Client Alert September 2020: Economic Substance – current focus areas

Company tax return filing deadline deferred to 28 February 2021

The Guernsey Revenue Service (“GRS”) has confirmed in a GSCCA circular that the company tax filing deadline for the 2019 Year of Charge has been moved from 30 November 2020 to 28 February 2021.

According to the GRS, this decision is intended to allow customers completing corporate and personal income tax returns more time, noting that for many 2020 has been an extraordinary year. To support this change and enable Revenue Service staff to focus on customer support and processing returns, tax return filing reminders will no longer be sent to customers. From 1 March 2021 any customers with outstanding 2019 income tax returns will be issued with a penalty.

Backdated surcharges will not be applied to late payment of tax where the 2019 income tax return has been filed by 28 February 2021.

As a result of this extension, there will be a delay in the availability of the calendar year 2020 income tax return. More details on the return and the new online portal, will be shared towards the end of 2020.

Deloitte comment: 2020 has been a challenging year for business and government, including some IT issues with the tax filing portal. The extra time is likely to be appreciated by many companies; in particular, for those entities within the scope of the Economic Substance requirements, the extra time will be helpful to ensure that sufficient documentation and other evidence is collated to support the declarations on the 2019 tax return.
 

Where are you tax resident?

Section 4 of the Income Tax (Guernsey) Law 1975 (“the tax law”) introduced new provisions relating to the tax residence of companies with effect from 1 January 2019. Companies not incorporated in Guernsey may be tax resident in Guernsey if their place of central management and control is in Guernsey. Form 706 must be completed by 14 July in the year of charge following any year in which a company becomes tax resident in Guernsey. Also, Guernsey incorporated companies which are centrally managed and controlled outside Guernsey may be regarded as not tax resident in Guernsey. Form 707 must be completed to request non tax resident status.

It should be noted that new forms have been created for companies migrating from Guernsey (708) and being liquidated (709).

It is important to carry out a thorough review and to ensure that the relevant forms have been completed to avoid penalties. It may also be necessary to examine the tiebreaker provisions of any relevant double tax agreements (“DTA”) and for the UK this can be complex as the new DTA came into effect on 1 April 2019 for UK purposes and 1 January 2020 for Guernsey purposes.

Deloitte comment: We have seen a number of queries arising from the combination of the amendments to section 4 of the tax law in relation to corporate residence and the introduction of the new DTA between Guernsey and the UK. This is a matter which warrants careful consideration.
 

Economic Substance – extra detail on the tax return

As a reminder, in addition to certain additional declarations on the tax return, companies with an accounting period starting on or after 1 January 2019 will also have to complete the Economic Substance sections. In practice, for most non-December year ends, the first Economic Substance declarations will be required on the 2020 tax return to be filed in 2021.

The Economic Substance requirements only impact entities which undertake and receive income from a “relevant activity” as defined in the Economic Substance regulations. For companies not undertaking a relevant activity, the Economic Substance sections of the tax return will not need to be completed.

For entities undertaking a relevant activity, extra information will need to be declared on the return which includes :

• Confirmation of “relevant activity/ies” performed (from which income was generated) in Guernsey;
• Core Income Generating Income (“CIGA”) performed in Guernsey;
• Gross income and operational expenditure in respect of the relevant activity;
• Number of employees in Guernsey (including how many have reportable qualifications) and confirmation that this number is “adequate”. This number is calculated based on a 35 hour working work to 2 decimal places;
• Confirmation of adequate physical presence;
• Details of outsourcing arrangements, including 
  • The number of outsource providers;
  • Whether the outsourcing was performed exclusively in Guernsey;
  • Whether there is adequate supervision of the outsourcing;
  • Confirmation that all outsourcers are Guernsey tax resident;
  • For each outsource provider, the name of the provider, the number of full time resources provided, the amount paid to the outsource provider and their company registration number;
• Confirmation that the entity is “directed and managed” in Guernsey (on a self-certification basis unless the company wishes to answer further questions).

For pure equity holding companies, there are reduced information requirements, whereas for “high risk IP” entities, additional considerations apply.

Deloitte comment: Further to the publication of the Economic Substance regulations in December 2018 and the subsequent issuance of guidance in April and November 2019, the main focus of Guernsey tax resident companies has been on deciding if they are within scope and if so whether they meet the Economic Substance tests.

The focus has now moved towards the submission of the tax return. This involves being able to complete the sections of the tax return but just as important is ensuring that there is sufficient information retained to support the declarations, in particular for those aspects of the tax return completed on a self-certification basis.
 

Requirement to submit financial statements

For the 2019 tax return and in future, it is a requirement for all Guernsey tax resident companies (with the exception of “certificate 2” entities which is predominantly dormant entities) to submit financial statements with the company tax return.

The GRS has confirmed to the GSCCA that, in accordance with section 68 of the tax law, it reserves the right to request that financial statements are “certified” should they not be satisfied with the accounts submitted (although penalties for an incomplete return would not apply unless the company could not provide “certified” financial statements within the timeframe requested).

Deloitte comment: Trust and Corporate Service Providers have previously been able to file the tax returns on a “consolidated” basis but must now file the tax return on an entity by entity basis. The extra time required to file each tax return and upload financial statements should not be underestimated. Consideration should be given to the qualifications of the individual who prepared the financial statements as this will also be disclosed on the tax return.
 

Changes to Economic Substance regulations in respect of self-managed collective investment vehicles (CIVs)

The existing Economic Substance guidance confirms that a CIV subject to regulation in the island is outside the scope of the rules.

New legislation has been passed which brings self-managed CIVs within the scope of the substance rules. These rules come into effect from 1 October 2020 regardless of the year end of the self-managed CIV.

The new legislation can be found here.

This new legislation also formalises the existing guidance by stating that the Economic Substance rules do not apply to a CIV (within the meaning of the Tax Exempt Ordinance), unless it is a self-managed CIV.

Where a CIV has no other person or body conducting fund management in respect of it, that CIV will be considered a self-managed CIV. As a self-managed CIV, that CIV will be subject to the Economic Substance requirements as if it carried on the relevant activity of fund management and received income from that relevant activity.

Deloitte comment: This change was made further to discussions with the EU Code of Conduct on this matter. Even though there would be no gross income from the relevant activity of fund management, the CIV would be within scope and need to consider the tests as if it were a fund manager.
 

Deloitte Outlook

Whilst this Client Alert focuses on compliance for the 2019 year of charge and the upcoming filing deadline it is important to remain focused on the Economic Substance rules as they apply on an ongoing basis and in particular during 2020. Of course, the most significant aspect of 2020 is the impact that COVID-19 may have had on the way companies are conducting their operations due to travel restrictions and quarantine/self-isolation. In March, guidance was issued jointly by GIBA and GSCCA on what practical steps companies may wish to take to mitigate the threat of non-compliance. Six months later, there is still no official guidance from government but as the pandemic continues, including enforced quarantine in Guernsey, it is important to consider all aspects of the Economic Substance requirements and to take advice on a case by case basis.
 

Questions

If you have questions, would like to discuss any of the above or how Deloitte could support you with your Guernsey tax return filings (which can include preparing the tax returns themselves, reviewing the tax returns or assistance with support information to justify the economic substance declarations) please get in touch with your usual Deloitte contact or any of the below.