What are the substance requirements for Guernsey companies?

## Guernsey Economic Substance Requirements 2026

Guernsey introduced mandatory economic substance requirements under the Economic Substance (Companies and Limited Partnerships) (Guernsey) Law 2018, effective from 1 January 2019. The rules were introduced in response to the EU Code of Conduct Group's assessment of zero-tax jurisdictions.

## Which Companies Must Comply?

• Banking
• Insurance
• Fund management
• Finance and leasing
• Headquarters
• Shipping
• Holding company
• Intellectual property (IP)
• Distribution and service centre

Note: a company can be subject to substance requirements for multiple relevant activities simultaneously.

Pure trading companies (e.g., a Guernsey-based retail or services business trading with Guernsey customers) are not subject to the substance rules — they fall outside the 9 relevant activities.

## The Three-Part Substance Test

### Test 1: Directed and Managed in Guernsey

The company must be directed and managed in Guernsey. This means: - Board meetings must be held in Guernsey - A quorum of directors must be physically present in Guernsey at board meetings - Directors must have adequate knowledge and expertise to make strategic decisions - Minutes must record the decisions made and confirm directors were present in Guernsey - The majority of strategic decisions must be made in Guernsey

Video conference board meetings where directors dial in from overseas generally do not satisfy this test.

### Test 2: Core Income-Generating Activities (CIGA) Conducted in Guernsey

The key income-producing activities for the relevant activity must be carried out by Guernsey-based people. Examples:

| Relevant Activity | Core Income-Generating Activities | |------------------|-----------------------------------| | Holding company | Acquiring and managing equity participations; strategic decisions | | IP company | R&D oversight; development, enhancement, exploitation decisions | | Finance/leasing | Agreeing terms; managing risks; managing assets | | Fund management | Taking investment decisions; risk management | | Headquarters | Providing group services; managing material risks |

### Test 3: Adequate Employees, Expenditure and Physical Presence

The company must have: - An adequate number of employees in Guernsey (proportionate to the activity) - Adequate operating expenditure in Guernsey - Adequate physical premises in Guernsey

These are proportionality tests — a £50m fund management company must have more substance than a holding company with two investments.

Outsourcing is permitted provided: - The CIGA are genuinely conducted in Guernsey - The company maintains oversight and control of outsourced activities - The outsourced service provider is in Guernsey - Resources (employees, expenditure) are counted at the outsourced entity

## Reduced Substance for Pure Equity Holding Companies

This is a significant concession for passive holding structures.

## IP Companies: The Highest Scrutiny

IP companies earn the highest scrutiny. The OECD's Nexus Approach requires that the IP income must be connected to genuine R&D activity conducted by the company. A Guernsey company that acquires IP without performing R&D, and earns royalties, faces strict analysis. The substance test for IP requires real R&D, development, and exploitation decisions to be made in Guernsey.

## Annual Substance Declaration

All Guernsey tax-resident companies must file an annual substance declaration as part of their corporate tax return. The declaration covers: - Whether the company carries on any relevant activity - If yes: evidence on each of the three tests - Number of Guernsey employees and their qualifications - Total operating expenditure in Guernsey - Description of CIGA conducted in Guernsey

## Penalties for Non-Compliance

| Year of Non-Compliance | Penalty | |-----------------------|---------| | First year | £10,000 | | Subsequent years | £100,000 | | Continued non-compliance | Referral to EU Code of Conduct Group / OECD |

Referral to the OECD or EU can result in the company's home jurisdiction being notified and the company's Guernsey tax advantage being challenged at the international level.