The rapid deployment of measures to prevent the spread of COVID-19 (Coronavirus) are having an impact on how companies continue to meet their regulatory obligations. Concerns have arisen that those measures, such as restrictions on travel and voluntary and mandatory social distancing, could cause difficulties for companies required to satisfy the economic substance test in Guernsey.
Under the Income Tax (Substance Requirements) (Implementation) Regulations, 2018, as amended, certain companies that are tax resident in Guernsey must satisfy the economic substance test. Companies that are tax resident in Guernsey include companies that are registered, or managed and controlled, in the Island. Part of the economic substance test is for companies to demonstrate that they are directed and managed, and performing core income generating activities, in Guernsey in respect of their relevant activities for economic substance. The di ected and managed part of the economic substance test is separate and distinct from the managed and controlled test used to determine the tax residence of foreign registered companies.
Where companies' operating practices are adjusted in response to the COVID-19 pandemic, it is expected that the States of Guernsey's Revenue Service will not treat the company as having failed the economic substance test, if and to the extent that the adjustments are required in order to mitigate the threats from the outbreak. For example, where directors would normally travel to Guernsey to be physically present at board meetings, but to avoid travel or self-isolate, meetings are temporarily held virtually or by telephone, these adjustments should not be regarded as failing to meet the economic substance test.
Guernsey tax resident companies that have adjusted their operating procedures as a result of COVID-19 should clearly record in their books and records the procedures that are being applied, including in board minutes for meetings where directors have not been physically present due to implementation of such measures. If companies intend to hold virtual or remote meetings, they should also check that virtual meetings (including meetings by telephone) are permitted by their Articles of Incorporation. All other normal protocols for meetings should also be observed.
Companies must be mindful of the consequences of any adjustments to their operating procedures in jurisdictions other than Guernsey, which may not take into account the COVID-19 pandemic when assessing the tax residence of companies. The COVID-19 pandemic will also not absolve companies that are in scope of the economic substance requirements from continuing to meet their obligations. Companies should consider alternative arrangements where possible, including appointing alternate directors in Guernsey.
Walkers has a dedicated Regulatory & Risk Advisory Group that can offer legal advice and guidance in connection with all aspects of the Channel Islands' regimes for economic substance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
