EU calls Guernsey’s zero-10 tax regime ‘harmful’

The offshore domicile’s corporate tax regime has been deemed harmful by EU officials, a decision which may affect private equity fund management and fund administration companies on the island.

The European Union’s Code of Conduct Group on business taxation has ruled that Guernsey’s zero-10 tax regime is “harmful”; the group had previously ruled similarly on Jersey’s and the Isle of Man’s regimes.

The tax rate for all companies, both owned by residents and non-residents, is zero percent but profits distributed from companies owned by local shareholders are taxed at 20 percent. 

This 20 percent is known as ‘deemed distribution’ and is what the EU believes is harmful, as it effectively creates a two tier tax system for residents and non-residents. 

“The obvious solution to make the regime compliant is to remove this deemed distribution element, which is the solution that Jersey and the Isle of Man have already adopted,” a source close to the matter said.

If so, it could mean that fund administration and fund management companies are taxed to recoup lost tax revenue Guernsey faces by not charging local shareholders a 20 percent tax rate. 

“In Guernsey the 10 percent only covers banking profits whereas in Jersey the 10 percent is wider, covering fund administration companies and so on,” said the source. “This could be a possibility for Guernsey if they lose the deemed distribution element and the tax take. This is a way they could be looking to recoup some of that money.”

Despite any changes, funds will remain untaxed as the government is expected to later this year expand its tax exempt regime for collective investment schemes to include “any vehicle which is part of a fund structure”, according to a statement from Guernsey Finance, a state-backed trade association.