Guernsey: Personal Taxation
Residence and Liability for Taxation
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 July 31 in the year of charge; or if he has maintained a dwelling-place in Guernsey for 91 days or more in the year of charge; or if he has spent 365 days or more in Guernsey in the four years immediately preceding the current year of charge.
Resident means solely or principally resident. Residents pay Guernsey income tax at 20% on their world-wide income.
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, if the individual does not carry on business in Guernsey through a permanent establishment).
Non-residents, which is anyone other than residents, or those who are resident but not solely or principally resident, pay tax only on Guernsey-sourced income, with exemptions for local dividend, interest or royalty income as in the previous paragraph.
Guernsey’s Treasury and Resources Department is proposing to lower the ‘tax cap’ for wealthy residents and to introduce a new ‘flat tax’ charge for residents who do not spend the majority of their time on the island.
The Department’s proposals were to be discussed by the States at the end of January 2009. They could prove attractive to high net worth individuals seeking a low-tax lifestyle and could eventually benefit the Exchequer.
The proposals follow a consultation exercise carried out in the latter half of 2008 and have been presented to the States as part of a wide-ranging package of amendments to the Income Tax Laws.
The Department consulted in 2008 on the tax cap, which was introduced at the same time as the zero-10 tax changes were implemented.
The overwhelming response was that the present cap, GBP250,000 on income arising outside of Guernsey (and Guernsey bank interest) was uncompetitive in a global context and a disincentive for high net worth individuals to stay with the island. The industry was aware that other jurisdictions were actively targeting Guernsey residents encouraging them to relocate for a lower tax cap.
The new proposals would see a reduced liability cap of GBP100,000 (income tax paid) for an individual or a couple on non-Guernsey income, increased to GBP200,000 if an election is made for the cap to apply to worldwide income (including Guernsey source income).
This would mean that, for the first time, some current Guernsey residents could fall into the tax cap limit and see a reduction in their tax bill.
Guernsey wants to be able, by regulation, to set a ‘flat tax charge’ for individuals resident but not solely or principally resident on the island (i.e., people who spend most of the year off the island) who elect to pay the charge. At present such people pay tax only on Guernsey source income and any overseas income they bring to the island.
The Department issued a consultation document on this matter in September 2008. The outcome was general support for a minimum level of tax payable, given concerns that some people could use the current system in order to pay nothing, or very little.
Concerns were raised over the position of individuals who may be resident, but not solely or principally resident, who were in Guernsey mainly for employment. It has been agreed that they should be protected.
It was proposed that the minimum level of tax liability should initially be GBP25,000. People would have to elect to pay the GBP25,000 charge and, if they do so, would have to make a declaration relating to their Guernsey source income and satisfy certain requirements. If they could not qualify for the GBP25,000 charge, they would be liable to tax on their worldwide income, or they would need to satisfy the Administrator that they were only in Guernsey to undertake employment, in which case the existing rules would continue to apply. The rules used to determine residency will not change.
In November, 2009, the tax cap was amended to the proposed GBP100,000 level. Starting with the 2009 tax year, resident individuals could elect to opt for the new tax cap or, alternatively, pay an annual charge of GBP25,000. The 2012 budget increased the cap by 10% to GBP110,000 on non-Guernsey income and GBP220,000 on worldwide income. The annual charge for resident individuals was also increased by 10% to GBP27,500.
To relieve the administrative burden, the Department proposed a law change to allow companies to elect to distribute at least 65% of trading profits each year. They no longer have to report deemed distributions, just deduct and account for Guernsey tax on distributions actually made. Some anti-avoidance measures are included as part of the proposals.
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% on July 1, 2008 and to 35% from July 1, 2011.
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.
On June 21, 2005, the Guernsey States agreed to adopt equivalent measures with EU Member States to be implemented through bilateral agreements. The Directive was implemented on July 1, 2005 by the EU Member States. From the same date Guernsey introduced domestic legislation to give effect to the bilateral agreements. A number of other dependent or associated territories of the Member States together with certain third countries (Switzerland, Andorra, Liechtenstein, Monaco and San Marino) implemented similar measures from the same date.
In June, 2006, the Guernsey Administrator of Income Tax announced that in the initial 6-month period since the implementation of the bilateral savings tax agreements with the 25 EU Member States, approximately GBP4.5 million of retention tax had been collected by Guernsey's Income Tax Office.
Of this sum 25% (approximately GBP1.125 million) would be retained by the States of Guernsey, the balance being passed over to the relevant Member State, in accordance with the terms of the agreements.
Under those agreements, EU resident individual investors have the option of receiving interest gross by opting for information on their savings income to be exchanged with their domestic tax authority. It is estimated that over 57% of interest which falls within the scope of the agreements has been returned under this option.
Administrator of Income Tax, Ken Forman, said that: "The process of exchanging information and retaining tax has worked well and now that the template is in place there will be less of an administrative burden in the future both for our office and paying agents. I am conscious of, and am grateful for, the resources which Guernsey paying agents have put into implementing the necessary systems, which has enabled the first submissions of tax and information to be made relatively smoothly".
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 was 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 September 2009, the Guernsey government issued a statement in relation to concerns surrounding the HM Revenue and Customs' (HMRC) offshore information disclosure initiative, wherein 300 financial institutions are required to disclose transaction details relating to any offshore accounts where the holder has a UK address associated with their account.
The Guernsey government’s statement explained:
“In 2007, Guernsey’s Data Protection Commissioner received numerous complaints from local residents about the disclosure of their bank account details to [HMRC].”
"The outcome of those complaints was an undertaking by HMRC that any information relating to people without a UK tax liability would be destroyed.”
”It is likely that this disclosure initiative will once again affect some local residents who may have no liability for tax in the UK, but have some UK links, such as a temporary address in the UK or some other historical or family connection.”
"The disclosure orders have been served on UK institutions, so should only affect those residents whose bank does some processing activities in the UK.”
"Anyone who is at all concerned as to whether their account details may be disclosed to HMRC is recommended to contact their local bank, who should be able to give them further information.”
"HMRC has given an undertaking that any transaction data relating to non-UK taxpayers will be destroyed, but the Information Commissioner has advised the Guernsey Commissioner that he will be scrutinising the operation of the scheme to ensure that it remains compliant with the Data Protection Act.”
The Guernsey government informed that Peter Harris, Guernsey’s Commissioner, has written to HMRC about this matter and had been advised as follows:
“HMRC will be working with the financial institutions subject to the notices over the next few months, to ensure that the information disclosed is only that required under the notices. We have already issued them an information pack and will be holding workshops in September to help further.”
HMRC also assured the Commissioner that it will not cold call any islanders about their tax affairs; the Commissioner emphasizes that if anyone receives cold calls claiming to be about income tax, they should be ignored.
In February 2010, it emerged that Qualifying Registered Offshore Retirement Schemes (QROPS) regulation in Guernsey would be tightened up in order to give greater protection to investors.
The proposals follow pressure from pension providers on the island who have raised concerns that unregulated advisors are using Guernsey to mis-sell QROPS to investors and, by breaching current regulations, leaving them with tax charges on pension transfers of up to 55% on their total fund.
Onward transfers from Guernsey to other QROPS providers were at the time limited to a tax-free cash drawdown of 25% of the existing fund; one proposal was to increase this limit to 30%. There was also a proposal to limit one-off lump sum payments to GBP30,000.
Guernsey QROPS Committee chairman Roger Berry said:
"These are only proposals but they have strong backing and if supported at government level will in all likelihood become law."
"Let’s be clear, unregulated advice on pension transfers is occurring in the QROPS market. From a UK-centric perspective, where pension transfer advice is well regulated, that will be an uncomfortable fact and a natural reaction is of disappointment and wonder how this is allowed."
Berry warns investors to be wary of schemes that offer to transfer small sums and schemes that offer to sanction transfers from defined benefit schemes. "Frankly, where there is little room for excuse is the transfer of final salary or defined benefits schemes. Unless the transfer is trivial in size, if your prospective new QROPS trustee is happy to accept such a transfer without independent assessments or an equivalent report being provided to you, alarm bells should be ringing."
The government announced in April 2011 that the tax-free cash drawdown would be increased to 30% - backdated to January of that year. However, the UK Budget 2012 introduced a new rule to close a loophole which had allowed the transfer of UK pension savings tax-free to another jurisdiction. The new policy sets out clear rules that the recipient overseas scheme must meet certain conditions. Among these is the requirement that tax advantages (as exist in Guernsey) are not available to non-residents.
Only three Guernsey-based schemes have remained on the approved HMRC QROPS list.