In 1950 Guernsey had already devised a fiscal regime for non-resident/offshore companies by way of the Corporation Tax (Guernsey) Law, which subjected companies owned by non-residents to only a set tax rate of £500 annually. However, in January 1990, the law was repealed, transforming all Guernsey offshore business companies and entities registered and incorporated in Guernsey into resident bodies for tax purposes. Under the new system, company exemption from tax was made possible only if accorded pursuant to the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989, the new Act.
With this arrangement, Guernsey companies referred to as Exempt Companies, were excused from income tax obligations for any income generated in a foreign jurisdiction, meetings could be held in Guernsey and were not deemed ‘doing business in Guernsey’, funds could be deposited in bank accounts without incurring tax and investments could be made in other Guernsey exempt companies or investment schemes entirely tax free. In essence, what the new regime aimed to do was open up Guernsey’s shores to non-resident nationals and companies which were now able to freely invest in the Island (establish branches, management offices, factories etc.), as Guernsey offshore companies and entities were no longer restricted to operating solely overseas. Guernsey companies were also grouped into 4 main categories and were required to meet certain conditions in order to be eligible for tax exemptions. These groups included Category A (Guernsey established Unit Trusts), Category B (Guernsey registered Investment Companies), Category C (Investment Companies registered in foreign jurisdictions, and Limited Partnerships incorporated in foreign jurisdictions) and Category D (Exempt Companies).
Despite the ongoing use of these categories to identify Guernsey companies and entities, by 1997 the fiscal system was soon to evolve further. This time around, an overhaul of the fiscal system for Guernsey companies would be primarily motivated by new international regulatory demands, partly promoted by European Finance Minister’s Economic and Financial Committee among other organizations like the OECD, to bring ‘harmful’ business practices to a halt. Harmful practices generally referred to the unequal/preferential tax treatment meted out to non-resident/offshore companies over resident/onshore companies, not only in Guernsey but internationally. In Guernsey for example, domestic Guernsey companies were subject to tax on international income at a rate of 20%, whilst offshore companies acquired exempt status for not being owned by any Guernsey resident and not generating any revenue in Guernsey.
After careful assessment of the potential negative impact of new regulatory demands, in 2007, under the Income Tax (Zero-10) Guernsey Law, 2007 and the Income Tax (Zero-10) Guernsey No 2) Law 2007, Guernsey committed to introduce a zero/10 fiscal regime for companies, offshore and onshore alike. Under this framework, Guernsey sought to respond to international regulatory standards without destroying its international business sector. The zero/10 system made all Guernsey companies liable to 0% tax whereas loan companies and banks pay 10%, whilst companies which generate income from activities involving buildings, utilities and land pay a tax rate of 20%. Prior to this, taxation was applied across the board (individuals and companies) at 20%. However, though the zero/10 slogan tends to indicate two rates of taxation, Guernsey companies are now presented with at least four options: 0%, 10%, 20% as explained above, whilst the Category B and C companies are able to retain their exempt status if all income is generated outside Guernsey. Furthermore, Category A, B or C companies/entities may be registered yearly and opt to pay a yearly exemption fee of £600.
As time, business considerations and client profiles evolve, Guernsey continues to engineer adaptable corporate structures and legal entities. This is evidenced in the Cell Company, pioneered by Guernsey and which serves as a multipurpose vehicle, an alternative to the regular group holding, presents a cellular approach to private fund investing and succession planning. Family oriented structures such as the Family Limited Partnership, Family Office and Private Trust Company have also been designed for expats, foreign and UK nationals. The Family Limited Partnership, for instance, is an ideal alternative to trusts (established for children) which in the UK have been subject to an inheritance tax rate of 20% on initial capital exceeding £325.000, including a fixed 6% charge which is applied on the value of trust property every 10 years. Guernsey FLPs are exempt from all these charges as long as the settler remains alive for at least 7 years after establishing the FLP, partners are taxed separately based on the source of receipts from the partnership, only some types of Guernsey sourced income are taxed and only licensing fees may apply to general partners for managing the FLP.
Diversity however, has not caused Guernsey’s international business sector to be flooded with numerous corporate structures. Instead, while certain structures have specific uses, others are multipurpose, able to cover an extensive span of functions and operations.
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