Setting Up and Operating in Guernsey

An introduction for fund managers

Originally published in the December 2006/January 2007 issue

Why Guernsey?

Guernsey is a leading financial centre of the highest reputation and standards. Its continuing success as a financial offshore centre is based on various factors, including economic and political stability, the independence it enjoys, an easily accessible justice system and an independent regulatory regime. It's low tax status, proximity to the financial markets of Europe and sophisticated financial industry infrastructure also contribute to its success. The well established financial services industry which broadly comprises banking, insurance, investment and fiduciary sectors is serviced by a comprehensive infrastructure of highly qualified lawyers, accountants, trust and estate practitioners. The island is also ideally suited geographically being within the European time zone and conveniently placed between the US and Far East time zones. It is serviced by regular flights to and from Gatwick airport and enjoys reliable high quality communication links.

Regulatory Framework

Whilst the finance industry in Guernsey is of the highest repute and regulation and supervision is in place to maintain this reputation, protect all parties and ensure the smooth running of the industry, the island does not suffer from overregulation and the cumbersome, costly and time consuming requirements that often result from overregulation. The finance sector in Guernsey is regulated and supervised by the Guernsey Financial Services Commission (the "Commission"), whose primary objective is to regulate and supervise financial services in Guernsey, with integrity and efficiency. In doing this it plays an important part in upholding Guernsey's international reputation as a finance centre.

The establishment and operation of investment managers in Guernsey is governed by the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, (the "POI Law") together with the rules made there under.

Under the POI Law persons carrying on "restricted activities" in connection with "controlled investments" in or from within the Bailiwick of Guernsey, by way of business, must obtain a licence. The activities of investment managers, including, inter alia, management, dealing, administrationand advising, fall within the definition of "restricted activities" and as these are generally conducted in connection with "controlled investments", which include collective investment schemes and general securities and derivatives, it is necessary to apply to the Commission for a licence.

It is not necessary for an investment manager to have a physical presence on the island, however it will still require a licence under the POI Law if it carries on the controlled investment business referred to above. An investment manager established as a Guernsey company will require a licence under the POI Law even if it is only carrying on controlled investment business in or from within countries or territories outside of the Bailiwick of Guernsey.

An investment manager established as a Guernsey company will need to be administered by an appropriately licensed Guernsey administrator if it does not have a physical presence on the island. Once licensed, an investment manager is required to comply with the Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules 1998 (the "FNCC Rules"). While providing an appropriate level of regulation the compliance requirements in Guernsey are not as burdensome as in the United Kingdom and in contrast to the FSA Handbook the FNCC Rules are concise and run to a mere 25 pages.

In a step that streamlines the application process and prevents the potential wastage of time and costs it is possible, in advance of a formal application, to make an informal approach to the Commission which may include a preliminary meeting. Potential licensees who do not appear to meet the Commission's expectations will be discouraged from making a formal application. A formal application will comprise of the completion and submission of a form and personal questionnaires in respect of directors, managers and various other officers of the company together with an application fee of £1400.

A licence under the POI Law is issued in the form of a letter setting out the categories of investment business the new licensee may deal with and the restricted activities it may undertake in connection with that business. Conditions may be imposed on the licence.

Upon licensing, an annual licence fee becomes payable. This fee is presently set at £1400. It is to be noted that the Commission, as a matter of practice, requires an investment manager to have the equivalent of £10,000 issued capital. The FNCC Rules also set out an ongoing financial resources requirement that will apply to an investment manager. This financial resources requirement will differ depending on whether the investment manager has an established physical presence on the island or not.

Tax Regime

One of the favourable aspects of conducting business in Guernsey is its tax regime. Whilst it is currently possible to select one of three different tax regimes for a Guernsey Company, taxation in Guernsey is presently under review.

Unless otherwise elected the first regime will apply and a company incorporated in Guernsey will automatically be treated as resident in Guernsey for tax purposes and will be assessed to income tax at the rate of 20% on all income and trading profits. In the event that none of the beneficial owners of a company are resident in Guernsey for tax purposes, an application can be made to take advantage of beneficial tax treatment and a company may elect either to be treated as a tax exempt company or an International Company.

Exempt status is granted under The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. Exempt companies enjoy the advantage of paying no tax in Guernsey on income arising outside of Guernsey and, by concession, on bank interest arising within the island. Companies enjoying this status are required to pay an annual fee of £600. It should be noted that if a company carries on trade in the island through an established place of business in Guernsey, income tax will be chargeable on the profits derived from those activities. Whilst an investment manager with a physical presence in Guernsey may qualify for tax exempt status it will be subject to Guernsey income tax on its profits arising from the business carried on in the island. However, the tax authorities take a pragmatic view of what is Guernsey source income and, where income is generated as a result of international business, regard such income as non-Guernsey sourced and non-taxable.

There are also various guidelines which have been issued by the tax authorities which are of assistance.

The provision of administrative or accounting functions in Guernsey, will not, of itself, constitute the establishment of a place of business on the island. Furthermore, directors of a tax exempt company may hold board meetings in Guernsey and contracts can be negotiated and executed in Guernsey without incurring any liability to Guernsey income tax. The Administrator of Income Tax takes the view that whether or not a company is carrying on business in Guernsey is a question of fact and that each case should be judged on its merits. An investment manager that does not have a physical presence on the island will, subject to being taxed on Guernsey source income, be able to receive the benefit of tax exempt status.

The third regime that is in place is by virtue of the Income Tax (International Bodies) (Guernsey) Law, 1993 which provides that a Guernsey or overseas incorporated company owned by non residents may be used to conduct international trading activities generating income derived exclusively from non residents of Guernsey. Subject to meeting certain conditions such a company may qualify as an International Company and be treated as resident in the island for tax purposes but taxed at a rate between 0% and 30% but not zero. This tax rate is agreed with between the Administrator of Income Tax and the applicant.

Guernsey's corporate taxation structure is presently under review with changes to take effect in 2008. Resolutions have now been adopted which provide that, from 1 January 2008, companies other than banks or utilities will not be liable to income tax.

Furthermore, individuals resident in Guernsey will have their tax on non-Guernsey income capped at £250,000; equivalent to an income of £1,250,000. Together, these new tax laws provide an attractive package to investment managers locating in Guernsey.


Guernsey company law is flexible in respect of director requirements and whilst a Guernsey company must have at least one director, directors may be individuals or corporate entities and there is no requirement for directors to be resident in Guernsey.

Subject to a company's memorandum and articles of association, directors of a Guernsey company will be deemed to be present at a meeting provided that each director participating can hear or read what is communicated by each of the others. A meeting shall be deemed to be held in the place where the chairman is present.

Whilst directors of the investment manager will be required to submit a form to the Commission containing personal information, there are no director qualification requirements. Whilst not necessarily a director requirement, in the event that the investment manager is to establish a presence on the island the Commission will expect there to be at least two directors or persons employed by the company on the island, in order to satisfy the Commission's "four eyes" requirement. Where the company engages a local administrator, "four eyes" will often be provided by that administrator.

Markets in Financial Instruments Directive ("MiFID")

MiFID is an EU directive attempting to regulate conduct of business requirements in a detailed manner and aims to arrive at a framework of detailed rules that are consistently applied across the EEA. It is an attempt to standardise conduct of business across member states and as such will introduce changes to the member state's regulatory regimes.

Guernsey does not form part of the United Kingdom but is a self-governing dependency of the British Crown and by constitutional convention the island has complete autonomy in matters of internal government. The island's special constitutional position has been recognised by the European Union in a protocol (No.3) attached to the United Kingdom's treaty of accession to the EU. The protocol provides that the Treaty of Rome shall apply to Guernsey only to the extent necessary for the free movement of goods. Accordingly, European Union directives on fiscal harmonisation, financial services and company law do not have affect in Guernsey.

As such Guernsey will not be subject to MiFID and investment managers as a result will benefit from not being subject to a further increase in compliance requirements.

Channel Islands Stock Exchange

In order to extend the range of services it provides, an investment manager may wish to become a listing or trading member of the Channel Islands Stock Exchange ("CISX"). Under the CISX rules it is also possible for a trading member to apply for registration as a market maker in any number of listed securities.

The Guernsey based CISX was established in 1998 as a joint venture between Guernsey and Jersey to complement the existing range of services already available locally. Whilst it plans to extend the range of products and services provided it has to date concentrated on specialist securities, investment funds, primary and secondary listing of securities and shares issued by companies and Channel Islands Depository Receipts.

The CISX is regulated by the Commission and is a well recognised exchange. It is an Affiliate Member of the International Organisation of Securities Commissions and is registered with the World Federation of Exchanges as a "corresponding market". Amongst other recognitions it is approved by the UK Financial Services Authority as a Designated Investment Exchange within the meaning of the Financial Services and Markets Act 2000, has been designated as a Recognised Stock Exchange under Section 841 of the Income and Corporations Taxes Act 1988 and the US Securities and Exchange Commission has designated the CISX as a Designated Offshore Securities Market, within the meaning of Rule 902(b) under Regulations of the Securities Act of 1933.

It has recently announced its 1000th listing.

Data Protection

The Data Protection (Bailiwick of Guernsey) Law, 2001 (the "Data Law") came into force in 2001 having been designed to comply with the 1995 EU Data Protection Directive. It is based on the 1998 UK Act and the introduction of the Data Law has resulted in the Bailiwick of Guernsey being recognised by the European Commission as providing adequate protection for the trans-border flow of data.

The Data Law provides for the rights of data subjects and requires data controllers to be registered on a register maintained by the Data Commissioner.

Housing and Right to Work

In addition to Guernsey's progressive and favourable financial industry infrastructure offering commercial benefits, it is also to be noted that the residents of the island who service the financial industry enjoy a high standard of living, favourable weather conditions and picturesque surroundings.

There is no control over the ownership of property in Guernsey, however the occupation of dwellings is subject to certain restrictions as governed by the Housing (Control of Occupation) (Guernsey) Law, 1994, as amended (the "Housing Law").

The property market in Guernsey is divided into "Open Market" and "Local Market" properties. The right to occupy dwellings on Guernsey apart from those inscribed on the "Open Market" Housing Register is controlled.

Except in the case of persons occupying certain types of dwellings, including"Open Market" dwellings as referred to above and certain "qualified residents", subject to the provisions of the Housing Law, no person may occupy or permit another person to occupy a dwelling in Guernsey otherwise than under and in accordance with the conditions of a licence.

Although restrictions are in place on some housing it is a straight forward process for persons to take up accommodation in Open Market accommodation and obtain the right to work documentation mentioned below.

Employment in Guernsey is governed by the Right to Work (Limitation and Proof) (Guernsey) Law 1990 (the "Right to Work Law").

Whilst there are certain exceptions, under the Right to Work Law every person who is in employment in Guernsey must be the holder of a currently valid right to work document.