The continued deployment of government measures to prevent the spread of COVID-19 and protect people's health are having an impact on how companies continue to meet their economic substance requirements. Concerns have arisen that measures, such as restrictions on travel and voluntary/mandatory self-isolation, could cause difficulties for companies required to comply with economic substance requirements in Guernsey.
Under Guernsey economic substance legislation, certain companies that are either tax resident in Guernsey (or would be so resident but have exempt status) must comply with economic substance. Companies that are tax resident in Guernsey include companies that are registered, or centrally managed and controlled, in the Island.
Economic substance requirements include obligations for companies to demonstrate that they are both directed and managed, and performing core income generating activities (CIGA), in Guernsey. The directed and managed requirement is separate and distinct from the centrally managed and controlled test used to determine the tax residence of foreign registered companies.
The States of Guernsey's Revenue Service has stated that it will take a pragmatic approach when assessing a company's compliance with economic substance requirements whilst government measures are in place, clarifying that:
- It is expected that COVID-19 measures will only impact on the ability of a company to comply with the directed and managed requirement. It is still expected that a company will continue to meet the other economic substance requirements, including the CIGA requirement.
- A company subject to economic substance requirements should maintain and retain relevant records evidencing its COVID-19 policies and any relevant government imposed restrictions.
- Where a company does not comply with economic substance requirements due to COVID-19 measures, a Revenue Service Inspector will undertake a review of the company's tax return and affairs.
- The exchange information by the Revenue Service with other relevant tax authorities on a company as a result of its failure to comply would include information provided by the company on the impact of COVID-19 measures.
The guidance applies to measures adopted since the beginning of the COVID-19 pandemic and will remain in place whilst travel restrictions continue. The guidance is therefore relevant for periods or part periods since the first quarter of 2020.
Companies that are subject to economic substance requirements should consider the operation of their business since the start of the pandemic and how the guidance impacts on their compliance. Such companies may need to make adjustments to their business practices to assist with compliance going forward, and may want to consider the appointment of alternate directors who are in Guernsey.
As clarified by the guidance, companies that are subject to economic substance requirements and which have adjusted their operating procedures as a result of COVID-19 measures 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 content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.