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06. April 2020 | Taxation in the Channel Islands (Jersey Guernsey Alderney) (this contribution)

Some of the lesser-known tax havens are on your doorstep. To be precise, it is a number of European islands that offer their tax advantages. This includes the Channel Islands. Because of their special status as crown properties, the Channel Islands have their own rights – and this also in terms of tax law. For example, the corporate tax rate is 0%. There are other tax privileges for income tax, which is significantly lower at a maximum of 20% than in Germany or the United Kingdom, for example. An inheritance tax or gift tax is even completely missing. Due to their geographical proximity and the linguistic similarities and, of course, the advantageous taxation on the Channel Islands, Britons in particular have developed a keen interest in a residence or the establishment of a capital company on these Central European tax havens.

Tax havens: Panama, Cyprus, Dubai, Paraguay, Georgia, USA?

1. The special legal and political status of the Channel Islands

1.1. Legal status of the Channel Islands

The Channel Islands of Jersey and Guernsey, along with the politically affiliated islands of Alderney, Sark, Herm, Brecqhou and Jethou, are among the British Isles. However, they are outside the United Kingdom and are not crown colonies either, because their relations with Britain date back far into the Middle Ages, so that their status is based even on Norman law. Rather, as bailiffs with their own legislation and jurisdiction, they are directly under the British crown. For this special status of these separate entities, the term crown property is also used.

Although the Channel Islands have a certain internal independence, they are still under the sovereignty of Great Britain. The UK is responsible for such matters as foreign policy or defence, but it has no control over, for example, tax law in the Channel Islands. For this reason, the Channel Islands developed tax regimes in the past that elevate them to a level with other, albeit much better known, tax havens in the world. In fact, their experience of being an offshore tax haven goes back a century. Even then, many wealthy Britons fled with their assets to the Channel Islands, because there they were spared in particular from the property tax in force in Great Britain and the inheritance tax.

Now, as specialists in international tax law, we dedicate this article to extraordinary taxation in the Channel Islands, which is based on feudal roots but has been very successful so far.

1.2. Channel Islands relations with the EU

Nevertheless, the Channel Islands also maintained relations with the EU. Even when Britain was a member of the EU, the Channel Islands were part of the European Customs Union. Also in some other aspects they were subject to EU rules. The European consensus was followed in particular with regard to the free movement of persons and capital. It is therefore hardly surprising that the EU took a critical look at the tax regimes on its doorstep, as if these islands were indirectly part of one of its members. Nevertheless, the islanders always managed to defend their tax system to the outside world in this respect.

After Brexit and the complete departure of the UK from the norms of the EU, this relationship is likely to be subject to some change. However, given the Channel Islands’ previously revealed expertise in defending their tax regime, one might like to believe that even this change will at best have little impact on their future tax policy. Finally, the peculiarities of taxation in the Channel Islands are seen as a collective heritage, rather than merely a tax privilege for rich foreigners.

2nd Taxation in the Channel Islands: the Tax Law of Jersey

Now follow information on taxation in the Channel Islands, starting with Jersey.

Channel Islands taxation: Jersey tax liability

2.1.1 World Income Principle

Here the principle applies that all domestic and foreign income is taxable. However, rules to avoid double taxation are also applied through the relevant international agreements. For example, there are double taxation agreements with the United Kingdom, Luxembourg, Liechtenstein and, unsurprisingly, a whole series of other states that are also considered tax havens. And of course, the other crown properties are also legally linked through such an agreement, which also facilitates taxation in the Channel Islands and the Isle of Man. In addition, there are partial double taxation agreements with other countries, including the Federal Republic of Germany, but none with Switzerland and Austria.

2.1.2. Residence regulations

You are taxable in Jersey if you are resident or resident there because you stay on the island for at least 183 days a year.

Channel Islands Taxation: Jersey Income Tax

In the case of income taxes of natural persons, the tax law in Jersey regularly provides for income taxation. However, there are many exceptions and reductions. Nevertheless, the top tax rate is only 20%.

Taxation of partnerships takes place at shareholder level.

If a taxpayer does not receive income from an employment relationship, it is obligatory to pay an advance payment on income tax until the end of April of the year following the assessment period. The advance payment is 50 % of the tax incurred during the previous assessment period.

Channel Islands Taxation: Taxation of Corporations in Jersey

2.3.1. Tax liability of corporations in Jersey

First of all, it is necessary to clarify which corporations are subject to taxation on Jersey. A corporation is taxable in Jersey if it is incorporated under Jersey law or if it is taxable in a country where the income tax rate is less than 10% and at the same time the management takes place from Jersey. Also, foreign corporations are taxable in Jersey if the place of management is in Jersey.

2.3.2.Corporate Income Tax on Jersey

The corporate tax rate is generally 0 %. However, exceptions must also be observed here. For example, there is a 10% tax rate on banks and other credit institutions. In fact, it is estimated that taxes on these banking transactions account for about 70% of the Jersey household.

Furthermore, varying tax rates apply to commercial companies, but for which a maximum tax rate of 20% also applies. This applies in particular to companies where the local antitrust authority JCRA (Jersey Competition Regulatory Authority) supervises. Together with GCRA, its partner authority in Guernsey, with which it cooperates closely, it controls the free competition of companies active in the energy sector and certain other sectors. In particular, system-relevant companies are included (e.g. provident societies, telecommunications companies). This also includes companies that operate wholesale and record a taxable annual profit of more than GBP 500,000.

Appearing together as CICRA (Channel Islands Competition and Regulatory Authorities), these two authorities are also responsible for the transformation of companies.

By the way, a trade tax as it exists in Germany is completely unknown on Jersey.

2.4 Sales Tax on Jersey

There is also a Goods and Services Tax (GST) in Jersey. At 5% for most goods and services, it is very low.

2.5th Property Transfer Tax on Jersey

The amount of Land Transaction Tax (LTT) on Jersey depends on several factors, in particular the amount of the purchase price. It shall not exceed 9 %. The real estate acquisition tax is due 28 days after the purchase of the property.

2.6. No Inheritance Tax or Gift Tax on Jersey

An estate tax or gift tax does not care anyone on Jersey. It is also unknown here.

2.7. Taxation of capital gains on Jersey

Even with income from capital income, Jersey is well looked after, because there is no tax.

2.8. General social security contributions on Jersey

In addition to taxes, Jersey residents of working age also pay social security contributions. This finances pensions, health insurance, long-term care insurance and maternity allowances. Employees and workers contribute 6% of their wages if they work at least eight hours per week. At the same time, the employer assumes a further 6.5% as non-wage labour costs. But self-employed workers also have to pay social security contributions, which amount to a maximum of GBP 760.13 per month.

In addition, there are also reliefs that are due, for example, to pupils and students. Parents with a working week not exceeding 20 hours who care for a child at home who is still too young to attend school may also claim consideration.

An exemption from the payment of social security contributions can be achieved if you are an employee of a foreign employer-like social benefits abroad. This requires proof by the employer.

The Bailiwick of Guernsey constitutes a jurisdiction that comprises three different legislatures and thus also three tax regimes: Guernsey, together with Herm and Jethou, Alderney and Sark together with Brecqhou. However, only two of the three tax regimes existed so far, because Alderney agreed in 1948 with Guernsey that the legislation there should also apply to Alderney. However, Alderney has been claiming its own tax legislation since 2021 because it opted out of the existing agreement with Guernsey. Therefore, the following analysis of this chapter includes only the Channel Islands of Guernsey, Herm and Jethou. We look at Alderney’s new tax regime afterwards.

Channel Islands taxation: Guernsey, Herm and Jethou tax liability

3.1.1 World Income Principle

On Guernsey too, tax law considers the world income principle to be decisive.

3.1.2. Residency regulations in the Channel Islands of Guernsey, Herm and Jethou

Guernsey tax liability differs from Jersey tax liability. Because in Guernsey you are considered resident, and therefore taxable there if you are present more than 90 days a year. Alternatively, attendance on 35 days a year counts as a sufficient criterion for tax liability if you spent a total of 365 in Guernsey over the previous four years.

In addition, one also distinguishes the circumstance of a solely resident where one has a residence only in Guernsey and otherwise stays abroad less than 91 days a year.

Furthermore, the main residence is also relevant as a criterion for tax liability. If you can justify your stay in Guernsey at least 182 days a year (principally resident) or alternatively at least 91 days a year and 730 days in the four previous years in Guernsey (also principally resident), then you are taxable locally. This also applies to an influx, whereby one must occupy the sole residence or main residence on Guernsey in the following year.

3.2. Income tax and social contributions on the Channel Islands of Guernsey, Herm and Jethou

3.2.1. Taxation in the Channel Islands: Income tax on Guernsey

The income tax of taxable individuals on Guernsey and Herm is calculated with a general tax rate of 20%. However, a series of deductions can reduce income.

Another form of income tax limitation is the option to limit taxable (worldwide) income to GBP 130,000. In the case of persons assessed together, double the amount shall apply. However, there are certain exceptions. This is because income from the rental or lease of real estate on Guernsey is just as excluded as certain retirement income.

Newly recruited persons who purchase a property with a minimum value of GBP 1,500,000 on Guernsey may instead limit their maximum income to GBP 50,000 annually for the next four years.

Similar to Germany, Guernsey prefers an advance payment on employee income tax comparable to payroll tax.

3.2.2. Taxation in the Channel Islands: Taxation of foreign income in Guernsey

3.2.2.1 Double Taxation Agreement with Guernsey

In addition, Guernsey has concluded double taxation agreements with various countries. However, no such agreement exists with Germany, Austria or Switzerland.

3.2.2.2. Divergent taxation of foreign income on Guernsey

Nevertheless, Guernsey may also be interesting for taxpayers from abroad who live there, because even without double taxation agreements there are certain reliefs in the double taxation of foreign income. Thus, a deduction on the tax paid abroad is possible. The effective tax rate that would apply to Guernsey is to be reduced by 3⁄4 and then applied to net foreign income by increasing the net income by the differential percentage (net income x 100 / 100 – 3⁄4 effective tax rate Guernsey). This extended amount is then subject to the 25 % reduced effective tax rate on Guernsey in order to determine the tax deduction. However, if the foreign tax is levied at a tax rate of less than 75% of the rate applicable to Guernsey, then this tax rate applies instead.

Furthermore, as a so-called principally resident on Guernsey, you can opt to pay a lump sum of GBP 30,000 in taxes. This flat-rate tax covers only those incomes that have their source abroad. As a result, income generated on Guernsey is regularly subject to income tax.

3.2.3. Social security contributions on Guernsey

In addition to the actual income tax, social contributions are also payable on Guernsey. The amount of the charges depends on the type of employment of the taxable person. But employers, entrepreneurs and the self-employed also have a contribution to make here, which, however, is incurred with a different percentage. Age can also have an influence.

3.3. Taxes on real estate on Guernsey, Herm and Jethou

In addition to the income tax, there is a levy on property on Guernsey and its affiliated islands. The amount of the property tax equivalent to property tax depends on the area of the property and its function. The tariffs are revised annually by the Guernsey administration. A function comparable to the German Land Registry is assigned to the land registry office (Cadastre) on Guernsey. In addition, this authority is also responsible for collecting the taxes.

3.4. Taxation of companies in the Channel Islands Guernsey, Herm and Jethou

First of all, a general statement that applies to all types of companies on Guernsey, Herm and Jethou: here you do not know any trade tax or a tax comparable to their German equivalent.

3.4.1. Tax liability of corporations in Guernsey

Under certain conditions, companies are taxable in Guernsey. First of all, all corporations registered on Guernsey have a tax liability. Trusts and foundations also count as corporations for tax purposes.

Furthermore, companies registered abroad are also suitable if they are substantially established on Guernsey. This includes, among other things, that their management is carried out from Guernsey, Herm or Jethou. In addition, there is a tax liability on Guernsey for companies resident abroad if the majority of the voting rights are exercised by shareholders who are resident on Guernsey, Herm or Jethou.

Conversely, it is possible to avoid taxation on Guernsey. This is possible if you can prove that you are instead taxed abroad and that the place of management is also located there and that you are either subject to a tax rate of at least 10% or that you are entitled to taxation jurisdiction by a double taxation agreement. It must also be excluded that these conditions have no relation to a possible tax avoidance on Guernsey.

3.4.3. Tax liability of partnerships

Partnerships and sole proprietors themselves are generally tax-free on Guernsey because they are tax transparent. Therefore, corporation tax applies only to corporations.

3.4.2. Applicable tax rates for corporate taxation in Guernsey

Just like in Jersey, Guernsey, Herm and Jethou generally have companies paying 0% tax. Exceptions exist for banks and other financial institutions as well as for insurance companies. They pay 10% tax on their profits. Since the beginning of 2020, this also applies to companies that operate the registration of aircraft. In addition, up to 20% of corporate tax is incurred if a company operates in the energy sector or is under the supervision of the regulator GCRA (Guernsey Competition & Regulatory Authority). This is accompanied by a closely coordinated approach to the taxation of certain companies with the JCRA in Jersey.

3.5. No VAT on the Channel Islands Guernsey, Herm and Jethou

Guernsey is completely exempt from VAT. For consumers, this is of course very pleasing.

3.6. No real estate transfer tax on the Channel Islands of Guernsey, Herm and Jethou

There are no legal requirements regarding the taxation of the transfer of land to Guernsey. Only one fee applies here.

3.7. No inheritance tax or gift tax on Guernsey and Herm

Also with regard to inheritances or gifts, there is no need to pay taxes in Guernsey.

3.8. no taxation of capital gains on Guernsey and Herm

As in many other tax havens, there is no tax due on capital gains in Guernsey.

3.9 Guernsey’s international commitments to combat inappropriate financial practices

One of the most important aspects to consider when it comes to transferring assets to Guernsey as anonymously as possible is that Guernsey has established tax data exchange with a number of other countries. Guernsey is thus fulfilling its obligation to combat money laundering on the basis of international standards. This also includes the agreement with the USA on the basis of a FATCA agreement. The same applies to the UK and many other countries with which Guernsey concluded an agreement on Common Reporting Standards (CRS).

Since 2017, Guernsey has also met OECD requirements for combating BEPS. It is also interesting that since 2019 Guernsey has also fulfilled the implementation of an agreement with the EU to counter the classification as a tax haven. This is about the demand for minimum requirements for the company substance of a company taxed in Guernsey. As a result, pure letterbox companies on Guernsey should be excluded from the previous tax privilege. This is also the way to combat money laundering.

How serious Guernsey is in this regard can be seen from the fact that they created their own authority, the Guernsey Financial Services Commission (GFSC), to take on this task.

Incidentally, Guernsey also assumes these competences for the Channel Islands Alderney, Sark and Brecqhou, which are politically subordinate to her in this respect, and of course also for Herm and Jethou.

Since Alderney has had its own tax law since January 1, 2021, we take this opportunity to report on this as well. This is basically only about some tax aspects that should apply differently from those in Guernsey.

Alderney is taking his own path in terms of financial management. With this measure, Alderney is independent of the funds previously provided by the financial administration in Guernsey. Thus, the planned taxes on Alderney are designed in such a way that they cover their own budget.

4.1. No property tax on Alderney

The current levy on real estate assets, which Guernsey also imposed on taxpayers on Alderney until the end of 2020, is expected to be 0% in the future.

4.2 Excise duty on motor fuel

Since the property tax due so far is eliminated, part of the taxes on Alderney are to go into the household via an excise tax on imported motor fuels.

4.3. Taxes on capital transfers to Alderney

Since 2021, Alderney has also levied its own levy on the documentation of asset transfers. In this respect, this basically corresponds in some aspects to the real estate transfer tax in Germany.

Sell foreign company tax-free.

Taxation in the Channel Islands: the tax law on Sark and Brecqhou

Since the Channel Islands of Sark and Brecqhou have independent tax regimes from the main island of Guernsey, which otherwise administers them, but because of their small size and number of inhabitants are hardly important in terms of taxation law, we summarize only a few aspects.

Although Sark and Brecqhou are only very small islands with a low population and are one of the last feudal relics in Europe, their tax regime is still successful. Tax revenues have always kept the budget debt-free. And this is something that can only be said of the few other states in the world.

5.1 Taxation in the Channel Islands: Sark

5.1.1. no income taxes on Sark

On the island of Sark there is neither an equivalent to the German trade tax nor a sales tax. Thus, services are also tax-free. On the other hand, import duties only apply to certain goods (fuels, tobacco products, alcoholic beverages). Furthermore, there is no capital gains tax, inheritance tax or gift tax. Even an income tax is missing on Sark. Similarly, a corporate tax is waived. Even more unusual is the reason for this, because on Sark you know no company law. Therefore, it is hardly surprising that on Sark, unlike on Guernsey, there are no banks of their own.

5.1.2. Property tax as a real estate tax on Sark

On the other hand, there is a taxation of real estate, which is therefore in principle similar to a property tax. For this purpose, the legislature sets the tax rate per unit of area annually. For 2021, this value for built-up land is GBP 15 per unit of land. As a rule, it is the owners or users instead of the owners of a property registered in the cadastral register who are responsible for the first time. In April of each year they are obliged to pay the tax. Only if there is no owner registered in the cadastre, the owner of the property is taxable. Thus, the tax liability of this tax, known as the ‘property tax’, depends solely on the fact of possession, lease or ownership of land on Sark and Brecqhou; It is independent of residence.

5.1.3. Personal capital tax as equivalent to property tax

Based on this, there is also a tax on this asset on Sark. For this purpose, both a minimum and a maximum of the amount of the tax are determined by law. It currently amounts to 0,39 % (2021), but at least GBP 475, but is also limited to a maximum of GBP 9,500 per year. However, there is also a condition for tax liability. In order to be taxable with this “personal capital tax” on Sark and Brecqhou, it is enough to spend at least 90 nights per year on the two Channel Islands (as required by law).

5.1.4. Taxes on the sale of real estate

In addition, a levy also takes place in the case of a transfer of real estate. Both vendor and acquirer are collectively involved.

5.2. Taxation in the Channel Islands: Brecqhou

A description of the taxation on Brecqhou is superfluous insofar as the entire island is jointly owned by two twin brothers.