How Economic Substance Left Guernsey Stronger

A spill-over of all of this, as we are very well aware of now, was the transportation of the issue across to financial centres where, frankly, it was largely redundant.  Financial centres worldwide  scrambled to introduce economic substance legislation – requiring relevant economic activities to be conducted within the jurisdiction of registration – which  led to some getting caught in the firing line.

The Bailiwick of Guernsey’s movement was possibly easier than some, given that the move was not much more than a shift from ‘de facto’ to ‘de jure’ requirements on substance. Following the introduction of substance legislation in 2019, the island was immediately whitelisted by the OECD and EU Review Processes.  

This was not a surprise. Guernsey has a history of commitment to international standards in regulation and tax neutrality. The island was an early adopter of the OECD Common Reporting Standard (CRS) for the automatic exchange of information in 2014, later being branded as a co-operative jurisdiction by the OECD in 2015.

Earlier still, in 2013 Guernsey’s government – the States of Guernsey – signed a Model I agreement with the United States to implement Foreign Account Tax Compliance Act (FATCA) based reporting.

The Bailiwick was also an early signatory of the OECD’s Multilateral Instrument (MLI) to implement tax treaty related measures and is a signatory of the Multilateral Competent Authority Agreement (MCAA) to share relevant information in relation to Country-by-Country Reporting. And as most professionals on the island can tell you, our assessment of compliance with the anti-money laundering  (AML) requirements of the Financial Action Task Force (FATF) Recommendations remains, to this day, the highest of any jurisdiction.

In my view, a jurisdiction’s degree of commitment to the recognised and respected international standards reflects upon the type of financial centre that it is. Such a commitment and pedigree is a harbinger of a positive reputation.

I was always confident that Guernsey would emerge positively from this process, due to the insight I had picked up from being involved in earlier dialogues on tax with the EU and international bodies.

Being directly involved in taxation talks with the European Commission in the early 2010s, and in the regulatory dialogue in the mid-2010s, gave me a first-hand experience of the high regard in which Brussels officials hold our standards and application of rules.

Given the genuine economic substance of the jurisdiction, with a third of our workforce being employed in financial services; our large non-executive director community with one of the largest branches of the Institute of Directors in Britain; the requirements to demonstrate that companies are ‘directed and managed’ in Guernsey in relation to the substance activity; that they have adequate employees, expenditure in the island, and physical presence; and that core income-generating activities (CIGA) undertaken are carried out in Guernsey was, as certain marketing campaigns I have seen say, nothing more than ‘dotting the i’s and crossing the t’s’. 

Meanwhile, others had to make material change in their attempts to meet economic substance requirements.

Having been involved in international securities regulation and supervision, I fully appreciate why the legislative amendments required in many other jurisdictions were so material.

Guernsey has certainly emerged from this process stronger and more competitively placed.

If a centre is fully committed to substance, tax transparency, and the global BEPS and AML agendas, it is also likely that the jurisdiction is of a high quality in other aspects, too – its regulator is responsive, flexible, and fair, and the service providers are equally talented and diligent.

That point of view is increasingly shared – surveys we conducted in both 2019 and 2020 reported that Limited Partnerships (LPs) and others were increasingly seeing substance as a key determinant of locational choice. Reflecting this, in 2020 Guernsey introduced two new fast track regimes to help people migrate their affairs to the jurisdiction.

Fast Track Migratory Regime

In mid-2020, the Guernsey Financial Services Commission introduced a fast-track migratory regime to enable the migration of overseas (non-Guernsey) fund management companies (mancos), and their investment funds, to the Bailiwick within a 10-business day turnaround time. The only caveat is that ahead of moving to, and conducting business on the island, the incoming manco must ensure it has received consent to migrate, along with an official licence to conduct fund management in Guernsey – as per the Protection of Investors (Bailiwick of Guernsey) Law, 1987. To simplify this process, the fast-track application regime includes both processes, providing consent to migrate on completion of the licensing process.

There are just four steps to fast-track migrating a fund and manager to Guernsey:

• Appoint a Guernsey-licensed administrator.
• Submit application to the GFSC.
• 10-day review period.
• Pay the competitive migration fee – this is reduced pro rata in the first year.

Migration Of LPs To Guernsey

Just a few weeks after the fund and managers migration regime was introduced, the island followed up with the Limited Partnerships (Guernsey) (Migration) Regulations 2020 to further assist LPs that were originally established overseas to move to the Bailiwick quickly and easily.

Before the new regulations, the Limited Partnerships (Guernsey) Law 1995, enabled LPs to migrate into and out of the island on the condition that the LP became a new legal entity. If an LP moved to the island, it would no longer be the same ‘entity’ as it was in its jurisdiction of establishment. The 2020 Regulations make it clear that the migration does not result in the creation of a new legal structure, and that the foreign law limited partnership is ‘continuing’ just in Guernsey and as a Guernsey law limited partnership.

The five steps to migrating a LP to Guernsey are:

• Appoint a Corporate Service Provider (CSP).
• Due diligence completed – assessing whether the LP meets the criteria under the Regulation.
• If the LP intends to be a supervised entity – obtain consent from the Guernsey Financial Services Commission (GFSC). However, if the LP does not undertake supervised activities, it can move straight to step four.
• Apply for registration to the Guernsey registry and pay a fee.
• Migrate the LP to Guernsey on an agreed date.

Conclusion

It would appear that out of the global push for financial jurisdictions to meet international standards on economic substance, an opportunity has arrived for Guernsey.

The new regulations demonstrate Guernsey’s legal flexibility in responding to the needs of potential clients.

These developments build on the reality of Guernsey’s strengths, which have become evident during the emergence of these international rules and arise as a result of a considered approach to exploit the actuality of our substance.

Local lawyers are reporting significant levels of interest in migrating funds, companies, and limited partnerships to the island over the past 12 months and expect more to follow even as the process develops across the globe. Managers recognise Guernsey’s position of real substance, with a high-quality fund administration sector and a substantial pool of non-executive directors.

One of the first to move – from Cayman to Guernsey – praised the “robust and highly-regarded administrative, legal and regulatory infrastructure available in the island” and said the migration and licensing process was simple and straightforward.

2020 will be remembered for many things. The world has changed in many ways. One of the lesser-known has been the flight to quality that the substance agenda has catalysed.

What Family Offices Say About Substance

(Independent research commissioned by Guernsey Finance, 2019)

Substance requirements are so significant that they are influencing where HNWIs set up base for their family office.

Nine out of 10 family offices and corporate service providers in the British Islands said that substance was of growing importance for location of family offices.

60% of respondents consider substance to be of greater importance than it was five years ago.

61% believe that importance will grow over the next five years.

What Fund Managers Are Looking For In A Domicile

(Research commissioned by Guernsey Finance and carried out by BDO, 2019)

Cost 92%

Fund managers seeking to attract European capital can find the ability to use National Private Placement Regime (NPPR) from Guernsey is considerably cheaper than setting up a Luxembourg-based vehicle.

Reputation 90%

Guernsey has been involved in the structuring and administration of investment funds for more than 50 years and has a number of specialties, including London-listed vehicles and private equity funds.

Experienced service providers 67%

Experienced non-executive directors 50%

As a jurisdiction with strong business flows and background in the sector, the island has a wealth of first-class fund service providers.

Regulatory standards 69%

Guernsey has a proportionate, flexible and competitive regulatory regime for funds.

Dr Andy Sloan
Deputy CEO, Strategy at Guernsey Finance, Andy is responsible for coordinating the development of financial services strategy for the island. He also established and chairs Guernsey Green Finance, the island’s sustainable finance initiative, and represents Guernsey at the UN’s Finance Centres for Sustainability Network.