KEY TAKEAWAYS
In 2021, both Guernsey and Jersey implemented legislation extending economic substance to partnerships. The legislation brought partnerships into scope of economic substance requirements for accounting periods commencing on or after 1 January 2022, although partnerships formed on or after 1 July 2021 became in scope immediately on formation where they conduct activities that trigger the economic substance requirements. Walkers' briefing on the Guernsey legislative changes can be found here.
Following the extension of the legislation, Guernsey and Jersey (along with the Isle of Man) published joint guidance on the application of economic substance requirements to partnerships (the "Partnership Guidance"), which can be found here. This briefing summarises what the Partnership Guidance covers and how it provides further clarity on the extension of economic substance requirements to partnerships
The Partnership Guidance provides useful clarity and detail on the following key points of the Guernsey/Jersey economic substance regimes.
Economic substance requirements apply in Guernsey/Jersey where a partnership is treated as being "resident" in Guernsey/Jersey (as they case may be). Partnerships are generally fiscally transparent and so are typically not treated as tax resident entities (although some jurisdictions have election regimes to allow taxation at the partnership level).
Guernsey/Jersey substance legislation therefore needs to deem a partnership to be "resident" somewhere in order to apply economic substance requirements where appropriate, and adopts the concept of POEM to achieve this.
Broadly, a Guernsey/Jersey law partnership (being one that is formed under Guernsey/Jersey law, as applicable) is "resident" in Guernsey/Jersey for substance purposes, unless its POEM is located in a "qualifying jurisdiction" (see further below on this concept). Equally, a foreign law partnership is "resident" in Guernsey/Jersey for substance purposes if its POEM is located in Guernsey/Jersey.
POEM is an internationally recognised tax concept. POEM is defined in the economic substance legislation in Guernsey/Jersey, and the Partnership Guidance helpfully confirms that the Guernsey/Jersey substance legislation follow OECD guidelines on POEM, being "the place where key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made." POEM is therefore very much a question of fact. For limited partnerships ("LPs"), this will typically be where the board of the general partner make their decisions in relation to the LP.
The Partnership Guidance also confirms that a partnership may only have one POEM at any one time, even if there are multiple places of management – the core issue being, taking everything into account, where the partnership is actually managed. POEM is therefore ultimately a question of fact and degree, and as there is no set test, the Partnership Guidance provides some useful examples varying in complexity, to help businesses ascertain POEM.
The Partnership Guidance also contains a helpful set of relevant factors which can help ascertain the POEM in cases of uncertainty.
As stated above, a Guernsey/Jersey law partnership is "resident" in Guernsey/Jersey for substance purposes, unless its POEM is located in a "qualifying jurisdiction".
A "qualifying jurisdiction" is a jurisdiction where:
The Partnership Guidance contains a list of jurisdictions that are considered to have substantially similar substance requirements, which include Bermuda, BVI, Cayman Islands, Guernsey, Jersey and UAE. The full list of qualifying jurisdictions in the Partnership Guidance is kept under review and jurisdictions will be added/removed as appropriate.
Under legislation, the requirement that the activities of the resident partnership (that trigger substance) must be directed and managed in the relevant Island falls on the "governing body" of the partnership (as opposed to the board of directors, in the case of a company). The Partnership Guidance provides further details on that governing body, confirming that it is the person or group of persons responsible for making the partnership's strategic and management decisions. The Partnership Guidance also confirms that:
However, the governing body is ultimately a question of fact and so the above may not be the case in all circumstances, especially where there is evidence of substantive decision making taking place by other persons.
The Partnership Guidance also provides useful further details, including examples, on the three exemptions applicable to Guernsey/Jersey resident partnerships, being:
The Partnership Guidance provides useful clarity on the economic substance requirements for partnerships, especially in relation to POEM and the identity of the governing body. By confirming that Guernsey/Jersey substance legislation follows OECD guidelines on POEM, businesses can benefit from OECD guidance and commentary on this concept.
As some partnerships are already subject to economic substance requirements, businesses should be taking steps now to check whether or not they are in-scope of the economic substance requirements, and if so, to ensure that they can readily comply.
Walkers has a dedicated experienced Regulatory & Risk Advisory team that can offer bespoke privileged legal advice and guidance in connection with all aspects of the Channel Islands' regimes for economic substance, including POEM, company tax residence and compliance.
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