On the back of the recent endorsement to the Island’s policies, which was perhaps the first time that the EU publically agreed that the Island is not a Tax Haven, the Guernsey Revenue Service have issued draft Guidance Notes alongside the other Crown Dependencies with regards to the Income Tax (Substance Requirements) Regulations. A link to the draft Guidance Notes can be found here.
Overall, the Guidance Notes are not as detailed as many had expected. However, they do establish some useful principles that will assist boards on affected companies to determine their compliance with the new requirements. We highlight the following aspects:
- This is a work in progress document and therefore there are gaps within it, such as the guidance on the following relevant activities - insurance, shipping and intellectual property (Section 3).
- There are examples of what constitutes core income-generating activities (“CIGA”) for banking, holding companies, finance and leasing, fund management, distribution and service centres and high risk IP companies (Section 3).
- Guidance has been provided on the Directed and Managed Test (Section 3.13).
- A definition of employees and some guidance on outsourcing have been provided at Sections 3.14 and 3.16, respectively.
- There is some guidance on what a resident company carrying on ‘relevant activities’ is expected to report in the Income Tax Return (Section 2.4).
There are a number of important matters which we would bring to your attention:
- In order for a relevant activity of a company to be viewed as ‘directed and managed’, the company is expected to hold at least one board meeting per year and that where more than one meeting is held, then it is expected that the majority of such meetings will be held in the jurisdiction of residence of the company.
- In order to meet the economic substance requirements, the CIGA that generate the income must be performed in the Island.
- Sanctions for failure of the economic substance requirements will include exchange of information with “Competent Authorities in other jurisdictions”. The current wording of the legislation is that the information will only be exchanged where the parent of the company in question or the beneficial owners are resident in the EU. It is therefore expected that there will be a change in the current Law.
As always, KPMG will be assisting its clients in addressing the requirements of the legislation. If you would like to discuss any of the above, do please contact us.