On 22 November 2019, guidance in relation to economic substance requirements was issued jointly by Guernsey, Isle of Man and Jersey. In general, the relevant ‘adequate substance’ requirements mean that (amongst other things) a company must conduct Core Income-Generating Activity (‘CIGA’) in the relevant island, and that activity must be actually directed and managed in that island. Sanctions for non-compliance include exchange of information with Competent Authorities in other jurisdictions, financial penalties, and striking off the companies register.

The new guidance sharply illustrates the close relationship between tax and governance, and the fundamental role of intercompany agreements in both.

To give one example from the new guidance, Core Income Generating Activities (CIGA) for financing and leasing are stated to include ‘agreeing funding terms’, ‘setting the terms and duration of any financing or leasing’ and ‘monitoring and revising any agreements’ – all of which presuppose the creation and maintenance of appropriate intercompany agreements.

Page 13 of the new guidance goes further in providing an example of a finance leasing company XYZ Ltd, which leases a crane to an associated entity. The directors in this example did not understand or properly consider the terms of the finance lease agreement which had been drawn up prior to incorporation, and that agreement “did not include clauses … to mitigate the risk of the lessee not making the lease payments, or the risk of the crane not being properly maintained or improperly used throughout the duration of the lease.” As a result, the conclusion was that “XYZ Limited will not meet the substance requirement because the company is unable to demonstrate that the CIGA are being performed in the Island.”

None of this should be a surprise to anybody. The key role of corporate governance in multinational group structures is something that we cover in Module 1 of our Online Course in Intercompany Agreements for Transfer Pricing Compliance.

Although the task of creating and maintaining appropriate agreements may seem overwhelming, tools and support are available. We created our fast track intercompany agreements service specifically to provide a speedy, effective and affordable way to create best-in-class intercompany agreements, leveraging the information already held by TP, finance and corporate service providers. You can find more information about how this service works here.