The Income Tax Office have recently issued guidance, in the form of a Statement of Practice, on the further extension of the 10% tax rate (“the 10% rate”) to Fund Administration Businesses.
The extension applies retrospectively, and applies to income earned since 1 January 2015.
The 10% rate will apply to income earned from the administration of controlled investments (as defined in the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (“the POI Law”). Any entity that is regulated under the POI Law should consider the extent to which their income will be subject to tax at the 10% rate.
The Statement of Practice clarifies certain aspects of how the Income Tax Office intend to interpret the Law:
- The 10% rate will apply only where fund administration services are provided to unconnected third parties – any income earned from the provision of fund administration services to connected parties will continue to be taxed at 0%.
- The Tax Office intend to apply the 10% rate to any Scheme (unless specifically exempted by the POI Law) whose purpose is to “enable investors to participate in, or receive profits or income arising from, the acquisition, holding, management or disposal of property”, even if that property consists of a single asset.
- The 10% rate will not apply to persons invoiced in the supply chain for fund administration services, but who do not in substance carry out the services themselves (for example, the Principal Manager of a Scheme who may collect a fee, but has outsourced provision of administration services on an arm’s length basis).
- The Director will accept that a General Partner of a collective investment scheme is “connected” to the underlying Limited Partner(s). Accordingly, any income received from the LP by the GP, for direct provision of fund administration services, will be taxed at 0%. Similarly, should the GP outsource the provision of administration services to an administrator that shares common beneficial owners with the GP, the parties are “connected” and the income received by the administrator will be taxed at 0%. However, if there was not common beneficial ownership between the GP and the administrator, the income of the administrator would be taxed at the 10% rate.
Where a business has more than one income stream (for example, from the provision of a mixture of fund administration services, fiduciary services and insurance services), or receives income in respect of the provision of fund administration services from both “connected” and “unconnected” parties, its net profit should be apportioned between the 0% and 10% rates on a reasonable basis. There is a further Statement of Practice that provides guidance on what the Income Tax Office considers acceptable.
It should be noted that, as is commonly the case in Guernsey tax legislation, the definition of “connected” is based on shareholder control.
For example, two companies will be “connected” if they have a majority of shareholders in common and a Partner is “connected” to the Partnership in which they are a Partner. Any income paid by one such connected party to another, even in respect of fund administration services, will continue to be taxed at the 0% rate.
However, two companies controlled by identical Boards of Directors, but with different shareholders, are not “connected”. Any income received by one such company from the other, in respect of fund administration services, would be subject to the 10% rate.
If you require any advice in connection with the impact of this statement of practice on your business please contact one of our directors.
Colin Jeffreys, FCCA
20 July 2015
This article has been prepared as a general guide. It is not a substitute for professional advice. Neither Collenette Jones Limited nor its directors or employees accept any responsibility for loss or damage incurred as a result of acting or refraining to act upon anything contained in or omitted from this document.