Guernsey: Offshore Legal and Tax Regimes
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 rose 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 available to customers having accounts with Isle of Man banks was withdrawn.
The Guernsey government underlined that it had 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 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.
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, would be tabled when the budget was debated in December.
According to Trott, a public consultation was to be launched in the summer, with the results of this 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 proposed 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: “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.