Guernsey Corporate Taxation

In Guernsey there is no general capital gains tax, capital transfer tax, purchase or sales tax or VAT. The main taxes are income tax, which is levied on resident individuals, and companies in Guernsey and Alderney. Until 2009 there was a dwellings profit tax, which amounted to a capital gains tax on property sales. Its intention was to defeat speculation, somewhat similar to the one-time UK DLT. But in January 2009 the tax was suspended after it was found that the costs of collection were exceeding tax collected at least four-fold.

There are property rates (taxes), duties up to 2% on transfers of real property, some minor charges on issuance of capital, an annual charge of GBP100 on submission of a company's return. Individual parishes levy minor property-related taxes.

In 2002, the Guernsey States agreed that an overhaul of the taxation system was necessary to ensure that the island remains competitive as a low tax jurisdiction and international finance services centre. The centrepiece of Guernsey's Future Taxation Strategy was a 'zero/ten' rate of corporate tax, under which Guernsey's businesses and corporate entities have been subject to income tax at 0% from the 2008 tax year. However, businesses regulated by the Guernsey FSC are charged tax at 10%.

In July, 2006, Guernsey's parliament passed a set of economic and taxation changes that included the zero rate of corporate tax and the capping of personal tax at GBP250,000.

The package of measures included:

• A zero rate of income tax on company profits, except for specific banking activities which will be taxed at 10%;
• A continuation of the 20% tax on Guernsey residents' assessable income;
• A personal tax cap of GBP250,000 on non-Guernsey income and investment income;
• Taxation of Guernsey-resident shareholders on distributed company profits only; and
• Commitment that wealth taxes such as inheritance tax and capital gains tax will not be introduced.

"I am delighted that this package has been agreed by the States – it really is very good news for what is an already buoyant finance industry," Peter Niven, the Chief Executive of GuernseyFinance, announced in July 2006, adding that:

"Firstly, this decision provides the industry and its clients with certainty going forward and secondly, the set of measures agreed will further enhance the environment for doing business in the island."

He continued: "Importantly this package has the support of not just the finance industry but also the much wider business community. The measures reinforce the message that Guernsey is very much open for business and welcomes high net worth individuals."

"They also clearly promote enterprise within the economy as a whole, in particular high-earning, low footprint activities and the feeling within the finance industry is that they will help attract new business to the island, especially activities such as hedge fund management."

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The Situation From 2008

The main strands of the package came into effect on January 1, 2008. From this date, the standard rate of income tax for companies moved from 20% to 0% and exempt company and international business company regimes were abolished (other than for Exempt Collective Investment Schemes – CISs). As a consequence of this most Guernsey registered companies are treated as resident for tax purposes. In addition, the GBP600 annual exempt fee ceased to be payable from January 1, 2008 (again, other than for exempt CISs).

The change in the tax regime affects only companies and so unit trusts – which apply for exemption under Category A of the 1989 Ordinance – are not affected and they are able to continue to apply for exemption in the normal way. Companies which were exempt under Category B (Guernsey registered companies) and under Category C (non-Guernsey companies) are able to continue to apply for exemption if they wish to do so.

Companies which are currently exempt under Category D became resident for Guernsey tax purposes from January 1, 2008 and their income is chargeable at 0% unless it consists of income from:

• specified banking activities (which would include money lending, lease purchase, hire purchase and similar financing arrangements carried on in the island) – in which case they would be taxable at 10%;
• profits derived from activities that are regulated by the Office of Utility Regulation – in which case they will be taxed at 20%; and
• income derived from Guernsey land and buildings (whether from property development and exploitation of land or rental income) – in which case tax will be charged at 20%.

For companies previously exempt under Category D, there is no restriction on the company having a Guernsey source of income but if it does (other than bank deposit interest) it has to pay tax on that income.

Under the provisions of the Income Tax Law, companies that are resident for Guernsey tax purposes will be required to submit income tax returns and computations even if they are chargeable at 0%. This is because, in certain circumstances, the profits of the companies may be chargeable on the beneficial shareholder. However, a company is not required to submit accounts and tax computations with its annual tax return if it can confirm, on the income tax return, that it:

• has no Guernsey employees (other than local directors);
• has no Guernsey resident beneficial members;
• is not carrying out any activities which are regulated by the Office of Utility Regulation;
• has not made any qualifying loans (Chapter XII of the Income Tax Law);
• has no Guernsey rental or property development income; and
• does not carry out any banking activities.

Companies exempt under Categories B and C that choose not to apply for exemption for 2008 and beyond are also able to submit a tax return without supporting accounts and computations if they can satisfy the above conditions.

According to the Guernsey Income Tax Department, there may be a number of reasons why a Category B or C company may wish to be exempt from Guernsey tax (and therefore treated as non-resident) rather than being resident but taxed at 0%. These include:

• A Guernsey resident investor in a Category A, B and C entity will be taxed only on actual distributions made to him. Such investors will not be taxed on the underlying investment income nor on any deemed distributions where the company is exempt, whereas they may be taxed in this way if they invest in a company which is resident but pays tax at 0%.
• A CIS may consider that it is an advantage to be able to put in the scheme documentation/prospectus the fact that it is exempt from income tax in Guernsey. Whilst, in financial terms, there would be no difference for the CIS, whether it is exempt from Guernsey tax or whether it pays tax but at 0%, there may be a perception amongst potential investors that what is currently a 0% rate of tax may, in the future, increase.

If, in exceptional circumstances, a company which was previously exempt is not able to make the declaration referred to above, it may have additional, quarterly, reporting requirements and should notify the Administrator as soon as possible to ensure that it is provided with the necessary documentation to enable it to comply with those obligations.

A report from Guernsey’s Policy Council, supported in a vote by States members in October 2009, has said that in all probability the island, under pressure from the EU, will have to accept an increase in the general corporate tax to 10%.

“While no clear direction at this stage has been provided by HM Treasury [in the UK], it is believed that that a movement from a limited to general corporate tax rate of at least 10% is the likeliest route to achieve such support and success, as 10% is the lowest general rate of corporate tax within the EU," explained the report.

The report added that during a recent series of meetings between representatives of the States of Guernsey and HM Treasury it was communicated that that the EU Code of Conduct Group now considers the 'Zero-10' corporate tax regime of the Crown Dependencies to be non-compliant with the "spirit" of the European Union (EU) Code of Conduct for business taxation.

The Treasury went on to advise that the Crown Dependencies would need to review general corporate tax rates to comply with the Code not just technically, but with the "spirit" of the Code.

The report makes it clear that the UK Treasury had confirmed that the general approach was compliant with international standards and the EU Code of Conduct. Previous indications from the Code of Conduct Group were that Zero-10 would be deemed compliant.

The Policy Council blamed the unprecedented global economic turbulence of the previous 12-18 months and the significant deterioration of the fiscal position of many European countries for the ruling that the Zero-10 regime is no longer compliant with the spirit of the Code.

In reviewing corporate tax rates - which will be carried out in close consultation with Jersey and the Isle of Man - the Policy Council says that Guernsey must look to provide certainty for investors, and seek to maintain the respect of the international community.

“It is also of fundamental importance that Guernsey ensures the outcome of the next stage of the corporate tax strategy be fully sustainable in the long term, and mitigate any negative economic effects on our economy,” added the report.

Guernsey’s Chief Minister, Lyndon Trott announced to the States in April 2010 that proposals for a new corporate tax regime, to replace its 'zero-ten' system, will be tabled when the budget is debated in December.

According to Trott, a public consultation is to be launched in the summer, with the results of this to be published in the autumn of 2010.

Trott said that any new corporate tax regime must be "simple, competitive, internationally acceptable, based on a solid rationale, promote a sustainable economy, and must give rise to other benefits such as double taxation agreements."

The government has studied various proposals to replace the shortfall in revenues under the zero/ten system, including a general sales tax (GST), higher social security levies and additional duties on petrol, alcohol and tobacco. However, then Chief Minister Laurie Morgan announced in 2007 that Guernsey did not intend to move forward with a GST (as Jersey has done), although this the tax may be introduced as part of Stage 2 of the jurisdiction's Economic and Taxation Strategy.

In mid-2009, Guernsey’s Treasury and Resources Department took draft legislation for a General Sales Tax to the States for approval. The government insisted, however, that it does not seek to introduce a GST, but instead is merely considering its options.

A statement from the Guernsey government underlined that the department is only presenting an enabling law. If the States decides to introduce a GST at a later date, this could be done, following a debate on the detail and the subsequent preparation of an Ordinance to this law. It could even be possible to structure a system broadly compatible with the system introduced in Jersey.

Treasury and Resources Minister Deputy Charles Parkinson said:

“I don’t want the appearance of this legislation to take anyone by surprise. Its publication does not mean a decision has been taken to introduce a GST.”

“The States have previously directed my department to prepare an enabling law and it is a sensible move if the States have, at some stage in the future, to introduce such a tax.”

The States would only introduce a new tax after consideration of a detailed report, which would make recommendations on issues such as the rate of tax to be applied, proposed exemptions and collection methods.

In July 2005, Guernsey adopted a 15% retention (ie withholding) tax under the EU's Savings Tax Directive (STD) in respect of EU resident individuals' savings interest (although depositors retain the option to exchange information on savings income with the tax authority of their home member state). The retention tax increased to 20% as of July 1, 2008, for three years, after which it will rise to 35%.

As originally drafted, the STD aimed at a uniform 'information exchange' regime to apply across the Union, with all countries agreeing to report interest on savings paid to the citizens of other Member States to those States' tax authorities. Because of resistance from EU Member States with strong traditions of banking secrecy, the Commission had to allow Austria, Luxembourg and Belgium to apply a withholding tax. The STD also extends to a number of third countries which are not members of the EU, including Andorra, Liechtenstein, Monaco, San Marino and Switzerland. Many of the UK's offshore financial centres (including Jersey and the Isle of Man) have been forced to join the STD, along with the Netherlands Antilles and Aruba.

In July 2009, the Guernsey government released a statement regarding the Isle of Man’s decision to switch from a withholding tax system to the automatic exchange of information from July 1, 2011, when the withholding tax option currently available to customers having accounts with Isle of Man banks as part of a transitional arrangement will be withdrawn.

The Guernsey government has underlined that it has always considered the withholding tax arrangement to be transitional, and has begun a consultation with industry about a review of the position in the island.

Mike Brown, Chief Executive of the States of Guernsey commented at the time that:

"The international climate is changing with regards to exchange of information. We are fully aware of those developments and have had the position under review for some time.

"Guernsey’s commitment to the highest international standards in transparency is constant."

In January 2009, Guernsey released details of further tax proposals drafted by the government, including the suspension of Dwellings Profit Tax and amendments to the 'proportional relief' system. Regarding the Dwelling Profits Tax, the government stated:

“Collection of tax was never the principal purpose and the tax raised has never been significant – GBP58,000 over the last 14 years. Seven of those years produced no tax at all.”

“But the administrative burden on Income Tax – with a certificate required for every property transaction – takes up three people part-time at a cost of at least GBP17,000 a year. There are implications too for advocates’ offices, with consequent costs for those buying and selling properties.”

“The costs of collection have exceeded tax collected at least four-fold,” said Deputy Charles Parkinson. “And has the tax prevented property speculation and kept prices down? In its present form, my Department believes this tax is not effective in terms of administration costs, or in achieving its objectives.”

The Dwellings Profit Tax was suspended by the States under the Dwellings Profits Tax (Suspension of Law) (Guernsey) Ordinance, 2009. This Ordinance came into force on the 25th March, 2009.

Information given below relates to the tax regime in force until 2008.

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Guernsey Scope of Income Tax

Guernsey income tax is based on the Income Tax (Guernsey) Law 1975 as amended. The States Income Tax Authority (a permanent committee) controls income tax, through the Administrator, who assesses and collects tax. Appeals on income tax matters are heard by the Guernsey Tax Tribunal. Until 1990, corporation tax (which amounted to an annual fixed charge) was payable by limited liability companies registered in but not managed and controlled from Guernsey. Such companies were still liable to Guernsey income tax on income from Guernsey sources. The tax was abolished after exempt status was introduced for companies in 1989. Income tax is now payable by all companies resident in Guernsey or Alderney on income arising from 'business' widely defined but excluding income chargeable to Dwellings Profits Tax :

• Resident 'income tax' companies pay full income tax on their world-wide income
• Foreign companies controlled by individuals resident but not principally resident in Guernsey pay income tax only on Guernsey source income (excluding bank interest)
• International Companies pay income tax at the specified (negotiated) rate on their world-wide income
• Exempt companies pay full income tax on their income arising in Guernsey (excluding bank interest)
• Guernsey branches of foreign corporations pay full income tax on income arising in Jersey if they are managed and controlled outside the island; otherwise they are treated as Guernsey-resident 'income tax' companies

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Guernsey Income Tax Rates

The rate of Guernsey income tax is 20%.

Exempt companies pay an annual fee of £600.

International Companies pay a rate between nil and 30% according to the agreement they have negotiated with the Administrator.

See Offshore Legal and Tax Regimes for further details of the taxation of offshore entities.

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Guernsey Calculation of Taxable Base

For companies, income tax is normally assessed for the year of charge (the calendar year) on income arising in the year of computation, which is the accounting year of the company which ended in the year preceding the year of charge, or with the permission of the Administrator, in the month of January in the year of charge. Calendar year (the Year of Assessment). There are special rules for the opening and closing years of a business.

Income is defined fairly comprehensively and includes capital gains. Land and buildings (unless, broadly speaking, occupied for the purposes of the business) are chargeable on the basis of 'annual rental value' (ARV); the rules for calculating ARV are quite complex and include deductions for various types of expense.

Banks which are subsidiaries or branches of non-resident parents are allowed, by concession, a deduction of 90% of the profits made from international lending business.

Click here for details of Guernsey's Double Taxation Treaties with Jersey and the UK. There are some provisions for unilateral relief on taxed income received from other countries.

Allowable expenditure needs to be incurred 'wholly and exclusively' for the business and includes a fairly normal range of types of expense; mixed private/company expenses can often be apportioned.

There are capital allowances for buildings (1 1/4% annually if it is a normally substantial structure) and for glasshouses (important in Guernsey). For plant and machinery there is a pooling system for capital expenditure allowing deduction of 20% of the pool balance annually. The rules are reasonably complex.

Subject to some conditions, losses may be carried forward; terminal losses may be carried back two years.

Group relief was introduced by the Income Tax (Group Loss Relief Amendment) (Guernsey) Law 1997. Groups must consist of resident, non-exempt Guernsey businesses and outside ownership of a subsidiary company in a group is effectively limited to 10%.

No deduction is permitted for dividends paid out by a company; but a Guernsey-resident company may deduct standard rate tax from dividends paid out of taxed income (or which would have been taxed if an actual current year basis was applied). Resulting overpayments are refunded.

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Guernsey Dwellings Profit Tax

The Dwellings Profits Tax came into force in Guernsey in 1973, and is governed by the Dwellings Profits Tax (Guernsey) Law 1975 as amended. The tax is managed by the Administrator. The purpose of the tax was to deter speculation in land and buildings; it imposes a tax of 100% on the profits from sale of a dwelling or land, unless used for bona fide residential purposes. The rules are quite complex, but in practice the tax has succeeded in its object and it is not very often imposed. Nonetheless, a business needs to be aware of it, and to be careful when purchasing or dealing in real estate or companies owning real estate.

With regard to property taxation, stamp duty on property worth GBP150,000 or less was abolished to encourage first time buyers in Guernsey's November Budget 2001.

The Dwellings Profit Tax was suspended by the States under the Dwellings Profits Tax (Suspension of Law) (Guernsey) Ordinance, 2009. This Ordinance came into force on the 25th March, 2009.

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Guernsey Taxation of Trusts

When the beneficiaries of a trust are non-resident, full exemption from Guernsey taxation is given to foreign income and Guernsey bank interest, by concession, whether or not the income is distributed.

The trustee of a trust with Guernsey-resident beneficiaries may be charged with tax due on trust income, although the tax is normally assessed directly on the beneficiary. The trustee is entitled to any allowances which would apply to the beneficiary.

Unit trusts are treated in the same way as other trusts; the existence of Jersey unit-holders does not affect exemption, subject to some conditions.

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Guernsey Taxation of Partnerships

In Guernsey partnerships each partner is liable for income tax on his share of profits, including partnership income other than from the business of the partnership. Limited Partnerships are treated in the same way as ordinary partnerships.

Partnerships are treated as businesses under Guernsey law, and the calculation of profits follows the same rules as it does for companies (see above) including allowance for losses and capital allowances. The treatment of capital items used by the partnership is the same whether the items are owned by all the partners or only some of them. This provision does not apply to lettings or to capital items provided to the partnership in return for a consideration which is itself deductible from profits

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Guernsey Taxation of Insurance Companies

In Guernsey there are various special regimes for taxation of insurance companies.

A life insurance company, or the life insurance business of a composite insurer, is taxed according to the decision of the Administrator, either

1. as a normal business, with investment gains and losses being counted in (other than profits reserved or expended for policy-holders or annuitants); or
2. on the basis of gross investment income adjusted for various types of expense and income, as long as the final taxable amount is not less than it would be under 1., with any excess being carried forward as a loss to future years.

(NB: This is a highly simplified version of a set of complex rules).

Depending on their circumstances, other types of insurer can choose between a number of different taxation regimes:

1. to be taxed as normal businesses;
2. to be taxed on a sliding scale - the rules are complex, but broadly this results in no tax on underwriting profits, 20% income tax on Guernsey income and on the first £250,000 of other (investment) income, and a nominal rate of tax on the balance;
3. to be an Exempt Company; or
4. (an irrevocable choice) to be an International Body.

It is impossible here to set out the bases on which a choice might be made, since so much depends on the nature and circumstances of individual companies.

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