Contributed By Ferbrache & Farrell LLP
Guernsey has developed over the last 50 years into one of the leading offshore financial centres within the European time zone, offering a platform from which funds can be launched and managed. The Guernsey funds industry services clients from all over the world. It boasts a safe political and fiscal environment (having an allegiance to the British Crown while also maintaining independence from the UK parliament), with a robust but light-touch regulatory framework.
While Guernsey initially set up its finance industry in the late 1960s and early 1970s to cater for the banking industry, its flexibility, desire and necessity to attract developing alternative asset management industries has seen it grow into a highly recognised premier centre for offshore funds, built on the basis of the track record, experience and flexibility of its service providers and the great degree of interaction between the government, the regulator and the industry.
Assets under management and/or administration in Guernsey currently stand at approximately GBP295 billion. The funds industry is supported by professionals covering all services from asset, private equity or hedge fund managers with front desk management and operations in Guernsey to outsourced services dealing with managerial oversight function, lawyers, accountants and risk managers, as well as administrators, custodians and banks. Those service providers range from small, bespoke and highly specialised, independent service providers (eg, private equity or listed fund specialist administrators) to very large, international or global financial services groups with fund operations in Guernsey. In addition, Guernsey has cultivated a very strong pool of independent non-executive directors over the last few years who are able to provide the management and oversight of activities. All these individuals are fully aware of their duties and obligations, including their corporate governance role in effective management of companies, thus providing, in addition to the strength of the service providers, the required substance in an offshore financial centre. Guernsey provides a full scope of services to Guernsey funds, from “cradle to grave”.
The most common alternative funds established in Guernsey include private equity and venture capital, debt, mezzanine, real estate, commodities and precious metals, wine, classic cars, credit and loan origination and peer to peer, infrastructure, distressed debt and assets, renewable energy and green, forestry as well as a small number of hedge funds.
The structures most typically used for alternative funds in Guernsey are limited companies, protected cell companies, incorporated cell companies and limited partnerships (the latter are particularly common in private equity funds). Unit trusts are also often used for real estate investment funds. Many Guernsey alternative funds are listed locally, in the UK or elsewhere.
While there are a number of bespoke structures, Guernsey’s funds regulatory environment can be summarised into two very simple strands:
One of the main distinctions between authorised and registered funds is whether the principals and investors of the fund wish to benefit from the additional comfort of the GFSC formally reviewing and approving the parties and the documentation, or whether they are happy to rely on the activity being delegated on behalf of the GFSC to the Guernsey regulated administrators. The other distinction is the time to market – full GFSC-authorised approval generally takes an estimated six to eight weeks while the GFSC will usually grant the manager’s licence within 10 working days and the fund’s registration within a further three business days under the expedited registered approval process.
Alternative funds can be categorised as follows:
Authorised closed-ended funds are subject to ongoing supervision by the GFSC.
Registered alternative funds must not be offered directly to the public in Guernsey. They may, however, be offered to regulated entities in Guernsey, or offered to the public by entities appropriately licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (POI Law).
An open-ended registered investment fund must appoint a custodian in order to safeguard the assets of the fund. A closed-ended registered investment fund may, but is not required to, appoint a custodian.
Qualifying Investor Funds
An authorised open-ended or closed-ended investment fund may be authorised as a qualifying investor fund (QIF). This means, however, that only “qualified investors” are able to invest in the fund.
A qualified investor is deemed to be able to evaluate the risks and strategy of investing in a QIF and to bear the economic consequences of investment in the QIF, including the possibility of any loss arising from the investment. The GFSC considers that professional investors, experienced investors and/or knowledgeable employees constitute qualified investors.
A professional investor includes:
An experienced investor is a person, partnership or other unincorporated associate or body corporate which has in any period of 12 months (whether on his, her or its own behalf or in the course of his, her or its employment by another person) so frequently entered into transactions of a particular type in connection with:
being transactions of substantial size entered into with, or through the agency of, reputable persons who carry on investment business, that he can reasonably be expected to understand the nature of, and the risks involved in, transactions of that description or who provides a certificate from an appropriately qualified investment adviser confirming that the investor has obtained independent advice.
A knowledgeable employee includes:
The GFSC will expect investors into a QIF to provide certain warranties or confirmations that, among other things, the QIF has been established in Guernsey and is only suitable for investors who satisfy the definition of qualified investors; the investors will not acquire an interest in the QIF for the benefit of any person who is not a qualified investor; the investor has read and understood the offer documents of the QIF (including the risk warnings disclosed) and that investing in the QIF may involve special risks that could lead to a loss of all or a substantial portion of any investment the investor makes in the QIF.
Private Investment Funds
Private investment funds (PIFs) were introduced in 2016 to recognise categories of funds where management has a closer relationship to the investor than is typical in most funds. PIFs cannot have more than 50 investors at any one time, unless investment in the PIF is made by an investment manager acting as agent for a wider group of stakeholders.
Manager Led Products
The “Manager Led Product” (MLP) was also introduced in 2016 to be used by alternative investment fund managers (AIFMs) which are licensed by the GFSC and which are seeking to market alternative investment funds in an EU member state under its national private placement regime. The MLP may apply to open- or closed-ended funds and it is particularly suited to AIFMs that have structured their investment funds with the use of a management company (for example, a super management company dealing with the operation, administration and regulatory compliance of the fund, or a general partner to limited partnerships). The advantages of the MLP are that it avoids any regulatory duplication with respect to licensees, it provides a more efficient road to market, and it may also result in reduced administrative costs as a result of associated licensees not being subject to any rules.
Guernsey’s regulatory regime also allows for Guernsey service providers to offer management, administration or custody services to non-Guernsey investment funds. Exemptions are also available in specific circumstances for the promotion of non-Guernsey funds (see 4.3 Rules Concerning Marketing of Alternative Funds, below).
Funds can be set up in Guernsey to act as loan originators to potential borrowers. The loan origination must form part of the investment strategy and policy which is described in the fund’s offer document and adopted by the fund board. There are no special rules that apply to funds acting as loan originators and providing loans or other facilities on a P2P or B2B or other basis. The GFSC would assess any application on its individual merits looking to ensure that key controls are appropriate.
There are no legal or regulatory restrictions placed on funds investing in cryptocurrencies or other non-traditional assets. Provided the investment strategy and policy, and risk factors, are included in an offer document, there are no overall restrictions. However, the GFSC issued a statement on 27 February 2018 on virtual currencies, cryptocurrencies and Initial Coin Offerings (ICOs) stating that it believes that there are significant risks involved in investing in virtual or cryptocurrencies, especially for retail customers, but that professional investors with a high-risk appetite may wish to invest in this development sector. The GFSC would, however, assess any application on its individual merits looking to ensure that key controls are appropriate – for example, around custody, liquidity, valuation of assets and investor information.
The standard process for obtaining regulatory approval from the GFSC in respect of alternative funds can be broken down into three stages:
The GFSC has provided the timeframes above as an indication only and is not bound by these.
A fast-track application process is available for registered closed-ended funds and QIFs (three business days) and PIFs (one business day). The timings for these applications may take longer, however, if the GFSC needs to request further documentation or information.
Except for funds which are established as PIFs, there are no legal or regulatory requirements to have a Guernsey investment manager managing a Guernsey fund. Traditionally, and as a matter of practice, funds set up as limited partnerships will have a Guernsey general partner so that they can be, and be seen as, managed from Guernsey following all Guernsey legal and regulatory requirements for their set-up.
There are no legal or regulatory obligations to have local directors for corporate funds. However, it is standard practice and there is a general expectation by the GFSC that at least one local director will be appointed to the board of the fund. Local managers (including general partners) regulated by the GFSC acting in respect of Guernsey funds will need at least two Guernsey-based directors in order to provide the local regulatory “four eyes” requirement. With regards to the implementation by Guernsey of the substance requirements of the EU Code of Conduct Group, Guernsey has adopted legislation and guidance notes setting out the substance requirements for substantial economic presence in Guernsey. Local entities, such as managers and general partners that manage local funds, need to be directed and managed in Guernsey and carry on their core income-generating activities (CIGA) in Guernsey, with the appropriate level of qualified employees, expenditure and physical presence in Guernsey. There are no prescriptive requirements to hire local employees, since entities such as fund managers and general partners may outsource part of their activities to, among others, local service providers, provided the CIGA remains in Guernsey. As a matter of law, a Guernsey limited partnership must have a general partner, but that general partner does not need to be a Guernsey entity.
All Guernsey-domiciled alternative funds must be administered by an administrator which is both resident and licensed in Guernsey. In addition, open-ended funds must have a Guernsey-based custodian for the purpose of safeguarding the fund’s assets. Closed-ended alternative funds are not strictly required to have a custodian but may choose to have one. The GFSC is willing to consider a non-Guernsey-domiciled custodian for registered funds, PIFs and hedge funds.
Financial services businesses in Guernsey are subject to the GFSC’s Handbook on Countering Financial Crime and Terrorist Financing (the Handbook). The Handbook requires that such businesses appoint a money-laundering compliance officer (MLCO), a money-laundering reporting officer (MLRO), a compliance officer and a nominated officer. The MLRO and MLCO must be natural persons who are at least manager level and have the appropriate knowledge, skill and experience, as well as being resident in the Bailiwick of Guernsey. The MLRO and MLCO should be employed by the relevant entity or by another entity in its group. Alternatively, these roles can be fulfilled by persons who are employed by the manager or administrator appointed by the alternative fund.
As mentioned in 2.9 Rules Concerning Other Service Providers, the GFSC is willing to consider a non-Guernsey-domiciled custodian for registered funds, PIFs and hedge funds. The GFSC will be willing to waive the requirement for a locally licensed custodian and designate a prime broker as custodian for institutional and expert investor funds if that prime broker is regulated in an acceptable jurisdiction and has substantial net worth. Where the alternative fund is targeted at retail and less sophisticated investors, the GFSC would normally require a traditional custodian to exercise essential oversight of the fund manager and to be a licensed Guernsey institution. The GFSC may be prepared to waive these requirements if the fund’s property is held by a prime broker which is regulated in an acceptable jurisdiction and has substantial wealth, if it can be satisfied that the custodian’s role in overseeing the fund manager will be subject to monitoring by the custodian’s regulatory authority.
Alternative funds structured as limited companies will be subject to the standard company rate of income tax, currently 0%, unless they obtain tax-exempt status. Tax-exempt structures are not considered to be resident in Guernsey for income tax purposes and are therefore exempt from tax in Guernsey on both bank deposit interest and any income that does not have its source in Guernsey. Limited partnerships and unit trusts are not subject to Guernsey tax.
Guernsey currently does not levy taxes upon capital such as inheritances, capital gains, gifts, capital transfers or wealth, nor are there any estate duties (save for registration fees and where a Guernsey Grant of Representation is required). No stamp duty or other taxes are chargeable in Guernsey on the issue, transfer, disposal, conversion or redemption of shares. There is no sales tax, GST or VAT in Guernsey.
Shareholders not resident in Guernsey for tax purposes will not be subject to income tax in Guernsey in respect of or in connection with the acquisition, holding or disposal of any shares owned by them and will receive dividends without deduction of Guernsey income tax.
Any shareholders who are resident for tax purposes in the Islands of Guernsey, Alderney or Herm will be subject to income tax in Guernsey on any dividends paid on shares owned by them, but will suffer no deduction of tax by a company from any such dividends payable by that company where the company is granted exempt status. The company is required to provide the Director of Income Tax in Guernsey with such particulars related to any distribution paid to Guernsey-resident shareholders as the Director of Income Tax may require, including the names and addresses of the Guernsey-resident shareholders, the gross amount of any distribution paid and the date of payment. The Director of Income Tax can require the company to provide the name and address of every Guernsey resident who, on a specified date, has a beneficial interest in the shares in the Company, with details of the interest.
Guernsey has a wide-ranging anti-avoidance provision which targets transactions where the effect of the transaction or series of transactions is the avoidance, reduction or deferral of a Guernsey tax liability. At his or her discretion, the Director of Income Tax will make such adjustments to the tax liability to counteract the effects of the avoidance, reduction or deferral of such Guernsey tax liability.
Tax Treaty-related Measures
Guernsey is committed to adopting the Base Erosion and Profit Sharing (BEPS) minimum standards and has implemented country-by-country reporting in respect of accounting periods commencing on or after 1 January 2016, as well as adopting the spontaneous exchange of tax rulings with other jurisdictions. Guernsey, along with over 60 other jurisdictions, signed the OECD’s Multilateral Instrument to implement tax treaty-related measures to combat BEPS and treaty abuse on 7 June 2017. In particular, Guernsey implemented BEPS Action 5 with regards to legal substance requirements, by adopting new legislation with effect from 1 January 2019 imposing new economic substance requirements for resident companies undertaking specified activities, including fund management. Investment funds are not, however, subject to the substance requirements.
Guernsey has entered into full double-taxation treaties (DTAs) with 13 jurisdictions and partial DTAs with 12 jurisdictions. In addition, Guernsey has signed 60 tax information exchange agreements to date. Alternative funds would, where relevant, qualify for benefits under the relevant treaty except where such DTA is solely in respect of individuals.
Alternative funds often establish subsidiaries for the purposes of holding investments. They can be used to separate different types of investments or assets, to isolate riskier investments from others or the fund itself, to make it easier for funds to sell or transfer assets or to raise capital or financing.
Subject to the restrictions imposed by sanctions issued by international or European bodies and those issued by the GFSC, promoters/sponsors of alternative funds in Guernsey originate from most jurisdictions. Typically, the promoters/sponsors of Guernsey alternative funds originate from mature jurisdictions such as the UK, the US, mainland Europe, the Nordic countries, the Middle East and the Far East, as well as from emerging markets where the investment strategy is to invest in that asset class.
Subject to the same sanctions and restrictions set out in 2.14 Origin of Promoters/Sponsors of Alternative Funds, investors in alternative funds do not come from any typical jurisdictions, although investors from the jurisdictions mentioned in 2.14 would predominantly apply.
There are no typical jurisdictions in which investments are made by Guernsey alternative funds, since these include the location of all assets. These can be either in established and mature jurisdictions or emerging markets. Typically, the jurisdictions would include Europe, the US, Russia, China, the Middle East, the Far East, India, Scandinavia and the emerging markets.
While Guernsey has established itself as a jurisdiction with a great deal of experience in a number of asset classes including, but not limited to, debt, private equity, equities, and fund of funds, recent trends have seen the continued development of private equity and listed funds within the confines of the National Private Placement Regime under AIFMD. Guernsey has recently established a pole position as a jurisdiction from which to launch green funds for investments into various green initiatives.
Guernsey investment funds and their Guernsey managers are subject to various disclosure and regulatory reporting requirements. These include prior regulatory approval for change of controllers or directors of Guernsey-regulated managers and notification of changes to their key employees. Immediate notifications to the GFSC are also to be made in respect of certain key events such as changes of service providers of funds or of their Guernsey managers (eg, change of administrator or other key parties, including custodians for open-ended funds), changes to investment objectives, addition of classes, sub-funds or cells to registered funds, and proposals for winding up or restructuring of funds. A Guernsey administrator must also provide the GFSC with annual updates covering changes to the information set out in the fund’s original application for regulatory approval. Open-ended funds must inform investors of changes to the prospectus.
Annual audited reports and quarterly statistical returns also have to be provided to the GFSC.
The existing regulatory regime for funds is under constant review by local industry and the GFSC to ensure that it evolves with the demands of investors and international requirements and adapts itself to the constantly changing environment. There are, in particular, joint industry and regulatory reviews of some of the existing approval regimes for investment funds which may benefit the process of regulatory approval and the time to market.
Guernsey attracts fund managers from all over the world. To the extent that the alternative fund has a Guernsey-based manager, most will use a Guernsey limited company or a limited liability partnership as the vehicle for the manager. Where the alternative fund is a limited partnership structure, the general partner is usually appointed as the manager. A non-Guernsey adviser will then advise the manager. Where there are multiple limited partnership structures, such as in the case of successor funds, occasionally a super-management entity advising general partners is interposed.
Any person who carries on, or holds themselves as carrying on, controlled investment business in or from within the Bailiwick of Guernsey must be licensed by the GFSC according to the POI Law.
Controlled investment business is carrying on, by way of business, a restricted activity in connection with a controlled investment. The latter includes collective investment schemes and general securities and derivatives.
Restricted activities include:
Typically, an application for a licence to the GFSC will take approximately four to six weeks and the GFSC will usually grant the licence on the same day as it issues the letter of formal authorisation in respect of the alternative fund. There is a fast-track route which takes ten business days (subject to the GFSC not raising any queries or requiring further information) but this is only available where the applicant is seeking to provide management services to registered funds and QIFs.
Licence applications for the manager of a PIF will be dealt with in one business day, alongside the application for registration of the PIF itself. Licence applications for a manager under the MLP regime will also be dealt with in one business day.
Local entities which provide investment manager services are subject to income tax at the company intermediate rate of 10%. The exception to this, however, is where investment manager services are provided to Guernsey alternative funds, which will continue to be tax exempt or taxed at a rate of 0%.
On 1 January 2019, the corporate residence test was extended beyond control through a majority of Guernsey resident shareholders to include management and control being exercised in Guernsey. A permanent establishment of a company that is non-resident for Guernsey tax purposes is subject to Guernsey tax on the profits of that permanent establishment arising in Guernsey. It is important to note that Guernsey funds and managers of Guernsey funds can elect to be either tax exempt or tax resident at 0% in Guernsey.
Guernsey has no capital gains tax and therefore would not tax carried interest at source.
Guernsey managers may outsource some of their functions, provided that they comply with certain principles set by the GFSC:
Ultimate responsibility for the outsourced function will remain with the manager – it cannot discharge itself completely from its responsibility. Managers who outsource functions to third-party service providers must ensure from the outset, and on a continuing basis, that the delegate is a fit and proper service provider.
In addition to the substance requirements implementing BEPS Action 5 and the requirements of the EU Code of Conduct Group, managers that are regulated in Guernsey need to comply with both capital adequacy rules covering both managers with and without physical premises and staff in Guernsey, as well as conduct of business rules. In essence, a manager without staff or premises will need to have an issued share capital of GBP10,000 or equivalent, and a manager with staff and premises in Guernsey will need an issued share capital of GBP25,000 or equivalent.
To the extent that a non-local manager is carrying out controlled investment business (as set out in more detail in 3.2 Regulatory Regime) in or from within Guernsey, they will need to be licensed by the GFSC in accordance with the POI Law.
Guernsey as a mature offshore jurisdiction does not traditionally promote alternative funds in Guernsey to Guernsey investors. However, it is not unusual for Guernsey alternative funds to be promoted to Guernsey professional or institutional investors, including professional trustees of trusts, family offices as well as high net worth individuals. The level of ownership by Guernsey-resident investors in Guernsey alternative funds may affect the tax-exempt treatment of those funds. For this reason, there is much greater appetite for non-Guernsey investors in Guernsey alternative funds.
In order to market alternative funds in Guernsey, the firm must be licensed by the GFSC under the POI Law, unless one of the statutory exemptions applies. See 4.3 Rules Concerning Marketing of Alternative Funds.
As mentioned in 3.2 Regulatory Regime, the promotion of alternative funds in Guernsey is a restricted activity which requires the promoter to be licensed by the GFSC under the POI Law. There are certain statutory exemptions however:
It is the GFSC’s view that marketing campaigns that do not originate from within Guernsey and do not specifically target Guernsey residents (but might include Guernsey as part of a wider population) are unlikely to constitute a restricted activity.
In order to make an offer to Guernsey residents for securities or derivatives, wherever an offeror is domiciled, it will need to circulate a prospectus, notice, circular or other document containing detailed information about that offer. Such prospectus or other document will need to comply with the Prospectus Rules 2018 and the offeror cannot circulate the prospectus or other document until the GFSC has registered it.
Local investors are not prevented from investing in alternative funds which are established in Guernsey, provided that the alternative fund in question is appropriate for the type of investor (eg, a qualified investor for a QIF) and any firm which promotes such funds is licensed or exempt as set out in 4.3 Rules Concerning Marketing of Alternative Funds. Investments by Guernsey residents into alternative funds which have elected to have tax-exempt status may affect the tax treatment of the fund causing it to become tax resident at the rate of 0%.
Firms seeking to promote alternative funds in Guernsey will need to apply to the GFSC for a licence prior to undertaking any promotion in Guernsey. If the firm seeks to rely on certain of the statutory exemptions referred to in 4.3 Rules Concerning Marketing of Alternative Funds, they will need to notify the GFSC in advance and may need to file specific forms.
All licensees are subject to ongoing supervision by the GFSC. As part of this, licensees will need to submit a return annually to the GFSC. Licensees are also required to notify the GFSC of certain changes to their structure/key personnel and may, in some cases, need to obtain the GFSC’s prior consent (eg, for a change of controller).
Refer to 2.18 Disclosure/Reporting Requirements.
Refer to 2.11 Tax Regime.
On 13 December 2013, the United States of America and the States of Guernsey entered into an intergovernmental agreement which brought into effect the provisions of the Foreign Account Tax Compliance Act (FATCA).
The object of the FATCA regime is to require “foreign financial institutions” (FFI) to report to the Internal Revenue Service, US persons’ direct and indirect ownership of non-US financial accounts and non-US entities. Offshore alternative funds constitute an FFI for this purpose.
Guernsey committed to the adoption of the global Common Reporting Standard (CRS) on Automatic Exchange of Information with effect from 1 January 2016. The adoption of the CRS by the States of Guernsey replaced any reporting obligations under the European Union Savings directive and the intergovernmental agreement entered into by the States of Guernsey with the United Kingdom.