumstance and business activity involved. In view of the subjective nature of the tests, obtaining legal and/or taxation advice was frequently a key part of the process for more complex cases, as was the need to maintain a full and detailed record of the basis of decisions made by the board.

Global pandemic to contend with

When the new regulations were introduced, no one could have foreseen that preparation of the enhanced tax returns would be taking place in the midst of a global pandemic. CSP and GRS staff were often working remotely from home during lockdown and the GRS software was having to be enhanced to meet the new requirements. Understanding the challenges, the GRS extended the filing deadline of 30 November to 28 February and, following a second lockdown in Guernsey, subsequently to 31 March 2021, recognising the ongoing impact of Covid-19 and the additional preparation needed. This was widely welcomed by all concerned. 

And now fast forward to 2021

The world was hoping that 2021 would usher is a new wave of optimism, but in view of the island going through a second wave with ongoing uncertainty at the time of writing this article and several countries facing a third wave, what does 2021 hold for us?

When it comes to turning attention once again to the Guernsey tax return, the experience gained last year should result in the 2021 filings being more straightforward.

Travel restrictions throughout much of 2020 frequently prevented directors resident elsewhere from being able to physically attend board meetings in the island. Whilst most were able to attend through innovative solutions such as Zoom or MS Teams, in some cases a quorum may not have been physically present and so the ‘directed and managed in the island’ test was not met. This may also have impacted the requirement that the majority of directors must be physically present in Guernsey when considering CIGA. When preparing for the 2020 tax return, careful consideration of any such impact will need to be documented and factored in. The helpful guidance issued by the GRS made it clear that a pragmatic approach will be taken when assessing the impact government-imposed restrictions have had on the ability of companies to meet the directed and managed test, but it is expected that companies will have continued to meet the other Substance tests.

The GRS recently announced that the 2020 tax filing deadline has been extended from 30 November 2021 to 28 February 2022 and so for this year at least, companies will once again have additional time to prepare and approve financial statements, but CSPs should be thinking now of setting a suitable deadline by which they should receive these, in order to file the next round of tax returns on time. Fortunately, a cooperative process between the GRS and the industry, albeit in challenging circumstance, has resulted in the successful introduction of various enhancements to the existing tax return regime.

A version of this article first appeared in The Step Journal, 2021, Issue 3.