As expected, the guidance note does not attempt to provide comprehensive answers to all questions on the legislation. In particular, it does not provide any further clarity on the meaning of the term “adequate”, which is used in some of the key requirements in the substance legislation, nor does it clarify the process that will be used by local tax officials to determine whether a company meets the substance requirements. However, it provides welcome clarification in a number of areas, including the following:

Pure Equity Holding Companies: If a company meets the criteria to be regarded as a pure equity holding company (and therefore subject to less onerous requirements), the guidance note clarifies that passively holding investments and receiving income or gains from them will not be regarded as a “commercial activity”. To fall outside the definition of a pure equity holding company, the company would have to carry out real activities, which must be commercial in nature (i.e. directly linked to the sale/exchange of goods or assets or services in pursuit of profit).

Financing and Leasing: The guidance note confirms that intra-group financing is within scope. It also clarifies that the consideration received by the lender must be monetary in nature (i.e. a lending fee or interest) for the lender to fall within this relevant sector (in that sense, the term “consideration” will not be given the meaning that contract lawyers will be familiar with). The guidance note also makes clear that providing trade credit on terms that do not require the debtor to pay interest will not fall within this relevant sector. Lastly, the guidance note helpfully explains that this relevant sector does not extend to the purchase of government bonds or traded debt securities as an investment.

Core Income Generating Activities: Perhaps the most important statement in the guidance note is that a relevant company must perform the core income generating activities that generate its income in any relevant sector in the relevant Crown Dependency. A similar change was recently made to the substance legislation in Jersey. It remains to be seen how this will be interpreted for, by way of example, a bank incorporated in one Crown Dependency that has a branch in another Crown Dependency. The guidance note also provides examples of what the core income generating activities might include for certain relevant sectors.

Direction and Management: The guidance note provides a little more colour on the requirement for relevant companies to be directed and managed in the relevant Crown Dependency.

Employees: The guidance note clarifies that, for the purpose of the substance requirements, the term “employee” is not limited to individuals that are legally employed by the company itself.

Reporting of Information: The guidance note summarises the information that relevant companies will be required to provide in their tax returns regarding the substance requirements.

The guidance note acknowledges that it is a work in progress. In particular, information on IP holding companies, and the reduced substance requirements for pure equity holding companies, will follow in subsequent guidance.

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 within 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.

If you have any questions, please speak to Alison MacKrill in our Guernsey office, Andrew Weaver in our Jersey office or Garry Manley in our Isle of Man office.

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