The revised guidance builds on version 1.0 of the guidance, which was published in April 2019, and provides additional guidance in the following key areas:
Core income generating activities:
- The revised guidance goes further than before by prohibiting a relevant sector company from undertaking core income generating activities (CIGA) outside the island in which it is tax resident. It explains that this does not include non-income generating activities. It is not clear whether this prohibition would extend to activities that do generate income (but not in a relevant sector).
- Although taking decisions outside the relevant island generally indicates performance of CIGA outside the island, the revised guidance helpfully clarifies that isolated decisions can be taken outside the island subject to certain conditions.
Pure equity holding companies
The revised guidance removes a section that was included in version 1.0, which illustrated factors that would cause a company to fall outside the definition of a pure equity holding company. Despite this deletion, however, the underlying legal position remains unchanged: A company will not be a pure equity holding company if it performs “commercial activity” or if it has a primary function other than acquiring/holding interests in other companies.
The guidance suggests that the primary legislation will be amended to bring self-managed corporate funds within the fund management relevant sector.
Distribution and service centre
The guidance appears to broaden the scope of this relevant sector by limiting the circumstances in which a company would fall outside this relevant sector on the basis that distribution and service centre business is not its main activity.
Sector-specific guidance is now included for insurance, shipping, IP and high-risk IP companies (although in the latter case this simply repeats what was set out in the December 2018 key aspects note).
The revised guidance clarifies that a company will only be an IP company if it derives income directly from exploiting IP assets. This addresses some of the uncertainty caused by the broad statutory definition of an IP company. If a company sells finished goods of which IP assets (such as patented technology or a registered trademark) form an integral part, it will not be an IP company because of the sale of those goods since the use of the IP asset is incidental to the sale of the goods. By the same logic, a professional services company that sells services using a recognisable brand would not be an IP company.
Collective investment vehicles
The revised guidance clarifies that collective investment vehicles are out of scope if they are subject to regulation in the relevant island, but it includes a reminder that their subsidiaries could still be in scope if they derive income from a relevant sector.
The revised guidance clarifies the different treatment of protected cell companies (PCCs) and incorporated cell companies (ICCs) under the substance legislation. PCCs will need to satisfy the substance requirements at a whole entity level (including the activities and resources of each cell); however, since ICCs and their cells are separate legal entities, an ICC and each of its cells will need to consider the substance requirements separately.
The question of whether a given company derives income from one or more relevant sectors requires a detailed case-by-case legal analysis of the precise factual matrix within which the company operates. Appleby can help you to determine if any of the companies in your group are subject to the substance requirements and, if so, what that means for you. As the only law firm with offices in all three Crown Dependencies, Appleby is uniquely positioned to advise on the differences between the substance legislation in Guernsey, Jersey and the Isle of Man.
Appleby provides an online Economic Substance Questionnaire, which provides complimentary guidance on the economic substance regulations in the Crown Dependencies. It works by guiding readers through a set of questions to analyse whether or not the entity in question is in scope of the relevant regime. From there, it will lead the reader through a summary of the steps required to meet the economic substance requirements in the relevant jurisdiction.
If you have any questions, please speak to Jeremy Berchem in our Guernsey office, Andrew Weaver in our Jersey office or Garry Manley in our Isle of Man office.
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