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
:
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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
comes 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
- as
a normal business, with investment gains and
losses being counted in (other than profits
reserved or expended for policy-holders or annuitants);
or
- 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:
- to
be taxed as normal businesses;
- 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;
- to
be an Exempt Company;
or
-
(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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Guernsey
Filing Requirements and Payment of Tax
The tax year is 1st January to 31st December and
is referred to as the year of charge. Tax due
on an assessment is payable in two halves, one
before 30th June of the year of charge and one
before 31st December; or if the assessment is
late, tax is due within 21 days of the issue of
the assessment.
Guernsey
Withholding Tax
Dividends are subject to income tax at 20%. Payments
of interest to a non-resident by a Guernsey 'income
tax' company (ie resident company) are also subject
to 20% income tax. By concession, payments of
interest by Guernsey banks to non-residents or
exempt companies are untaxed. Royalties are treated
on the same basis as interest.
As
from 1st July, 2005, interest and other returns
on savings paid to citizens of EU Member States
are subject to withholding tax at 15% under the
Savings Tax Directive.
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