digital storm /
8 April 2019Analysis

BEPS and substance requirements: Hugh’s views

Good news for the captive community. In March 2019 the EU Council’s Code of Conduct Group and the European Council of Finance Ministers (ECOFIN) confirmed that that the island has satisfied its legal substance requirements for entities operating in or through the jurisdiction. Earlier, Guernsey had fully satisfied the OECD BEPS (Basis Erosion and Profit Shifting) requirements, which were a rather lower set of criteria.

We interpret that to mean that captives in Guernsey relying on management companies, and that take sufficient risk, satisfy the requirement for substance. That is an important development for Guernsey captive owners, and could, by extension, give some comfort to captive owners using contract management companies in other domiciles.


The OECD’s pronouncements against BEPS included a vaguely worded requirement that worried captive owners about substance. That was that a captive had to demonstrate substance in the captive domicile. If this meant a requirement for full time personnel, that would have spoiled the widespread practice of outsourced management to captive management companies.

Another concern about OECD’s substance requirement was that every company would have to demonstrate sufficient activity in the captive domicile to justify the profits generated in the domicile.

Guernsey, a domicile that has often led others in captive regulation, has had their own substance requirements accepted by the OECD, and now by ECOFIN. They included two things that interest us. One was a specific reference to outsourced management. They also mentioned the notion of risk exposure as part of the demonstration of substance. The relevant text from the proposed requirements is quoted below, with the two relevant sections heighted in bold italics.

“We are Guernsey”, the domicile’s publication under which Guernsey Finance promotes the island's financial services sector, says the following on economic substance:

Substance Requirements

Companies that carry out relevant activities, other than IP and pure equity holding companies, must comply with the following:

  • the company is directed and managed in Guernsey, which includes:
    • there must be board meetings in Guernsey at adequate frequencies (given the level of decision making required) during which there must be a quorum physically present in Guernsey;
    • strategic decisions of the company must be set at these board meetings and the minutes must reflect those decisions;
    • all company records and minutes must be kept in Guernsey; and
    • the board, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board;
  • the company's core income generating activities ("CIGA") are undertaken in Guernsey;
  • there are adequate and appropriately skilled personnel in Guernsey;
  • the company has adequate annual expenditure and physical presence in Guernsey to reflect the amount of profits attributed to Guernsey.

The CIGA referred to above will depend on the relevant activity carried out and will reflect the different needs of the companies involved and the risk exposure, and will be aligned to international standards identified by the OECD's Forum on Harmful Tax Practices ("FHTP"). The States of Guernsey Revenue Service (the "Revenue Service") will provide public guidance that will, where appropriate, build on any existing regulatory requirements relating to local substance.

It is expected that outsourcing of CIGA and other activities to another entity within … Guernsey will be permitted. Therefore, a company should be able to meet requirements relating to premises and personnel where a Guernsey-based administrator provides the appropriate premises and personnel. Companies that outsource CIGA will need to ensure that they are properly supervising and overseeing the outsourced activity. An anti-avoidance provision will be introduced to ensure that outsourcing cannot undermine the principles and purpose of the regime.

Hugh’s Views: Other offshore domiciles will be moving to replicate Guernsey’s success which, although only valid in the EU,  should, by extension, satisfy BEPS criticisms in all jurisdictions. The text cited in our box could serve as a template. And it is surprising that Bermuda ended up on the EU “black list” in this regard.