I INTRODUCTION

Guernsey is part of the Bailiwick of Guernsey, within the Channel Islands. It is located 164 miles southwest of London and 27 miles from the Brittany coastline of France, with a population of 62,000 people. The other islands in the Bailiwick are Alderney, Sark, Herm, Jethou and Brecqhou.

The constitutional position of Guernsey is that it is a dependency of the British Crown having its own parliament, the States of Deliberation, but is reliant upon the United Kingdom for foreign representation and defence. The States of Deliberation generally meets on a monthly basis and consists of 38 deputies elected in districts, plus two representatives from the States of Alderney, a presiding officer (the Bailiff, or the Deputy Bailiff in his absence) and two law officers of the Crown (being Her Majesty’s Procureur (Attorney General) and Her Majesty’s Comptroller (Solicitor General)). Other than the deputies, the appointments are made by the Crown. There are no political parties and Guernsey deputies are elected for a period of four years. The Bailiff is also the senior judge of the Bailiwick. The Queen also appoints a Lieutenant Governor, who is her personal representative in the Bailiwick.

The States of Deliberation elect a president who is the most senior political office holder and chairs the policy and resources committee. This committee has oversight of six principle committees and a number of associated authorities, boards and commissions.

Guernsey enjoys a unique relationship with the European Union, along with the two other Crown Dependencies, the Isle of Man and Jersey. Under the terms negotiated by the UK in 1971, under Protocol 3 of the Treaty of Accession,2 Guernsey is within the common customs territory of the community. This means that goods exported from Guernsey into the EU are not subject to the common customs tariff. For all other purposes, Guernsey is outside the EU, but EU directives, which are binding on Member States, may be brought into force in the Bailiwick by an ordinance passed by the States of Deliberation3 if they are thought to be of value to the Bailiwick. Guernsey has a representative office in Brussels.

Guernsey law has its origins in Norman law, the Bailiwick having been part of the Duchy of Normandy since 993, but in 1204 gained the right to self-government after pleading allegiance to King John as he fought to maintain his territory in France.

The legal system has subsequently been increasingly influenced by English law and the Guernsey courts will refer to case law from England and other common law jurisdictions, with the Privy Council being the highest court which may deal with Guernsey court matters.

Today, Guernsey is regarded as a pre-eminent international financial jurisdiction and a centre of excellence for wealth planning matters. In addition, it has a long-standing reputation for political stability.

Guernsey’s regulatory standards have received global recognition through a succession of reviews since 19974 and meeting international standards set by bodies such as FATF and the IMF. The report into the most recent international assessment undertaken by MONEYVAL in 2014 was highly positive and found that Guernsey had surpassed the standards set in the equivalent IMF report on Guernsey in 2010. Guernsey has subsequently implemented harsher penalties for financial crime in line with recommendations in the MONEYVAL report.

In September 2013, the then UK prime minister, David Cameron, said: ‘I do not think it fair any longer to refer to any of the Overseas Territories or Crown Dependencies [of which Guernsey is one] as tax havens. They have taken action to make sure they have fair and open tax systems.’

The solid legal, political and regulatory platform is supported by a strong financial services infrastructure including international standard accountancy and law firms, a banking industry represented by leading international institutions, and other important support sectors such as insurance and investment management services.

Since the late 1960s when financial institutions and professional advisers first began to recognise the potential for Guernsey as an international financial centre, Guernsey has pursued a conservative and long-term approach to its position as a financial centre, resulting in state of the art financial legislation that has evolved to meet the demands of international UHNWI clients.

As a jurisdiction, it offers world-class expertise for international clients and their wealth planning needs, but also is attractive to UHNWI clients as a home. A simple, low-tax environment (see below) is underpinned by good communications with the UK by air and sea, international telecommunication standards and high-quality education and public services.

II TAX

Guernsey’s domestic budget is funded primarily by income tax receipts, supplemented by indirect taxes such as import duties on alcohol, tobacco and motor fuel. Property taxes are charged but at far lower rates than in many other countries.

i Individuals

Personal income tax is charged at a rate of 20 per cent. Persons who are ‘principally resident’ in Guernsey are subject to income tax on their worldwide income, while persons who are ‘resident only’ (broadly meaning they spend less than 182 days per annum in Guernsey and have their principal residence outside Guernsey) may elect to pay income tax only on Guernsey source income plus an annual ‘standard’ charge of £30,000.

It is also possible for personal taxpayers to cap their Guernsey income tax liability:

For those with Guernsey and non-Guernsey source income (Guernsey bank interest is not regarded as Guernsey source income), the individual can either pay 20 per cent tax on their Guernsey source income plus a tax cap of £110,000 on non-Guernsey source income or cap their liability on worldwide income to £220,000.

For individuals with only Guernsey source income they can either pay 20 per cent on their income, or cap their liability at £220,000.

For individuals with only non-Guernsey source income they can either pay 20 per cent income on their income, or cap their liability at £110,000.

Guernsey does not levy:

a capital gains tax;

b inheritance tax;

c GST or VAT; or

d wealth tax.

ii Corporate

Companies do not generally pay income tax on their profits as the standard rate of tax is zero per cent. However, certain companies are subject to a 10 per cent rate, including banks, fiduciary businesses and various classes of domestic insurance business.

iii International agreements

Guernsey has a policy of meeting internationally accepted standards on tax transparency. As at 6 July 2016, Guernsey had signed 60 tax information exchange agreements and 28 double taxation agreements, with active ongoing negotiations with a number of countries taking place.5

III SUCCESSION

As a leading international finance centre, with a globally diverse client base, Guernsey’s law in relation to succession has evolved in step with its laws for trusts and corporations. The most recent, and significant, development is the Inheritance (Guernsey) Law 2011 (the Law).

Before the Law came into force on 2 April 2012, Guernsey’s succession law retained aspects of its Norman law origins and testamentary freedom was limited in a way that would be familiar to its European neighbours. The Law is now more in keeping with Guernsey’s status as a pre-eminent trust jurisdiction.

Testamentary freedom and the rules on intestate succession vary according to whether or not the individual is domiciled in Guernsey, whether the estate consists of moveable or immoveable property and, in the case of immoveable property, whether that property is situated in Guernsey or otherwise.

For wills executed from 2 April 2012, a Guernsey-domiciled settlor will have complete testamentary freedom. There are safeguards for family and dependants in that the Law allows defined persons to apply to the court if they feel that they have not been reasonably provided for in the will.6

Where the individual is domiciled outside of Guernsey, the law of their domicile will govern their estate in relation to realty outside of Guernsey and all personal property. If that law includes forced heirship provisions, then those provisions will have effect.

Guernsey law will, however, apply in relation to any realty situated in Guernsey.

i Estate administration

When an individual dies leaving assets in their own name in Guernsey, their executor or personal representative will have to apply for a grant of probate (if there is a valid will in existence) or a grant of administration (where the deceased has died intestate). Assets held in joint names will generally pass to the survivor.

Unusually, the issue of a grant in Guernsey remains a matter for the Guernsey Ecclesiastical Court, a jurisdiction long since handed over to the civil courts on the mainland.

In order to obtain the grant, the executor or administrator will generally have to appear in person or be represented by their duly appointed attorney.7

The exception to this is where the estate consists of Guernsey realty; this passes automatically on death to the lawful heirs, be that on intestacy or under the terms of a valid will.

ii Matrimonial issues

In matrimonial matters, Guernsey has modelled its approach on the equivalent legislation in the UK, and the court can be expected to take a similar approach in dealing with financial provision orders and the like. As a matter of principle, while Guernsey legislation recognises that pre and post-nuptial contracts exist, the court retains a discretion to vary or ignore them as it sees fit, in much the same way as its English counterpart. With a growing acceptance in England that prenuptial contracts have a role in divorce proceedings, the expectation is that Guernsey will follow suit,8 particularly when the parties are from a civil law tradition. If such a contract is recognised under the law of the testator’s domicile, then clearly it will have an effect on dealing with their personalty and non-Guernsey realty.

Guernsey does recognise civil partnerships and registered overseas relationships as defined in England’s Civil Partnership Act 2004 and on 10 December 2015 the States of Guernsey approved proposals to introduce same-sex marriage (but not same-sex civil partnerships), although it is not clear when the proposed law (which is yet to be drafted) will come into effect.

Guernsey has long been an attractive destination for high net worth individuals looking for a place to live that is familiar, close to major markets and fiscally benign. Guernsey’s modernised succession law, increased recognition of diversity, and a modern flexible approach to matrimonial assets will add to its attractiveness. In a political climate where tax rates in the major economies continue to rise and the attractiveness of the UK for high net worth non-domiciliaries continues to be eroded, Guernsey is well-placed to benefit.

IV WEALTH STRUCTURING

Since the 1960s, Guernsey has demonstrated a willingness to adapt and innovate in order to meet the needs of an increasingly sophisticated and global market for wealth structuring, whether that be in its state-of-the-art trust law, its world-class collective investment regime or its continuously evolving company law.

Guernsey trust law was first codified in 1989, and then given a significant facelift in 2007. Since then, Guernsey has introduced a foundations law, an image rights registry (the first anywhere in the world), and an aircraft registry. It also continues to develop its company law for an increasingly international market. Guernsey’s latest focus is on promoting itself as a leading jurisdiction for Fintech and digital businesses.

Guernsey in 2016 is very much a first rank international finance centre. The island has become a centre of excellence for fiduciary services, with access to first-rate law firms, accountants, banks and investment managers. The political system is stable, and the judiciary extremely well versed in dealing with very complex and high value commercial and fiduciary matters.

While continuing to service institutions and advisers in London, Guernsey has a global significance. Service providers on the island have a distinct awareness and sensitivity to the needs of clients from very different cultures with consumers of Guernsey fiduciary services coming from Asia, the Middle East, eastern Europe and Latin America as much as from more traditional European economies and the UK.

i Trusts

Guernsey trust law has developed from its English law roots to include features that are essential to meet the needs of this global client base, while retaining the fundamental characteristics of trust principles.

As well as a growing body of precedent of its own, Guernsey can also look to other common law jurisdictions for guidance on legal principles, and with the Privy Council as its ultimate appellate court, has access to the leading judicial minds in the field.

Guernsey’s trust law has a number of features that are designed to provide solutions for its global audience.

Examples of Guernsey’s approach include the following.

Duration

Guernsey law does not have perpetuities and accumulations restrictions as evident on the mainland. The 2007 law allows for trusts of unlimited duration.

Purpose trusts

A Guernsey law trust can be established for charitable or non-charitable purposes. This can be particularly useful for structuring family businesses, commercial structures or in a private trust structure as discussed later in this chapter. An enforcer must be appointed to a purpose trust to hold the trustee accountable.

Reserved powers

One of the challenges that settlors face when they establish a trust is to play an ongoing role in the administration of the trust without compromising the benefits that it provides. Under Guernsey law, settlors can reserve to themselves, or to others, a wide range of powers such as powers to:

a revoke or vary the trust;

b appoint income or capital;

c direct investments;

d appoint or remove trustees and directors of underlying companies;

e change the proper law; and

f veto trustee decisions.

Trustee liability

Trustees of a Guernsey trust have a wide range of duties under the law, including a duty (subject to the terms of the trust) to preserve and enhance the value of the trust, so far as is reasonable. There is also an overarching duty to act in the utmost good faith and ‘en bon père de famille’.9 Trustee liability can be excluded under the terms of the trust, but not so as to exclude liability for fraud, wilful misconduct or gross negligence. Claims for breach of trust must be brought within three years of the claimant becoming aware of the breach or they will be prescribed.10 Prescription differs from limitation under English law in that it operates to extinguish a claim, rather than denying relief from the claim.

Dispute resolution

Guernsey has recognised that where breach of trust claims are made against trustees, it is important that any settlement reached between the parties outside of the court room has legal and binding effect. The 2007 law therefore provides, with appropriate safeguards, for claims settled under alternative dispute resolution to be binding against all beneficiaries of the trust, whether or not yet ascertained or in existence.11

ii Company law

Guernsey’s company law continues to evolve, with the latest amendments set out in the Companies (Guernsey) Law, 2008 (Amendment) Ordinance 2015, coming into effect on 3 September 2015.

Among the many changes introduced by the new ordinance, is an ability for a Guernsey company to be incorporated with, or register, an alternative name expressed in non-Roman alphabet, characters or script. This was in response to demands from clients in the Far East and the Middle East. Other measures included provisions to align Guernsey’s legislation with the UK’s City Code on Takeovers and Mergers.

Given the number of Guernsey companies that list on the LSE, there is a clear need for the company law to remain modern and flexible.

Incorporation in Guernsey is easy and quick with the use of Guernsey’s online registry through licensed providers. A company can be incorporated within a day and, for a modest premium, in less than two hours.

In 1997, Guernsey was the first jurisdiction to introduce the concept of the protected cell company (PCC), with a further innovation in the shape of the incorporated cell company (ICC) following in 2006. Both are attractive in collective investment and insurance situations, allowing segregation and insulation of assets as between cells in the company, with the principal difference being the need for cells in an ICC to be separately capitalised.

Guernsey law also provides for companies to be limited by guarantee, a facility that is particularly helpful in structures were there is a need for an orphan vehicle.

iii Limited partnerships

Limited partnerships established under the Limited Partnerships (Guernsey) Law, 1995 are used widely in Guernsey for collective investment schemes as well as in private family arrangements. Partners have the ability to elect for the partnership to be a body corporate, with separate legal personality.

The limited partnership will generally be a look through entity, made up of a general partner (often a corporate) and one or more limited partners. The general partner holds the assets of the partnership and they are under its control. The profits of the partnership are allocated to the partners under the terms of the partnership agreement.

Limited partnerships are often used in private equity fund structures, but they can also be used in family situations where the tax consequences of establishing a trust would be unattractive. They allow a separation between ownership of an asset – such as a family business – and its control.

Limited liability partnerships have been available since 2014, following the enactment of the Limited Liability Partnerships (Guernsey) Law 2013. A limited liability partnership may be a useful vehicle for authorised or unauthorised collective investment fund structures, or for professional firms looking to incorporate for the purposes of limited liability.

iv Foundations

While trusts remain very important for Guernsey, it is not always easy for civil law clients to embrace the concept. In civil law countries, including many of the emerging markets (Brazil, Russia and China to name but three), the foundation may be more familiar and easier to accept.

With these issues in mind, and with an eye on some of the lessons learned in neighbouring jurisdictions, the Foundations (Guernsey) Law 2012 came into force on 7 January 2013.

The foundation is in some ways a hybrid between a trust and a limited company (often referred to as an ‘incorporated trust’). Like a company, the foundation has separate legal personality, a certificate of incorporation, a registered number and a Guernsey registered office. There is public certainty as to the foundation’s existence – a foundation cannot fail if it has no assets – like a company it can be ‘re-capitalised’ by an additional endowment.

A foundation is established under a charter, which is in two parts. Part A is public and includes basic details of the foundation. Part B is maintained by the registrar but in strict confidence and will include a statement of the purpose of the foundation. This latter provision was included as a regulatory safeguard.

The other core document for the foundation is the rules. These are not registered and remain completely confidential between the founder and the council. The purpose of the rules is to set out how the foundation is going to operate.

All foundations must have a purpose, which can be charitable or non-charitable and can be drafted as widely as required. The foundation may also have beneficiaries, and if it does these can be enfranchised, with a right to information in respect of the foundation like a trust beneficiary, or disenfranchised, with no right to information.

Whenever there are disenfranchised beneficiaries, or if there is only a purpose, a guardian must be appointed with responsibility for holding the council to account.

The expectation is that foundations will be used in three principal ways:

a as part of a succession planning structure for private families – be that a structure that includes a trust or as a substitute for a trust;

b as vehicles for charitable donations; and

c as orphan vehicles in corporate structuring, as opposed to using a purpose or charitable trust.

v Private trust company structures

As noted earlier, the Trusts (Guernsey) Law 2007 includes provisions allowing the settlor to reserve a broad range of powers. This allows settlors a degree of control over trustee actions and decisions without compromising the fundamental validity of the trust.

For a number of reasons, this may not always be the preferred approach, and may not go far enough in terms of giving the family the degree of influence and control over trustee decisions that they would like to have.

The solution for many families is to establish a private trust company (PTC) under their control to act as trustee of trusts established only for the family. Guernsey allows such a company to act outside of the regulatory licensing regime so long as the PTC does not charge a commercial fee.

The PTC allows the family to influence and control the structure in a number of ways:

a The family can retain the ability to nominate directors of the PTC to sit alongside directors from the service provider and other professional advisers. These family nominated directors will often be members of the family.

b The trust can still include reserved powers, giving the settlor additional comfort in relation to key decisions.

c The settlor can provide the board of the PTC with guidance on an ad hoc basis or through a letter of wishes.

d The settlor or family can control the composition of the board of subsidiary companies held by the trust.

e The settlor or family can establish a set of rules dictating how the PTC should be run and how key decisions should be made through the drafting of the constitutive documents of the PTC alongside other documents such as a family charter.

It is a lot easier for the family to change the composition of the board of directors of the PTC than it would be to remove and replace an independent trustee appointed in the more usual fashion.

When establishing a PTC structure, it is important that the family considers how the PTC should be owned. Traditionally, the PTC would be a company owned by a purpose trust. Alternatively, the PTC can be structured as a guarantee company, although care will need to be taken in order to ensure issues in relation to succession to guarantee membership are considered. More recently, foundations have been used instead of the purpose trust to own the PTC. Alternatively, the PTC can simply be established as a foundation.

V REGULATION

Guernsey has been at the forefront of regulating and licensing fiduciary service business. Alongside Jersey, it was the first jurisdiction to introduce legislation for the licensing of fiduciaries in 2000.12

Under the auspices of the Guernsey Financial Services Commission (GFSC), fiduciary businesses in Guernsey are subject to a state of the art regulatory regime. The GFSC operates a risk-based approach to regulation. According to its 2015 report, the fiduciary division of the GFSC had 153 full licensees under its supervision, each of which have been risk-assessed and all of which will receive regular visits from and reviews by the regulator.

All licensees are required to abide by core principles set out in the legislation, related rules, codes of practice and guidelines.

Guernsey has a comprehensive suite of legislation in relation to anti-money laundering (AML) and prevention of the financing of terrorism in keeping with the highest levels found internationally. A principal function of the GFSC is to ensure that licensed fiduciaries adhere to the requirements of the legislation and there is a separate division dealing with financial crime and a further division focused on enforcement. In this regard, the 2015 report noted that its enforcement policy focussed on ensuring that licensees have adequate risk mitigation programmes in place.

Taken as a whole, the regulatory regime is a significant factor in Guernsey’s status globally and explains why Guernsey has received such positive reviews from the likes of MONEYVAL.

As ever, the regulatory environment does not stand still and the GFSC is working on a number of initiatives including revisions to the AML handbook and a comprehensive revision of the regulatory laws.

Guernsey, like most other jurisdictions in the world, is also actively involved with the increased degree of reporting and sharing of information in response to FATCA and its UK equivalent. Guernsey is also an early adopter of the Common Reporting Standard and will be playing its full part in the process of ensuring that its tax neutrality continues to operate in a way that is consistent with international law.

The UK has been leading the charge on the implementation of a public register of beneficial ownership of UK companies that is soon to be expanded to include non-UK entities owning UK real estate. Guernsey has announced plans to introduce a central register of beneficial ownership in relation to Guernsey entities and a public consultation on these proposals has just closed. In contrast to the UK’s beneficial ownership register, which is publicly available and searchable, Guernsey’s register will be centrally maintained, but the information on it will not be publicly available. Instead, it will only be available to certain Guernsey regulatory and law enforcement bodies (who will be able to disseminate this information to their counterparts in other countries when requests for such assistance are received).

VI CONCLUSIONS & OUTLOOK

From its beginnings in the 1960s, Guernsey has emerged as a major player in international finance. It has moved with the times, adapting its approach and its legislation in order to meet the ever-changing demands of its international client base and a rapidly evolving global approach to economic and fiscal change.

With the increasing momentum towards automatic exchange of information and increasing transparency of beneficial ownership of corporate vehicles across the globe, clearly Guernsey will need to continue to innovate in order to remain competitive while being recognised as a good global citizen. Its track record for over 50 years gives every reason for confidence that Guernsey is well placed to meet that challenge.

Following the UK’s ‘Brexit’ referendum on 23 June 2016, Guernsey is considering its position. On 24 June, the Policy & Resources Committee issued a statement pointing out that Guernsey remains a ‘third country’ in the EU, with market access to the EU in a number of areas. A policy letter is to be published shortly to form the basis of negotiations with the UK to:

a protect Guernsey’s interests in the UK exit agreement with the EU;

b replace Protocol 3 in the new UK/EU relationship;

c safeguard Guernsey’s long-standing constitutional relationship with the UK; and

d seek new opportunities as the UK establishes new trading relationships with the rest of the world.

Footnotes

1 Keith Corbin is executive chairman and Mark Biddlecombe is client services director and in-house legal counsel at Nerine Trust Company Limited.

2 Treaty of Accession of the United Kingdom to the EEC signed 22 January 1972.

3 European Communities (Implementation) (Bailiwick of Guernsey) Law 1994.

4 ‘Edwards’ Report commissioned by UK Home Office 1997.

5 A list of TIEA and DTA partner countries is located at www.gov.gg/tax.

6 Inheritance (Guernsey) Law, 2011, s.4(2).

7 It is possible instead to arrange for a postal oath to be sworn before a notary public or the equivalent.

8 See, for example, E v. E (Royal Ct.), 2003–04 GLR N [22] where the issue was not about policy, but about the circumstances under which the contract was entered into.

9 This is a customary law principle, particular to Guernsey’s law. In trust law the Privy Council determined in Spread Trustee Co Ltd v. Hutcheson [2011] UKPC 13, that it was analogous to the English law prudent investor test.

10 The recent case of Broadhead v. Spread Trustee Company Limited & Ors (Guernsey Judgment 46/2014) determined that the clock starts to run once the claimant has enough information that would make any reasonable person begin to investigate whether there had been a breach of trust. They would see that a loss has been incurred, and have a sense that there was a real possibility (not a mere suspicion) that the loss had been caused by negligence on the part of the trustees.

11 Trusts (Guernsey) Law, 2007, Section 63.

12 The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law 2000.