Extension of Economic Substance requirements to Guernsey partnerships
19 August, 2021
The Income Tax (Substance Requirements) (Implementation) Regulations, 2021 (The Substance Regulations) came into effect on 30 June 2021 and replaces the previous regulations that covered Economic Substance which were:
- The Income Tax (Substance Requirements) (Implementation) Regulations, 2018
- The Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2018
- The Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2019
- The Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2020
Thus, the initial 2018 regulations and all of the subsequent amendments have been consolidated and included in The Substance Regulations. In addition, The Substance Regulations have been updated to capture the extension of the Economic Substance Rules to partnerships, which includes changes to some definitions to assist with the broader application.
We’ve summarised some of the key features of The Substance Regulations, as they apply to partnerships, below:
Commencement dates
- New partnerships formed on or after 1 July 2021 will come into scope from their first accounting period.
- Partnerships in existence before 1 July 2021 will come into scope from their first accounting period commencing on or after 1 January 2022.
Relevant activity
The relevant activities applicable to partnerships are the same as applied to companies. These are:
- Banking
- Insurance
- Fund Management
- Headquartering
- Distribution and Service Centre
- Shipping
- Financing and Leasing
- IP Holding
- Pure Equity Holding
Who’s in scope
- General partnerships formed in Guernsey and carrying on business activity in Guernsey.
- Limited partnerships (both with and without legal personality) registered in Guernsey.
- Limited liability partnerships registered in Guernsey.
- Foreign partnerships tax resident in Guernsey i.e. place of effective management (POEM) is in Guernsey.
POEM has been defined to mean the place where the management and commercial decisions necessary for the conduct of the business are substantially made, having regard to all relevant facts and circumstances. This in most instances will be determined by the location of the General Partner for Limited Partnerships. Notably, POEM is an international tax concept which has been extensively discussed by the OECD and can differ from the Central Management and Control corporate tax residence definition many will be familiar with in Guernsey.
Exempted partnerships
Certain specific partnerships will be exempt from the Economic Substance regime, including:
- Guernsey partnerships with a POEM in a qualifying jurisdiction.
- GFSC regulated fund vehicles who do not meet the self-managed conditions.
- Wholly domestic partnerships i.e. partnerships with activities only within Guernsey and not part of a multinational group.
- Partnerships made up of only Guernsey tax resident individuals subject to personal tax on the income from the partnership in Guernsey.
Qualifying jurisdiction has been defined to mean a jurisdiction other than Guernsey where the following conditions are met:
- the partnership is subject to the application of substance requirements under the law of the jurisdiction that are substantially the same as the Guernsey regulations; or
- the highest rate of tax on income of any person in that jurisdiction is at least 10%.
Sanctions for failing to meet the regulations
Similar sanctions apply for partnerships as they apply for companies, however, partnerships without separate legal personalities may face a financial penalty of up to £150,000 in the fourth and subsequent years of default.
Filing requirements
Partnerships are now required to register with the Guernsey Revenue Service (GRS). The GRS has issued Form 715 for partnership registrations, which is required to be submitted by 14 July after the end of the first year of applicability to the partnership. Penalties of up to £10,000 (for negligence) and £20,000 (for fraud) may apply where the partnership fails to register with the GRS.
Partnerships will now have an annual tax filing requirement (if required by the Director of the GRS) along with submission of supporting documents. We would expect every partnership that registers with the GRS to receive a notice of duty to submit tax returns accompanied by financial statements. The partnership will be expected to appoint a partner or some other officer of the partnership to be responsible for the partnership’s return.
What action is required?
The first step, as it was for companies, is to establish which partnerships are undertaking relevant activities and put the appropriate measures in place to ensure in-scope partnerships are able to pass the test or take appropriate remedial action.
Preparing a revenue defence pack can help ensure that those responsible for approving the tax returns have the appropriate supporting information to do so with confidence. Our experience from the corporate substance regime was that those who had performed an initial assessment/review before or during the first in-scope accounting period found it much easier during the tax return process, as they had all the information available and materially reduced instances of trying to shoehorn a pass based on historic events which cannot be changed.
Where a corporate partner holds interest in a partnership which receives gross income from a relevant activity, the company and the partnership should be considered together to ensure there is alignment of classification and the potential for duplication is avoided.
Many businesses have now moved out of the project stage of substance for companies, having clearly documented policies and procedures mitigating the substance risk and making the overall process more efficient. These policies and procedures will need to be adjusted and expanded to take into account the above.
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