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Economic substance rules in the Channel Islands

11 May 2020

The EU Code of Conduct Group undertook a screening exercise in 2017 to assess various jurisdictions on their tax transparency, fair taxation and anti-BEPS measures. Guernsey and Jersey were found to be compliant in the areas of tax transparency and anti-BEPS measures, but concerns were raised about their lack of statutory substance requirements leading to an increased risk that the profits of companies registered in Guernsey or Jersey might not be commensurate with their activities in these jurisdictions. Accordingly, Guernsey and Jersey, alongside the Isle of Man, each committed to implement statutory substance requirements no later than 1 January 2019 and worked together in preparing their respective legislation.

Both Guernsey and Jersey’s substance legislation came into effect on 1 January 2019. The Income Tax (Substance Requirements) (Implementation) Regulations, 2018, as amended, outline the substance requirements in Guernsey. In Jersey, the Taxation (Companies - Economic Substance) (Jersey) Law 2019, as amended, contains similar substance requirements.

This briefing aims to give an overview of what the substance rules mean for companies in Guernsey or Jersey.

Who do the substance rules apply to?
Companies (other than foundations) that are tax resident in Guernsey or Jersey (or, in Guernsey, are controlled or centrally managed and controlled in Guernsey) and that are either carrying out a relevant activity, are receiving income from intellectual property assets or are a pure equity holding company are affected. The following industries are considered relevant activities, to which the substance rules will apply ("Relevant Activities"):

  • banking, insurance, fund management (excluding companies that are collective investment vehicles), financing and leasing, headquartering, shipping, and a distribution and service centre;
  • companies deriving income from intellectual property; and
  • pure equity holding companies (or, in Jersey, simply 'holding companies') receiving an income.

What are the substance rules?
Companies to which the substance rules apply must demonstrate that they:

  • are directed and managed in Guernsey or Jersey;
  • are conducting Core Income Generating Activities ("CIGA") in Guernsey or Jersey; and
  • have adequate people, business, premises and expenditure in Guernsey or Jersey.

i) directed and managed in Guernsey or Jersey
Companies can demonstrate that they are directed and managed in Guernsey or Jersey by ensuring the company's board meet in Guernsey or Jersey with adequate frequency, having regard to the level of decision making required by the board. Companies should also ensure that:

  • a quorum is physically present at the board meeting in that jurisdiction (and it is expected that a majority of directors should be present);
  • strategic decisions of the company are made in those meetings with minutes recorded;
  • the board of directors as a whole have the knowledge and expertise to discharge the duties of the board; and
  • minutes and other records of the company are kept at the office in that jurisdiction.

ii) conducting CIGA in Guernsey or Jersey
Companies are required to demonstrate that their CIGA are carried out in the relevant jurisdiction. The laws set out non-exhaustive lists of what constitute CIGA for each Relevant Activity to which the substance rules apply.

Companies are able to outsource parts of their CIGA, provided that the outsourcing is performed in and supervised from their jurisdiction in Guernsey or Jersey. Companies should not outsource CIGA outside of their jurisdiction, but certain external professional advice provided from outside the jurisdiction is permitted.

iii) having adequate people, business, premises and expenditure in Guernsey or Jersey
There must be an adequate level of appropriately qualified employees, expenditure and physical presence in Guernsey or Jersey which is proportionate to the level of the Relevant Activity carried out. Again, it is expected that affected companies will be able to rely on outsourced resources to demonstrate compliance with these requirements.

The term 'adequate' is often used as a threshold for meeting these substance requirements; however neither Guernsey's nor Jersey's laws provide a definition of its meaning. Preliminary guidance references the dictionary definition: "enough or satisfactory for a particular purpose" but further guidance is expected to follow.

Pure equity holding companies
Pure equity holding companies are defined under the Guernsey law as being those that hold shares in other companies and have no commercial activity.

Under Guernsey law, pure equity holding companies that receive an income, e.g. by way of dividends, will be required to meet the following reduced substance requirements:

  • to comply with Guernsey company law i.e. ensure compliance with all corporate law filing requirements; and
  • to ensure that there is an adequate level of people and physical presence in Guernsey in order to hold and manage the shares.

Under Jersey's substance law, 'holding companies' are similarly defined, but would be required to comply with the same substance requirements as companies carrying on other Relevant Activities.

Next steps
If they have not done so already, directors of companies in Jersey or Guernsey should carefully consider the relevant substance law to assess whether they may be caught and, if so, what steps may be required to ensure compliance.

Disclosure requirements for affected companies
Companies that are caught by the substance rules are required to disclose additional information in their annual tax return via a dedicated online portal.

Tax resident companies will be required to include the following additional information in their income tax filing to demonstrate to the taxation authorities how they have met the substance requirements:

  • business/income types in order to identify the type of Relevant Activity;
  • amount and type of gross income;
  • amount of operating expenditure;
  • details of premises;
  • number of (qualified) employees, specifying the number of full time equivalents;
  • confirmation of the CIGA conducted for each Relevant Activity;
  • financial statements;
  • net book value of tangible assets at the balance sheet date; and
  • confirmation and details of any CIGA that has been outsourced.

Companies without an income for an accounting period that would otherwise have been caught by the rules are not required to comply for that period.

Special provisions for high risk intellectual property companies
Certain IP companies are considered high risk IP companies. High risk IP companies are those that have acquired IP assets from outside of Guernsey or Jersey, or hold IP assets without conducting CIGA in Guernsey or Jersey.

High risk IP companies are subject to enhanced substance requirements whereby there is an initial rebuttable presumption that the requirements for CIGA are not met. This presumption can be rebutted with sufficient evidence in the company's tax return. Additionally, the laws provide for mandatory disclosure of information relating to high risk IP companies to the relevant foreign tax authorities, regardless of compliance with the relevant substance law.

Treatment of cell companies
Tax resident protected cell companies (a "PCC") and incorporated cell companies (an "ICC") are subject to the substance requirements if they have income from a Relevant Activity, but how the substance requirements are applied varies as follows:

  • a PCC is a single legal entity and, therefore, will be required to satisfy the substance requirements at a whole entity level including the activities and resources of all its protected cells (each cell will need to demonstrate that it conducts CIGA in Guernsey or Jersey). Each cell is not itself a body corporate and so its activities and resources form part of the overall substance information to be reported by the PCC and it is not required to report any substance requirements on its own account; and
  • an ICC is a legal entity and its incorporated cells ("ICs") are also separate legal entities. Given this, the ICC will only have to satisfy the substance requirements in relation to any activities it conducts itself and not for any Relevant Activities conducted by its ICs or taking into account any resources of its ICs. Each IC will have to satisfy the substance requirements in relation to its own activities and referring to its own resources without taking into account resources of any other ICs or the ICC itself.

What happens if you are not caught by the substance rules?
Companies not caught by the substance rules can file their tax return as usual without including additional evidence to show that the substance requirements are met.

What happens if the company does not comply with the new substance rules?
Non-compliant companies to whom the substance rules apply will be subject to progressive penalties. These include increasing fines over time, disclosure of information to the relevant foreign tax authorities, and, ultimately, non-compliant companies may be struck-off the relevant Companies Register.

How can Bedell Cristin assist you?
Our financial services law teams can assist with assessing the applicability of the substance rules and provide guidance on the steps necessary to ensure compliance with the rules. If you would like any more information or assistance with the impact of the substance rules on your business, please contact one of our team and we will be happy to discuss this with you.

Where can I access more information?
Additional information and access to the laws and guidance are available at:


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