Economic Substance Regulations
From the 1st January 2019, new laws on Taxation and the structure of certain companies came into effect in Guernsey, Jersey and the IOM and will be effective for accounting periods commencing on or after 1 January 2019.
In 2016 the EU Council committed to coordinated policy efforts in the fight against tax fraud, evasion and the Code of Conduct Group ("COCG") were instructed to undertake a screening process whereby jurisdictions, including the Crown Dependencies of Guernsey, Jersey and the Isle of Man, were assessed against three standards in respect of:
- tax transparency
- fair taxation
- compliance with anti– Base Erosion and Profit Shifting ("BEPS") measures.
The COCG were concerned that this "increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial economic presence". These concerns were articulated in a letter to each of the Crown Dependencies in November 2017.
As a result the Government's of Guernsey, Jersey and the IOM have all introduced new legislation on broadly similar terms.
The new regulations take into account three specific concerns that the EU had for the activities of a company;
- being directed and managed in the Island;
- conducting Core Income Generating Activities (CIGA) in the Island; and
- having adequate people, premises and expenditure in the Island.
The EU were even further descriptive in identifying the relevant activities that they were concerned about, which includes Shipping.
Under the new Guernsey Legislation Shipping is defined as:
Any vessel larger than 24 meters operating in international waters (i.e. not in the Bailiwick of Guernsey waters) for income, for the transport of passengers or cargo including the following activities:
- The rental on a charter basis of the ship;
- The sale of tickets or equivalent and the provision of services connected with such sales;
- The use, maintenance or rental of containers (including trailers and other vehicles or equipment used for the transport of containers) used for the transport of goods or merchandise; and
- The management of the crew of a ship.
Under the new regulations once a company has been identified in the activities relevant to the new laws, the Guernsey company must satisfy an "Economic Substance Test", which is in three parts.
- The requirement to be directed and managed in the Island
- Frequency of Board meetings – that an adequate number of board meetings are held having regard to the amount of decision-making required at that level. What constitutes an adequate number of meetings will be dependent on the relevant activities of the company. However, it is generally expected that even for companies with a minimal level of activity, there will be at least one meeting per annum of its board of directors.
- Meetings held in Guernsey – that there is a quorum of directors physically present in Guernsey. It is not necessary for all of those meetings to be held in the Island but it would be expected that the majority are. Also, though the SLR refers to the "quorum" of directors being present in the Island, the Guernsey Tax Office have confirmed they would expect to see the majority of the board physically attending in the Island.
- Minutes and records - that the associated minutes and records are kept and provide evidence that the board is a decision-taking body making the strategic decisions.
- Knowledge and expertise of Board – that the board has the necessary knowledge and expertise to discharge their duties. In the case where there are corporate directors, the requirements will apply to the individual(s) (officers of the corporate director) actually performing the duties.
- Records kept in Guernsey – all minutes and records are kept in Guernsey.
2. For each sector the proposed legislation provides a list of the core activities a company operating in such a sector could carry on but it is not necessary for the company to perform all of the CIGA listed in order to demonstrate substance. As such, a company that owns a vessel does not have to carry on the CIGA of management, chartering and crewing.
What the Guernsey company has to be able to demonstrate is that it has adequate supervision and control of the outsourced activities and, to meet the substance requirements, that those activities are undertaken in the Island.
3. The company must have "adequate resources", these are defined as;
- Premises - Adequate physical offices and/or premises in the jurisdiction from which it can carry out the activities of the company.
- Employees - The Company has an adequate level of (qualified) employees in the jurisdiction proportionate to the activities of the company.
- Expenditure - An adequate level of annual expenditure is incurred in the jurisdiction proportionate to the activities of the company.
The new legislation imposes penalties for failing to meet the new regulations.
- For first accounting period failure, a penalty not exceeding £10,000 rising in subsequent years until after the forth failure, £100,000
Here at Bachmann's our business is solely Marine. Al, the staff that work for us are either maritime professionals, certified experts in their own field of HR, Payroll and Accountancy. To highlight some of our in house expertise, we have on our team;
- Ex Fleet Manager, Senior Master, ISM Lead Auditor, DPO, CSO qualified
- Ex Operations Director, DPO, CSO, ISM Lead Auditor qualified, with seagoing experience
- Ex Fleet Engineering Superintendent, Senior Chief Engineer.
- Ex Fleet Electrical Superintendent
- Team of Chartered Institute of Payroll Professionals, Certified Payroll Technicians.
- A fully CIPD certified HR team which includes staff who posses a Msc. in Human Resource Management.
We are already fully compliant with the new legislation and if you would like help in meeting the new legal requirements, we would be delighted to help.
For further details contact Nick on +44 (0) 1481 731059 or email him here