Impact of Savings Tax amendments on Guernsey

Guernsey's decision to chose automatic exchange of information
Less than 5% of interest earned in Guernsey was subject to the savings tax provisions because these were held in trusts, companies or in non-UCITS funds. To show that Guernsey was not a secretive tax haven, it agreed to full automatic exchange of information, surmising that little would be revealed anyway. However, the EU savings tax amendments will impact Guernsey like no other offshore center.

Trusts such as Fixed interest, Life interest, Interest in possession and Bare trusts are already in scope if an immediate beneficiary is named. The focus here is on discretionary trusts which account for over 95% of trusts established in Guernsey. Guernsey's Discretionary trusts have to date successfully avoided international taxes as they are crafted to present an image that no party involved can have a tax liability. This is done in seven stages:
Separate legal ownership of assets from the principal contributor: The principal contributor (initial settlor) gives away their assets to someone else to manage on behalf of named or unnamed beneficiaries.		Mask the original source of assets: Utilise a nominee to contribute the assets on behalf of the principal contributor. The only name on public record as the provider of funds is the nominee.
Utilise a temporary holder / manager of the assets: Savings tax cannot be applied on the trustee because they are: not beneficial owners of the assets, and not cross-border residents, and merely looking after the assets for named or unnamed beneficiaries		Disguise control of the assets: If the principal contributor (initial actual settlor) is seen to be controlling the assets after giving it away, he may be liable for tax. Therefore the principal contributor manages the assets indirectly via an undisclosed letter of wishes and/or protector.
Ensure no beneficiary is immediately entitled to income: No specific beneficiaries are named. Therefore no income tax payable.		Perform alchemy on income before distribution: Convert the character of income into a tax efficient payment at a later date, such as charity, capital gain, wage, loan, etc.
Add an entity / legal arrangement layer to further buffer ownership of assets Trusts often hold assets via an offshore company or partnership. This enhances confidentiality, simplifies holding of assets anywhere in the world, allows income to be distributed as dividends, further distances the beneficial owner from direct ownership, ensures the foundation or trust never holds assets directly,allows appointment of third party directors to further obfuscate the true management, etc.
Present a restricted view of trust to bank: The bank holding the structure's account is the Paying Agent responsible for applying the savings tax. However, with a restricted view presented to the bank, a beneficial owner cannot be identified. As no-one supposedly owns the assets, the bank cannot apply the savings tax.

How the EU savings tax amendments will tackle Guernsey trusts, is described in detail
in this guideline on Paying Agents Upon Receipt:

Trust becomes the Paying Agent Upon Receipt: To circumvent the bank's limited view of the structure, the savings tax directive amendment moves the Paying Agent responsibility away from the bank and onto these untaxed structures if they are managed within the savings tax territory. The logic being the structure has an unimpeded true view of all parties involved.
The Principal Contributor is the beneficial owner : The amendment takes into consideration that it will be highly unlikely to identify a beneficiary immediately entitled to the payment received. In this case, the principal contributor, i.e. the original actual settlor of assets will be deemed the beneficial owner, irrespective if the settlement is irrevocable or not. The logic being that tax liability remains yours until transferred to someone else with a tax liability. In limbo doesn't qualify for exemption.
Nominee settlor is transparent: The savings tax directive looks through a nominee settlor. The beneficial owner is deemed to be the individual who initially contributes the assets, directly or indirectly. According to the EU directive on money laundering and anti-terrorist financing, a nominee is a trust and company providing service and is therefore a candidate for Paying Agent Upon Receipt responsibilities.
Paying Agent Upon Distribution if no contributor identifiable: In the event that a principal settlor is not identifiable, e.g. for a deceased settlor, then the structure becomes a Paying Agent Upon Distribution and must apply the savings tax to any individual who becomes entitled to the payment within 10 years.
No more dummy charities: Trusts or foundations set up for charitable purposes will only be exempt from Paying Agent Upon Receipt responsibilities if they serve:- exclusively for charitable purposes, and for the public benefit. Mixed purpose or private charities will thus be in scope.
Pierce ownership of multi-layers of holdings If a trust owns its assets through a subsidiary entity / legal arrangement, then clearly the management also controls the subsidiary and hence will be deemed the Paying Agent Upon Receipt for that subsidiary. Consequently the Paying Agent Upon Receipt must identify the ultimate beneficial owner of the subsidiary.
Bank accounts in Singapore / Dubai / Bahamas/ etc. also in scope: A knee-jerk reaction to move the trust bank account beyond the savings tax territory will not help. The Paying Agent Upon Receipt must apply the savings tax provisions irrespective of where the assets are held. This is similar to an economic operator securing interest from anywhere in the world.
Run, but you can't hide: A trust fleeing to outside the savings tax territory, e.g. to a Singapore trust, will not help the trust and company providers based within the savings tax jurisdiction. If the new trust is still effectively managed from within the savings tax territory, then the trustee will be a Paying Agent Upon Receipt, and consequently the structure will be in scope.

Companies and Partnerships

If a company is managed in Guernsey and is effectively not taxed, it becomes a Paying Agent Upon Receipt. It must identify beneficial owners according to the 3rd EU money laundering and anti-terrorist financing directive 2005/60/EC, namely: Any shareholder who owns more than 25% equity of a company, alternatively The natural person who exercises control over the management of a legal entity Note that nominees are not acceptable as a beneficial owner per money laundering directive and due diligence requirements. In fact, nominees acting as shareholders or directors are considered trust and company providers and are candidates for being Paying Agent Upon Receipt and must identify the beneficiaries for whom they are acting as agents.

Note: that companies as Paying Agents Upon Receipt must apply the directive's provisions to assets they hold anywhere in the world, irrespective of banking secrecy laws in that jurisdiction. This is equitable to Paying Agents securing interest from anywhere in the world.

Collective Investments

The savings tax only targeted UCITS because the EU Commission believed those were the only funds authorised for distribution to cross border EU residents. However became apparent that non-UCITS were being distributed such as hedge funds or adoption of home rules. Even more blatant tax avoidance occurred in countries like the Caymans, which converted all their funds to non-UCITS equivalent purely to escape the savings tax. Therefore the amendments expand the definition of interest to include: Within the EU Savings tax territory: Undertakings for collective investment or other collective investment funds or schemes that either are:- registered as such in accordance with the law of any of the countries party to the directive, or have fund rules or instruments of incorporation governed by the law relating to collective investment funds or schemes of one of these States or countries. This applies irrespective of the legal form of such undertakings, funds or schemes and irrespective of any restriction to a limited group of investors of the purchase, sale or redemption of their shares or units. Outside the EU savings tax territory: Any collective investment fund or scheme established outside the directive’s territory. This applies irrespective of the legal form of that fund or scheme and irrespective of any restriction to a limited group of investors of the purchase, sale or redemption of its shares or units. Entities and legal arrangements similar to a UCITS can elect to be treated as a collective fund, such as a investment club. In this case the bank reverts back to be the Paying Agent.

Indicative list of fund types added to the directive's scope Luxembourg SICAV II, SICAR, SIF-SICAV Ireland UCITS-III collective investments Investment Company with Variable Capital / OEICs Professional investors funds Qualifying investors funds Caribbean non-UCITS equivalent funds Hedge funds Private equity funds Income trusts Manged Futures Accounts which act like a mutual fund for more than one investor Micro finance funds Pooled private investment clubs Mutual funds Closed end funds Unit trusts Fonds commun de placement Beleggingsvennootschap met vast kapitaal / PRIVAK Exchange Traded Funds (ETF) Real Estate Investment Trusts (REIT) Listed investment company, etc. . Note: Collective investments not caught by the 25% threshold and if not taxed, are indeed candidates for: Paying Agent upon receipt according to Article 4 Par 2, or Look through entities or legal arrangements according to Article 2 Par 3, or Some collective investments, notably ETFs, when marketed to private individuals and not held by financial intermediaries, might also be regarded as wrapper products found in Art 6 Par 1(aa), rather than investment funds

Securities with capital guarantee or link to interest

Any income paid or realised, or credited to an account, relating to securities of any kind, and where: the conditions of a return of capital defined at the issuing date include a commitment towards the investor that he receives, at the end of the term, at least 95% of the capital invested, or the conditions defined at the issuing date provide for a link of at least 95% of the income from the security to interest or income Securities are broadly categorized into: Debt securities, such as bonds and debentures Equity securities, such as shares Derivative contracts, such as options, futures, swaps and forwards   Capital Protected Structured products: The amendment affecting structured products is perhaps unfair compared to collective investments because all the product's capital income gains will be defined as interest, i.e. the fixed income returns plus equity growth plus dividends plus derivative gains. Derivatives: Marketable over-the-counter derivative contracts linked to at least 95% interest will be in scope, for example:- Interest rate swaps Interest rate caps and floors Short dated options and LEPOS on bonds if the gains are linked to interest, viz. LEPOS on zero coupon bonds. Bond baskets, bond certificates and mixed certificates Reverse convertibles Futures linked to interest such as bond futures.

Hybrid Capital: Products which are a form of debt, even though they generally have equity component or characteristics will now be in scope. Examples are preference shares, convertible bonds, payment in kind loans (PIK), tax liens, perpetual loans, mandatory convertibles and other debt plus equity products established through Special Purpose Vehicles. Islamic Banking: Sharia deposits with no risk of loss will also be included as a product offering similar guarantees although not classified as interest bearing as such. Sukuk bonds may be out of scope if loss is possible. Exemptions: Grandfathering: Interest payments are in scope only to the extent to which the securities producing that income were first issued on or after 1 July 2010. Contracts between two parties: E.g. equity swaps which are not marketable are not securities and would not be within scope.

Insurance

Guernsey is a leading captive insurance center for Europe, which is not affected by the savings tax at all. Although there are some major life insurers based on the island, significant restrictions exist to market Guernsey insurance products to EU residents. Therefore the extension of the savings tax directive to life insurance benefits will not materially result in insurers having much Paying Agent Upon Receipt responsibilities. However, Guernsey trusts holding life insurance policies will have Paying Agent Upon Receipt responsibilities regarding life insurance benefits which :- are based on performance of investments, or contain a guarantee of income, such as annuities

Information to be Automatically Exchanged

In jurisdictions that are mandated or have elected automatic exchange of information, the Paying Agent Upon Receipt i.e. trust, company or partnership, must provide the following minimum amount of information to the competent authority: the identity and residence of the beneficial owner established; the name and address of the paying agent; the account number of the beneficial owner (even Swiss bank account details) or, where there is none:- identification of the debt claim giving rise to the interest payment or of the life, or insurance contract, security, share or unit giving rise to that payment; the total amount of its interest payments received, secured or deemed to accrue to its beneficial owners. The information provided must distinguish and show separately for:- Debt claims - the amount of interest paid or credited Capital guaranteed securities - either the amount of any income paid, realised or credited or the total amount of the payment Accrued or capitalised debt - either the amount of interest or income referred to or the total amount of the proceeds from the sale, redemption or refund; Interest distributed by funds - either the amount of interest referred to or the total amount of the distribution Annualised interest - where a Member State exercises the option to annualise interest, on the amount of annualised interest or other relevant income; Life insurance - either the benefit calculated in accordance with that provision or the total amount of the payment. If, in the case of assignment to a third party, the paying agent has no information about the value conferred: the sum of the payments made to the life insurer under the life insurance contract

Impact of Fiduciary Business in Guernsey

Guernsey calculated the EU savings tax directive did not affect them materially, so they acquiesced to drop the withholding option. However, no sane tax evading EU-resident will go to the effort of having an undeclared Swiss / Singapore / Bahamas / Dubai / Hong Kong bank account due to their banking secrecy, and then wrap it in a Guernsey entity or trust, if it is obliged to exchange info . Individuals seeking confidentiality will rather utilise a jurisdiction retaining the withholding option.

Expected fall in fiduciary business in Guernsey