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Offshore Legal and Taxation Regime

The term 'offshore' is not used in Guernsey legislation or in describing company forms. Corporate non-residence and/or the avoidance of ownership by residents are the key factors which will ensure low-tax treatment in Guernsey. The main forms useful for offshore operations in Guernsey are the various types of Exempt and International Body, the Limited Partnership, and the Trust (NB the Exempt Company and International Company regimes were abolished with the introduction of corporate tax reforms in January 2008. See below). Normally, non-resident tax treatment is given to foreign income, while income arising in Guernsey is taxed more highly.

In 2002, the Guernsey States agreed that an overhaul of the taxation system was necessary to ensure that the island remains competitive. The centrepiece of Guernsey's Future Taxation Strategy is 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%. The changes to the tax system were intended to bring Guernsey into line with the European Union's code of business conduct over taxation, although it seems that the EU has performed an about turn, casting the future of Guernsey corporate tax system in some doubt.

The introduction of the 'zero/ten' regime in 2008 saw the end of the 'exempt' company regime in Guernsey.

In making the announcement, Advisory and Finance Committee president, Deputy Laurie Morgan observed that: "Ireland is going to 12.5% - that doesn't make 20% look very attractive any more. 20% is still a relatively low rate but it is now higher than the emerging rates from elsewhere - and we are in competition,'" he said.

In June, 2003, Guernsey confirmed it would introduce a retention (ie withholding) tax, initially at a rate of 15%, under the EU's Savings Tax Directive in respect of EU resident individuals' savings interest. This Directive entered into force on July 1, 2005. The retention tax rate increased to 20% from July 1, 2008 for three years, after which it will rise to 35%. 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."

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."

In May 2009, Guernsey’s Commerce and Employment Department published a consultation paper on a proposal for an industry levy, which will fund GuernseyFinance, the promotional agency for Guernsey’s International Finance Centre.

The publication of the consultation paper followed the Department's commitment at the March 2009 States Debate to consult with all interested parties. The Department is proposing a flat charge of GBP75 per full-time equivalent staff member on those businesses regulated and licensed by the Guernsey Financial Services Commission with a maximum charge per company of GBP7,500 in the first year. This was estimated to generate GBP380,000 towards GuernseyFinance's costs in 2009.

Guernsey's Minster of Commerce and Employment, Carla McNulty Bauer, said at the time that: “Today we issue consultation on this future proposal for business funding to support the promotion of GuernseyFinance. As part of the process we welcome feedback from all members of the community as the achievements of GuernseyFinance affect us all. As part of the consultation we are asking for responses on several key questions which will help to frame the future funding methodology for the organisation.”


The Situation From 2008

With effect from 1 January 2008, Guernsey’s Corporate Tax Regime changed radically. The standard rate of income tax for companies moved from 20% to 0%. From that date the exempt company and international business company regimes were abolished (other than for Exempt Collective Investment Schemes – CISs), as a consequence of which most Guernsey registered companies are treated as resident for tax purposes. In addition, the GBP600 annual exempt fee ceases to be payable (again, other than for exempt CISs).

The change in the tax regime affects only companies and so unit trusts – which previously applied 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 previously 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 were previously exempt under Category D are, as indicated above, resident for Guernsey tax purposes from 1 January 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.

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


Guernsey Forms of Offshore Operation

Offshore operations may take place within the following forms:

Guernsey Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of Guernsey corporate taxation, which also apply to offshore entities except as indicated below.

Offshore Guernsey entities are taxed as follows:

  • Non-Resident Foreign Companies (ie those not managed and controlled from Guernsey) will be charged with income tax at 20% only on income from Guernsey sources (other than bank interest, by concession); a Guernsey registered company cannot be non-resident - it is either resident or it is exempt or it is an International Body.
  • Exempt Private Limited Companies (Category D Bodies) pay a fee of GBP600 along with their annual application for exemption and also a fee of GBP100 payable when dealing with an Application for Exempt Status and filing the Annual Return (in duplicate). Generally they do not trade locally, but will pay income tax at 20% on local income if there is any (except bank interest, by concession).
  • Exempt Investment Schemes (Category A, B or C Bodies) pay a fee of £600 along with their annual application for exemption. Income tax at 20% is deducted from dividends paid to Guernsey investors, but there is no deduction from dividends paid to non-residents.
  • Exempt Insurers (Category E Bodies) pay a fee of GBP3,380 along with their annual application for exemption. Generally they do not trade locally, but will pay income tax at 20% on local income if there is any (except bank interest, by concession). Cells of Protected Cell Companies pay GBP1,100. Insurance managers pay according to the number of companies managed, from GBP3,000 for 1 - 10 companies, up to GBP10,000 for over 100 companies.
  • International Bodies (Companies or Partnerships) negotiate a rate of tax between nil and 30% (typically 2%) to be paid on their international income. An application is made to the Income Tax Authority, which considers eligibility, the nature of trading activities conducted, and the economic interests of Guernsey before issuing a certificate of International Tax Status, which is usually valid for 5 years at the specified rate. The intention is to help companies, particularly investment companies, conform to minimum tax requirements imposed by other jurisdictions.
  • Branches are subject to tax (income tax at 20%) only on income from Guernsey sources (other than bank interest, by concession).
  • Trusts with non-resident beneficiaries are taxed only on Guernsey-sourced income (other than bank interest, by concession), and the assessment is made on the trustee.
  • Trust management (Fiduciary) companies pay an application fee of GBP1,071 plus GBP107 for each entity managed; Personal Fiduciary Licences cost GBP536. Annual fees depend on the volume of trust business managed: GBP2,678 for up to GBP250,000; GBP5,356 for up to GBP1m; GBP13,000 for up to GBP2m; GBP15,080 thereafter.
  • Trust management (Fiduciary) companies pay an application fee of GBP1,125 plus GBP112.50 for each entity managed; Personal Fiduciary Licences cost GBP565. Annual fees depend on the volume of trust business managed: GBP2,810 for up to GBP250,000; GBP5,615 for up to GBP1m; GBP13,625 for up to GBP2m; GBP15,805 thereafter.
  • Non-resident partners in a Guernsey partnership or Limited Partnership are liable for tax only on Guernsey-derived income (with the usual concessions regarding bank interest), and then as individuals.


Guernsey Taxation of Foreign Employees of Offshore Operations

This section refers to the taxation of foreign employees of non-resident operations and International Business Companies; the general principles of individual taxation in Guernsey also apply to the resident employees of non-resident entities. There is in fact no distinction between the employees of resident or non-resident operations. It is a question of individual status. Most types of compensation and benefit paid to employees are taxable; there are no special privileges or exemptions for expatriate workers.

An individual is resident in Guernsey if he is on the island for a total of 182 days in the year of charge (the calendar year), or if he is on the island for a total of 182 days in the year to 31st July in the year of charge; and the use or possession of a dwelling-place usually leads to residence (the rules are complex). Resident means solely or principally resident. It is possible to be 'resident but not solely or principally resident' (essentially by not having a dwelling-place, but it's complicated); such an individual will pay Guernsey income tax on income sourced from or received in Guernsey (with exemptions for some sorts of local dividend, interest or royalty income).

Non-residents are liable to pay Guernsey income tax only in respect of income arising in Guernsey or from Guernsey sources (again, with exemptions for some sorts of local dividend, interest or royalty income).

In August 2004, proposals were offered in a States report seeking to amend the current legislation which determines residence for tax purposes. The reason for seeking the change is that the present rules are complex and not easily understood. Although for the majority of the population the changes will have no effect on their tax bills, the rentier sector may be affected. For this reason the accountancy profession was consulted. The simplification should lead to a reduction in the need for correspondence with the Tax Office on residence matters.


Guernsey Exchange Control

Guernsey has no exchange controls.


Guernsey Offshore Activities

For International Bodies, activities on the island must not involve transactions with Guernsey residents (except other International or Exempt Bodies), but are not otherwise specifically limited. For Exempt Companies, there is no specific bar against local activities; the more important factor is the whereabouts of the beneficial owners.

Exempt Investment Schemes must not invest in Guernsey, other than through bank deposits or through other Exempt Bodies.

Exempt Insurers are not limited as regards local activities, but must notify them to the Administrator.

In most cases of non-residence there are no specific rules about Guernsey activities; income is simply split according to its source and taxed or not accordingly.


Guernsey Employment and Residence

There are no special privileges or disabilities for the employees of non-resident or offshore operations as such. Nationals of European Union member states have free right of movement in Guernsey for the purposes of work and establishment. Non EU nationals must complete immigration formalities and obtain a work permit. Generally a work permit will be granted only if no suitably qualified local exists. Preference is given to UK and other European Union nationals.

The work permit policy is primarily export sector based and, except as provided for within this policy, issued solely to Keyworkers. A Keyworker Permit may be issued to skilled/qualified workers normally allowing a maximum of 4 years continuous employment. The Home Department will, however, consider a longer period if a high degree of essentiality to the Bailiwick can be demonstrated.

New businesses moving into the Island will be advised how many, if any, licences will be made available to them before they set up business. At present the supply of licences is very meagre, and new businesses must be prepared to buy/rent on the open market in order to house staff.

Housing in Guernsey is carefully controlled and this is the means by which the island prevents excessive immigration. Under the Housing Control of Occupation (Guernsey) Laws 1982 to 1990 the housing market is divided into 'local market' houses, and 'open market' houses. By the end of 2006, the average price of a house on the open market exceeded GBP348,000. There is a register of those properties which are on the open market. These properties are available for occupation by any person who wishes to take up residence in the Island and who satisfies immigration requirements. However, the number of these properties is restricted to about 2,000 and cost upwards from GBP450,000.

Broadly speaking, local market homes are available only to natives of Guernsey and their children (if they have spent 10 years living there). A further class of licence-holders with access to local market homes includes essential workers; however senior executives are often not given licences, forcing them to shop on the open market.

NB: The Guernsey housing laws are complex, and the above is a simplified statement.