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18 November 2013
Recent reassurances that Guernsey’s funds will be unaffected by changes to tax regulation cement the island’s position as a funds domicile of choice, argue Stuart Tyler and Jesse Owens
known as an attractive location for setting up and managing collective investment funds. However, its low rate of corporate taxation has come in for criticism recently, primarily from the EU Code of Conduct Group, which has objected to Guernsey’s ’Zero 10’ taxation strategy.
In an effort to reassure the fund services industry on the island, the Guernsey States Treasurer has emphasised that the exempt fund regime will be protected regardless of any other changes that might be made to tax legislation.
Guernsey also offers great flexibility in respect of the types of investment vehicles that can be used to manage large investment funds. Funds may be structured in the traditional way as companies, unit trusts or limited partnerships.
A good cell
Two of the more attractive structures on offer are the incorporated cell company (ICC) or the protected cell company (PCC). The PCC is a concept created and first legislated for in Guernsey. It operates as a single legal entity with distinct cells, the assets and liabilities of each cell being segregated by law from the assets and liabilities of the other cells. An ICC is similar to a PCC except that each cell is a separate legal entity.
PCCs are particularly attractive vehicles for diverse collective investment funds as they enable a fund to be divided into a number of classes that can facilitate different investment objectives for a range of investors. Provided the PCC is structured in the proper way, the liabilities of different cells can be segregated from those of other cells and the assets of one cell will not be available to creditors of other cells in an insolvency event.
The flexible nature of a PCC enables the creation of a group of funds legally separate from every other cell, despite the fact that all are ultimately held in one company. Cells can be integrated or migrated, offering greater flexibility, and the ownership of individual cells can be divided.
This enables a PCC to hold and manage a diverse range of assets, contracts and interests under a single or multiple ownership structure while separating risks and potential liabilities. It also enables investors to share overhead costs without losing protection from the insolvency of other cell members.
PCCs are also commonly used to hold private investment funds as separate family investments in different cells but as part of the same corporate structure. The cellular approach can be used to create private collective investment vehicles for a single family with different investment requirements, or for unrelated clients, each investing through one or more dedicated cells.
No heavy levies
As Guernsey does not levy taxes, fees or duties upon the creation of a mutual fund, or have any forms of capital inheritance, gift or estate duties, it has become one of the more attractive and cost-effective offshore jurisdictions for establishing a collective investment fund.
A further benefit includes the 0 per cent taxation on income from investment funds in most circumstances. The exception to this is where specified banking activities, or activities regulated by the Guernsey Office of Utility Regulation, are being undertaken, in which case tax is in most cases levied at 10 per cent.
Investment funds, which are typically organised in Guernsey as mutual fund companies, unit trusts, or limited partnerships, are able to benefit from 0 per cent taxation by registering in Guernsey for tax purposes. These entities, and any entities owned by them, can apply for exempt status under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989. Where an exemption is granted, which is typical in the majority of cases, income derived from a fund through derivative instruments will ordinarily be subject to income tax at a rate of 0 per cent.
Furthermore, shareholders in investment fund companies and non-resident unit holders in unit trusts are not liable to tax in Guernsey on distributions received from Guernsey-resident unit trusts or investment fund companies that have obtained exempt status.
There is also no domestic withholding tax in Guernsey on such distributions and when shares in a Guernsey resident fund company or units in a unit trust are disposed of by shareholders and non-resident unit holders there is no liability to tax in Guernsey on any gains made.
The flexible structures available in Guernsey, coupled with the reassurance from the treasurer on the future tax regimes in the jurisdiction, will protect Guernsey’s status as one of the leading collective funds investment jurisdictions for some time
Stuart Tyler is a partner and Jesse Owens is an associate at Babbé