Oct 3, 2024
KEY TAKEAWAYS
These features have made Guernsey companies extremely popular for use as asset holding vehicles, co-investment vehicles and as vehicles for investment funds.
This client memorandum gives a basic overview of the key features of Guernsey companies, including the incorporation process, day-to-day operations, the winding up process and other features that may be relevant when considering using a Guernsey company.
Guernsey companies are incorporated under and governed by the Companies (Guernsey) Law, 2008 (as amended) (the "Companies Law"). Key features of Guernsey companies include:
The advantages of using Guernsey as a jurisdiction for incorporation and administration of a company include:
The incorporation process is a straightforward electronic registration. This can be completed in a day (or in as little as fifteen minutes for a fast-tracked incorporation), provided that the prerequisite director registration and anti-money laundering formalities have been completed.
Incorporation must be carried out by a local corporate services provider ("CSP").
The company must maintain a registered office in Guernsey and complete an annual validation filing in January of each year. These services are usually provided by the local CSP.
Details of the company are maintained on the electronic register maintained by the Registrar of Companies (the "Registrar") (www.guernseyregistry.com and www.greg.gg) and all subsequent filings can be made electronically via its secure online portal.
Guernsey companies do not need an authorised share capital. Directors can issue shares or grant rights to subscribe for shares if they are authorised to do so by the memorandum or articles of incorporation, or by resolution of the company (but subject in all cases to any restrictions that might be contained in those documents).
The consideration transferred for the issue of any shares can be in any form whatsoever. Although they may do so if they wish, there is no requirement for Guernsey companies to maintain a share premium account. This advantage enables Guernsey companies to issue shares at a premium and for the premium to be transferred to the share capital account and used by the company without any restrictions. Guernsey companies are also able to issue shares at a discount or pay a commission in respect of the shares.
A Guernsey company can also (if it is permitted under its memorandum and articles) pass an ordinary resolution to alter its memorandum to amend the share capital of the company to consolidate, divide or sub-divide all, or any part, of its share capital, cancel shares which have not been taken up or convert any of its shares to a different currency.
A Guernsey company can permit members to redeem redeemable shares on such terms and in such manner as may be provided for in its memorandum or articles or in accordance with the terms of issue of those shares. However, it is important that the company always retains at least one member post redemption. Redemptions of shares will be regarded as a distribution and therefore the company will need to pass the solvency test (see below) following the completion of the redemption. However, importantly redemptions by open-ended investment companies are subject to a less stringent solvency test.
The shares of any member in a Guernsey company are transferable in the manner provided by the company's memorandum and articles and there are no statutory rights of pre-emption. However, rights of pre-emption can be included in the articles for the company or in a shareholders' agreement if necessary.
A Guernsey company can acquire its own shares on such terms and in such manner as may be provided for in its memorandum and articles or the terms of issue of the shares. If the acquisition is "off-market" a special resolution will need to be passed to approve the contract for the share purchase. The purchase by a company of its own shares may also be regarded as a distribution and therefore the company will also need to pass the solvency test (see below) following the completion of the acquisition. Again, the company must ensure that it maintains at least one member after the acquisition.
If a Guernsey company acquires its own shares, it can hold those shares as treasury shares, provided that it is authorised by its memorandum or articles or by an ordinary resolution to do so - the only restriction is that at least one share in the company must be held by another person. Otherwise the acquired shares should be cancelled.
A Guernsey company, or any of its subsidiaries, can give financial assistance to the Guernsey company for the purpose of, or in connection with, the purchase of its own shares. However, the financial assistance will be regarded as a distribution and consequently the solvency test will need to be satisfied (see below).
Guernsey companies are not required to maintain any specific amount of share capital, unless they are required to do so in their memorandum and articles or are regulated by the Guernsey Financial Services Commission ("GFSC") to carry out certain licensed activities. Consequently, Guernsey companies are generally free to distribute their assets provided that the directors are satisfied that immediately after making a distribution the company will satisfy the statutory solvency test.
The solvency test in Guernsey means that:
When considering the solvency test, the directors must have regard to the most recent accounts of the company and all other circumstances which the directors know, or ought to know, affect, or may affect, the value of the company's assets and liabilities. The directors can rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.
A distribution in Guernsey is the transfer of the company’s assets, other than the company's own shares, to or for the benefit of a member or the incurring of a debt to, or for the benefit of, a member in respect of the member's interests whether by means of a purchase of property, the redemption of or other acquisition of shares, a distribution of indebtedness or by some other means.
A dividend is any distribution (whether in the form of money or other property) other than a distribution by way of:
The directors of a company may authorise a distribution if the distribution satisfies any relevant requirement in the company's memorandum and articles and if they are satisfied on reasonable grounds that immediately after the distribution the company will satisfy the solvency test. The directors must approve a certificate stating that in their opinion the company will satisfy the solvency test and the grounds for it and the ground for that opinion. However, distributions by way of the redemption of shares made by an open-ended investment company do not require the directors to approve a solvency test certificate, although the solvency test must still be satisfied.
If after the distribution is authorised and before it is paid, the directors cease to be satisfied on reasonable grounds that the company would satisfy the solvency test, the distribution is deemed not to have been authorised.
If it transpires that a distribution was made to a member of the company at a time when the company did not immediately after the distribution satisfy the solvency test, the distribution may be clawed-back from the recipient, unless the member received the distribution in good faith without knowledge of the company's failure to satisfy the solvency test, the member has altered their position in reliance on the validity of the distribution and it would be unfair to require payment in full or at all.
If any wrongly paid distribution is not recoverable from the company's members, the directors may be personally liable to the company if they have voted in favour of a distribution in circumstances where the correct procedures relating to the distribution were not followed, or when there were no reasonable grounds for believing that the company would satisfy the solvency test immediately after the distribution was made.
In 1993 Guernsey pioneered the concept of the protected cell company, and has been instrumental in establishing these innovative vehicles as internationally recognised corporate entities. Subsequently in 2006, Guernsey also introduced legislation creating ICCs.
A PCC is a single legal entity, but the company is made up of a core and a number of ring-fenced protected cells. It is a way of creating separate and distinct portfolios of assets and liabilities within one company. Originally designed for use in the captive insurance industry, the potential benefits to other sectors of such vehicles, such as for investment funds, were also recognised from the outset.
Traditional "umbrella funds" have been popular in Guernsey and elsewhere for many years, but practitioners had always recognised the potential risk of "contagion" between sub-funds. For example, where an umbrella fund, established as an ordinary company, has a sub-fund which is highly geared and adverse market movements have resulted in the sub-fund's liabilities being greater than its assets, it is possible for creditors to look to the assets of other sub-funds (which might have a conservative investment and borrowing strategy) to cover their loss.
This potential risk is removed by the PCC structure because, in the absence of a recourse agreement, in the event of insolvency of a cell the assets of one cell will not be available to creditors of other cells. Recourse to the core or another cell can be made only in the event of a prior recourse agreement. This statutory protection provides fund promoters with the benefit of a corporate vehicle whilst affording similar protection from contagion as an umbrella unit trust.
PCCs have both core capital and cellular capital, which is the capital invested in individual cells.
PCCs have a number of benefits:
An ICC has cells like a PCC, but in the case of an ICC each cell is a separately incorporated, distinct legal entity. The ICC and its cells all have the same registered office and at least one of the directors of an incorporated cell must also be a director of its incorporated cell company. The ICC legislation specifically states that incorporated cells are not subsidiaries of the ICC. Unlike a PCC, and because it is an incorporated company in its own right, a cell of an ICC may have a different memorandum and articles of incorporation to the ICC itself or another cell in the same ICC.
The ICC submits a combined annual validation and only the ICC is required to create separate accounts (although, each IC can be prepare its own accounts if necessary).
This structure allows incorporated cells to exploit their status as independent legal entities, with the ability to contract amongst themselves.
The advantages of an ICC are:
Companies that are registered in Guernsey are subject to income tax on their profits at the rate of 0%, unless the company has certain types of Guernsey-sourced income. These are typically taxed at 10%. Those income types include income from banking business, fiduciary business, certain types of insurance-related business, administration of controlled investments and custody services. There is also a 20% rate which applies to utilities providers in Guernsey and income from the ownership of land and buildings in Guernsey.
There is no separate corporation tax in Guernsey and Guernsey has no capital gains, inheritance, capital transfer, value added or general withholding taxes. Further, no stamp duty is chargeable in Guernsey on the issue, transfer or redemption of shares.
Guernsey companies are required to keep accounting records that are sufficient to:
The company's accounting records can either be kept at its registered office in Guernsey, or at such other place as its directors decide (provided that accounting records are also kept in Guernsey showing the financial position of the company at intervals of not more than six months).
There is no requirement to publicly file accounts, and only the directors, secretary or other officers of a Guernsey company have a right to inspect the accounting records of the Company on any particular day.The directors of a Guernsey company must arrange for accounts to be prepared for each of the financial years of the company. Those accounts must include (i) a profit and loss account, and (ii) a balance sheet. The accounts must also be approved by the board of directors of the company and be signed by at least one of the directors.
For group companies, it is possible for the Guernsey parent company to prepare consolidated accounts that cover each of its Guernsey subsidiary companies.
The company's accounts, the directors' report and the auditor's report (if prepared, see below) should be provided to each member of the company (ie the shareholders) within twelve months after the end of the financial year of the company to which they relate.
Members and officers of the company can also make a request to the company that the company provides to them copies of the company's accounts, director's report and the auditor's report (if prepared) in respect of a particular financial year within seven days.
The directors of a Guernsey company are also required to prepare a directors' report for each of the company's financial years, unless a waiver resolution has been passed by the members. The directors' report should include a statement in respect of the principal activities of the company, which can be in summary form.
It is possible for the directors of associated companies to combine their reports into a single consolidated directors' report.
Guernsey companies can also waive the requirement to hold annual general meetings of their members by passing a waiver resolution. Alternatively, a Guernsey company should hold an annual general meeting within the first eighteen months of the date that the company was incorporated and then at least once in every calendar year and not more than fifteen months should lapse between each annual general meeting.
If the company does hold annual general meetings, it should present at the meeting copies of the most recent accounts, directors' report and auditor's report (if prepared) of the company.
Under the Companies Law there are two procedures available for the voluntary dissolution of a Guernsey company. A Guernsey company may be dissolved either by way of a "voluntary striking off" or a "voluntary winding up".
Ultimately, whether the voluntary winding up procedure or the voluntary striking off procedure is the most appropriate to dissolve the company will depend on various factors, including whether the criteria for using the voluntary striking off procedure are met, the commercial timescales and objectives and the costs involved.
For further information regarding the winding-up or voluntary striking off of a Guernsey company, please refer to our client memorandum entitled "Striking-Off and Winding Up Guernsey Companies".
Approximately 60,000 companies have been incorporated or registered in Guernsey to date and they continue to be a very popular vehicle for the structuring of corporate and personal transactions.
Due to the flexibility that Guernsey companies provide, their tax neutral tax status and the professional expertise available on the island, Guernsey companies should be a first choice for international transactions and structuring arrangements, whether it is for an investment fund, or other capital raising, an asset holding vehicle (such as real estate and intellectual property rights) or for new ventures and businesses (such as alternative financial services providers).
Key Contacts
Managing Partner
Guernsey
