Guernsey’s zero-10 tax regime approved by EU

The offshore domicile’s corporate tax regime, which was deemed harmful by EU officials earlier this year, has now been given a blessing by its mainland neighbour.

The European Union has approved Guernsey’s updated zero-10 corporate tax regime, which the industry feared could lead to taxes increasing for the island’s fund administrators and fund management companies.

However a source who agreed to speak under the condition of anonymity said despite the threat of a potential tax raise on Guernsey professional services firms, there was little to worry about as the island would not likely put itself at a competitive disadvantage to rival jurisdictions. 

Back in April the European Union’s Code of Conduct Group on business taxation ruled that Guernsey’s regime was “harmful”, taking exception to the element known as ‘deemed distribution’, as it effectively created a two tier tax system for residents and non-residents. 

The regime sets the tax rate for all companies, both owned by residents and non-residents, at zero percent. But profits distributed from companies owned by local shareholders are taxed at 20 percent – known as a deemed distribution – where as profits distributed from non-resident companies were not taxed.

Guernsey agreed to repeal this provision from its regime starting from January 2013 and the EU’s Economic and Financial Affairs Council formally ratified the regime as compliant with the EU Code of Conduct.

During the review period, concerns were raised that fund administration and fund management companies could suffer higher taxes as a way for the island to recoup lost tax revenue from not charging local shareholders a 20 percent tax rate on dividends.