Guernsey: Domestic Corporate Taxion
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). The rates vary from 2% on transfers of real property where the value is below GBP150,000, to 3% for values over GBP250,000. Some minor charges are levied 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 to 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."
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 were 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 made 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 was carried out in close consultation with Jersey and the Isle of Man - the Policy Council said 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.
The government 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 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 was merely considering its options.
A statement from the Guernsey government underlined that the department was 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 rose 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 available to customers having accounts with Isle of Man banks as part of a transitional arrangement were withdrawn.
The Guernsey government underlined that it had always considered the withholding tax arrangement to be transitional, and 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."
The move to automatic exchange of information was passed by the States of Deliberation on November 24, 2010, and paying agents had to implement the change between January 1, 2011, and June 30, 2011.
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.