6 November 2006
Tax changes recently announced in offshore jurisdictions have created a number of opportunities. The Channel Islands of Guernsey and Jersey have been considering tax reforms recently and the results will be coming to fruition in 2008. Guernsey has resolved what its new structure will be and Jersey will soon follow. The new structures will offer further benefits to offshore businesses.
The new system
In June the States of Guernsey resolved that from 1 January 2008:
- the rate of income tax on company profits will be zero per cent;
- a limited amount of regulated business - ie specific banking activities - will be subject to income tax at 10 per cent;
- trading activities regulated by the Office of Utility Regulation will be subject to income tax at 20 per cent (at present electricity, post and telecoms);
- resident individuals will continue to pay income tax at 20 per cent on assessable income;
- resident shareholders will be taxed at 20 per cent on their distributed profits and on all Guernsey rental and investment income;
- individual taxpayers will be liable to the standard rate on their investment and non-Guernsey trading income up to a defined income ceiling with a maximum tax payable of £250,000 on any individual's income from such sources; and
- 'wealth taxes', such as inheritance and capital gains taxes, will not be introduced.
The current system
The current regime in Guernsey will come to an end at that time. At present there are generally three options available to companies: exempt status, international status or income tax paying.
In Guernsey, a tax-exempt company is generally required to fulfil a number of criteria, the most important of which is that the ultimate beneficial owners of the company are not resident. Investment funds and investment companies can be granted exemption, as can insurance companies, and there are a number of other activities that have taken advantage of that status. The application for exemption is filed on an annual basis together with a £600 fee. The position in Jersey is similar.
Guernsey also has international business companies (IBCs). Such companies may agree a rate of income tax with the Administrator of Income Tax of up to 30 per cent, but not zero. Companies have taken advantage of that regime where payment of tax at a certain rate has been an acceptable deduction for tax purposes in another jurisdiction.
The final option is that which applies to those companies which do not make use of the other two options. A resident company pays tax at the rate of 20 per cent on its profit.
There are other options available in particular sectors. For example, captive insurers may pay tax on a sliding scale; banks may deduct 90 per cent of the profit from international loan continued #+ continuedbusiness for tax purposes should they so wish.
From 1 January 2008 all companies except banks and utilities will be subject to a rate of tax on profits that will be zero per cent. This will create a number of opportunities in Guernsey.
A number of investment managers are setting up a presence in the Channel Islands, in particular hedge fund and fund of funds managers and also private equity houses. The new tax regime for such operations will encourage this trend to increase. At present, where the principals of the investment manager become resident in Guernsey, it is not possible for the company to be exempt or an IBC. But from 1 January 2008 the company will not pay tax on its profit. Resident principals will also benefit.
The new regime will also be to the benefit of investment funds in that there will no longer be any need to make an annual application for exemption and to pay the appropriate fee. However, it is proposed that exempt company status is retained in relation to funds, which will enable a fund to have the further option to establish that it is non-resident for tax purposes.
Tax neutrality has enabled a number of structures to be used. Recently, most limited partnerships, and then unit trusts (GPUTs and JPUTs), have been used to hold UK real property.
There are a number of structures that have been used which have been facilitated by the Administrator of Income Tax in Guernsey, providing prompt responses and rulings on the application of tax laws in any particular situation, and this will continue with the new regime.
Where the whole of the income of a trust is payable to beneficiaries resident outside Guernsey, the liability of the trustees will be restricted to the trust income that arises in Guernsey, apart from Guernsey bank interest. Where one or more of the beneficiaries is resident in Guernsey, the liability of the trustees will be restricted to the income to which the resident beneficiaries are entitled, plus any Guernsey income - apart from Guernsey bank interest - of the non-resident beneficiaries.
Where the trustees have power to accumulate income for the benefit of beneficiaries, all of whom are resident outside Guernsey, no assessments will be raised on the trustees in respect of the accumulated income in so far as it does not arise from sources in Guernsey - for this purpose 'sources in Guernsey' excludes Guernsey bank interest. If separate funds are set up within the settlement, each can be looked at individually, if appropriate, in order to determine the trustees' liability to tax.
Following the introduction of the new tax regime, the analysis will be simpler but the effect will be the same: no tax will be chargeable in respect of the trust and no tax will be chargeable in respect of non-resident beneficiaries.
The details of the type of activities that are to be taxed have yet to be disclosed, but it is not anticipated that the tax burden on banks will rise.
Guernsey and Jersey residents will continue to pay tax at 20 per cent on income. However, a number of changes in Guernsey will be attractive to individuals who have international business, such as investment managers. First, there will be a cap on tax in relation to international - ie non-Guernsey - income. The effect will be that any annual income in excess of £1.25m will not be taxed where it is from international sources. An international source will be likely to include any investments in companies, funds or instruments outside Guernsey and, advantageously, may extend to any fees paid for the management of those assets. Second, income tax will be payable on distributed profits from corporate entities, which will allow profits to roll up within a company. While there will be a number of anti-avoidance measures, including deemed distribution in certain circumstances to be put in place, there are clear attractions to setting up operations in Guernsey.
The new tax regimes are designed to promote growth in business and to provide widespread opportunities. The detail may be yet to come, but a key advantage in these jurisdictions has always been the pragmatic and flexible approach of the tax authorities to ensure that there are winning solutions for businesses and offshore structures established in the Channel Islands. nRoger Le Tissier is a partner at Ogier