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Understanding the UK-Guernsey Double Taxation Agreement (DTA)

Published by Shailesh Sapkota
Posted Date: June 26, 2024 , Modified Date: July 10, 2024
Categories: Tax Agreements

On the 2nd of July 2018, the governments of the United Kingdom and Guernsey signed the pivotal agreement, namely, the Double Taxation Agreement (DTA), which was given effect by an Exchange of Letters. This agreement came into force on the 7th of January 2019.

This article aims to provide an overview of these agreements and to delineate their primary implications.

This is the agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the States of Guernsey for the elimination of double taxation with respect to taxes on income and on capital gains and the prevention of tax evasion and avoidance.

Scope and Application

The first two articles in the Agreement outline the scope and applicability of its provisions, detailing the persons and types of taxes it covers. Specifically, they define who is affected by the Agreement and the various taxes that fall under its guidelines.

Article 1: Persons Covered

This article primarily focuses on person who are residents of one or both of the territories.

Income or gains derived from an entity, or an arrangement treated as fiscally transparent under either territory’s law will be considered income or gains of a resident, but only if taxed as such by that territory.

Article 2: Taxes Covered

The scope of this agreement extends to taxes on income and on capital imposed on behalf of a territory, irrespective of the way they are levied. It includes all taxes on total income or parts of income, such as gains from selling movable or immovable property.

Specifically, the taxes covered are income tax ("Guernsey tax") in Guernsey and income tax, corporation tax, and capital gains tax ("United Kingdom tax") in the United Kingdom. The Agreement also extends to any similar taxes introduced after its signing, whether they replace or supplement the existing taxes. The tax authorities of both territories will notify each other of any major changes in their tax laws.

Article 3: General Definitions

This article provides crucial definitions for interpreting the agreement:

  • It defines “United Kingdom” to mean Great Britain and Northern Ireland and the areas beyond the territorial sea, over which they exercise sovereign rights or jurisdiction in accordance with their domestic law and international law.
  • “Guernsey” refers to the States of Guernsey as well as the islands of Guernsey, Alderney and Herm, and the territorial sea adjacent thereto in accordance with international law.
  • “A territory” and “the other territory” mean Guernsey or the United Kingdom, based on the context.
  • “Person” includes an individual, a company or any other body of persons.
  • “Company” refers to any body corporate or any entity that is treated as a body corporate for tax purposes.
  • “Enterprise” applies to the carrying on of any business.
  • “Enterprise of a territory” and “enterprise of the other territory” refer respectively to an enterprise carried on by a resident of a territory and an enterprise carried on by a resident of the other territory.
  • The term “international traffic” means any transport by a ship or aircraft,
  • “Competent authority" is designated as the Commissioners for Her Majesty’s Revenue and Customs in the United Kingdom and the Director of Income Tax in Guernsey or their respective authorised representatives.
  • “Business” includes the performance of professional services and of other activities of an independent character.
  • The term “pension scheme” means any arrangement that operates to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements, which is generally exempt from income taxation.

It's also noted that any undefined terms within the agreement should be interpreted based on their meanings in the domestic tax laws of the respective party, with the tax laws taking precedence over other laws.

Residency Status

Article 4: Resident

This agreement refers to the “resident of territory” as the person who, under the laws of that territory, is liable to tax therein by reason of his domicile, residence, place of management or incorporation, or any criterion of a similar nature. However, it excludes those who is liable to tax in that territory in respect of only income or capital gains from sources in that territory.

Residency-status UK-Guernsey Double Taxation Agreement

Whereby if an individual is a resident of both territories, he will be considered a resident only of the territory where he has a permanent home. Given that he has a permanent home available to him in both territories, the centre of vital interest test will determine his status. If this test is inconclusive, or if he does not have a permanent home available to him in either territory, he will be a resident of the territory in which he has a habitual abode. If he has a habitual mode in both territories or in neither of them, the competent authorities of the territories shall settle the question by mutual agreement.

If a person other than the individual is a resident of both territories, the authority will try to mutually determine their residency based on factors like the place of effective management and incorporation. Without the mutual agreement, such persons are not entitled to any tax relief or exemption provided by this agreement.

Article 5: Permanent Establishment

This article clarifies the term “permanent establishment” as the fixed place of business through which the business of an enterprise is wholly or partly operated.

The permanent establishment includes places like management offices, branches, factories, offices, workshops and extraction sites. A building site or construction project only counts if it lasts over 12 months. Exceptions to this are places used solely for storage, display, delivery, stock maintenance, purchasing goods, or preparatory activities unless they are part of a cohesive business operation by the enterprise or a closely related enterprise.

A person or enterprises are "closely related" if one controls the other or both are controlled by the same entity, typically through majority ownership. An enterprise has a permanent establishment in a territory if a person, other than an independent agent, habitually concludes contracts on its behalf there, unless their activities are limited to preparatory tasks.

Operating through an independent agent in the ordinary course of business does not create a permanent establishment. Additionally, a company is not considered a permanent establishment of another company solely due to control relationships.

Specific Tax Provisions

Article 6: Income from Immovable Property

Article 6 addresses the taxation on income derived from immovable property by the residents of a territory. The term “immovable property” has the same meaning as it has under the law of the territory where the property is situated. It includes property accessories, livestock and equipment used in agriculture and forestry, rights related to land property, etc. However, ships, boats and aircraft are not regarded as immoveable property.

This applies to all persons, including individuals and enterprises, who derive income from the direct use, letting or use in any other form of immovable property.

Article 7: Business Profits

The applicability of tax on the profits of an enterprise is explored in Article 7 of the Agreement. As per Article 7, such profits shall be taxable only in that territory where the profit is generated. However, where the enterprise carries on business in the other territory through a permanent establishment, the profits that are attributable to the permanent establishment may be taxed in that other territory.

The profits attributable to the permanent establishment means the profits it might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions.

Article 8: International Shipping and Air Transport

Article 8 addresses the taxation of an enterprise's earnings on international shipping and air transport.

International-shipping-and-air-transport

Such profits are only taxable in the territory in which the income is generated. For this article, the profits include,

  • Profits from rental on a bareboat basis of ships or aircraft, and
  • Profits from the use, maintenance or rental of containers used for the transport of goods or merchandise.

Article 9: Associated Enterprises

This provision covers the enterprises controlled by other enterprises residing in different territories.

If an enterprise in one territory is involved in the management, control, or capital of an enterprise in another territory, or if the same people are involved in both, and they set conditions between the enterprises that differ from those between independent enterprises, any resulting profits that should have accrued to one enterprise but did not due to these conditions can be included and taxed as profits of that enterprise.

If one territory taxes profits that would have accrued to its enterprise under independent conditions but were taxed by the other territory, the other territory must adjust the tax amount accordingly. This adjustment should consider the agreement's provisions, and the territories' authorities should consult if needed.

Article 10: Dividends

Dividends paid by a company in one territory to a resident of another territory are generally taxed in the resident's territory. However, dividends paid by a company in one territory can also be taxed in that territory based on its laws. But if the person receiving the dividends lives in the other territory:

a)

Normally, these dividends will not be taxed in the territory where the company is located.

b)

If the dividends come from income earned from real estate (as defined in Article 6) by an investment vehicle that distributes most of its income annually and is tax-exempt, then the tax in the company's territory cannot be more than 15% of the dividends unless the recipient is a pension scheme in the other territory, in which case the exemption in (a) applies.

This rule does not change how the company's profits, from which the dividends are paid, are taxed.

Article 11: Interest

The taxation on the interest is dealt with in Article 11 of the document.

Interest arising in a territory and beneficially owned by a resident of the other territory may be taxed in that territory as well as the other territory, according to the laws of that territory. However, suppose the beneficial owner of the interest is a resident of the other territory, and at least one of the following conditions is met. In that case, the interest shall be taxable only in that other territory.

The conditions include,

  • The interest is beneficially owned by an individual, a pension scheme, a bank or building society, etc. 
  • The interest is paid by a territory, one of its political subdivisions, local authorities or statutory bodies.

Article 12: Royalties

Article 12 of the agreement states the implication on the royalties received.

  • Royalties arising in a territory but beneficially owned by a resident of the other territory may be taxed in that other territory.
  • Royalties may also be taxed in the that territory where they arise, but if the beneficial owner is a resident of the other territory and meets at least one condition mentioned, those royalties shall only be taxable in that other territory. Conditions include ownership by the other territory itself or its statutory bodies, a resident individual, a publicly traded company, a company with less than 25% foreign ownership or any other approved person.
  • “Royalties” are payments received for the use of copyrights, patents, trademarks, plans, secret formulas or processes.
  • If the owner has a permanent establishment in the territory where the royalties arise and is connected to it, in such cases, provisions of Article 7 apply instead.
  • Royalties are deemed to arise where the payer resides or has a permanent establishment responsible for paying the royalties.
  • If there is a special relationship between the payer and the beneficial owner, causing royalties to exceed the normal amount paid, only the normal amount is covered by this article; the excess is taxed according to each territory’s laws.

Article 13: Capital Gains

Capital-Gains-UK-Guernsey Double Taxation Agreement

Article 13 of the Agreement covers the provisions for capital gains tax. The tax treatment of capital gains depends on various factors, such as the type of assets and the seller's residency. The provisions can be summarised as follows:

  • Immovable Property: If a resident of one territory sells immovable property located in the other territory, the gains from the sale may be taxed in that other territory.
  • Shares and Interests: Gains from selling shares or comparable interests, other than the shares which are regularly traded on a recognised stock exchange, that derive more than 50% of their value from immovable property in the other territory can be taxed in that other territory.
  • Movable Property: Gains from selling movable property that is part of the business property of a permanent establishment which an enterprise has in the other territory may be taxed in that other territory.
  • Ships and Aircraft: Gains derived by an enterprise from selling ships or aircraft operated in international traffic or from movable property related to the operation of such ships or aircraft will be taxed only in the territory where the business resides.
  • Other Property: Gains from the disposal of any property not described above will only be taxed in the territory where the alienator is a resident.

Article 14: Income from Employment

The provisions for taxation on income from employment are covered in Article 14 of the Agreement. Under this article, the salaries, wages, and other similar remuneration derived by a resident of a territory with respect to employment are taxable only in that territory. However, if employment is exercised in another territory, such remuneration may be taxed in that other territory.

For the remuneration derived by a resident of a territory from the employment exercised in the other territory to be taxable only in the territory where he is resident, all of the following conditions must be met:

a) The person is in the other territory for 183 days or less in any twelve-month period that overlaps with the fiscal year.

b) The employer is not a resident of the other territory.

c) The employer does not have a permanent establishment in the other territory that covers the payment.

Importantly, if a resident works on a ship or aircraft operated in international traffic (not just within the other territory), their earnings will only be taxed in their first-mentioned territory.

Article 15: Directors’ Fees

Article 15 clarifies the implication of tax on the fees charged by directors.

Directors’ fees and other similar payments derived by a resident of a territory in his capacity as a member of the board of directors of a company which is a resident of the other territory may be taxed in that other territory.

Other Provisions

Article 16: Artistes and Sportsmen

This article covers the tax on the income derived as an artist or sportsman, notwithstanding the provision of Article 14.

The income derived by a resident of a territory as an entertainer, such as a theatre, musician, or as a sportsman, from his personal activities as such exercised in the other territory, will be taxed in that other territory.

If the income derived from an entertainer or a sportsman’s activities in their capacity accrues to another person other than them, that income will still be taxed in the territory in which they are exercised, notwithstanding the provisions of Article 7 and 14.

Article 17: Pensions

This article clarifies the tax treatment of pensions and similar remuneration. Essentially, such payments received by residents and arising in a territory may be taxed in that respective territory.

Article 18: Government Service

Article 18 covers the taxation on income paid by governments or related authorities to the individuals.

Government-service-UK-Guernsey Double Taxation Agreement

Remuneration, including pensions, paid by the Government of one of the territories to individuals for services rendered will be exempt from tax in the other territory if the individual is not a resident in the other territory or is ordinarily a resident in that other territory solely for the purpose of rendering those services. 

The provisions of this paragraph shall not apply to payments in respect of services rendered in connection with any trade or business carried on by either of the Governments for purposes of profit.

Article 19: Students

Payments received by a student or business apprentice for the purpose of education and training are exempt from taxes in the Territory where they are studying if they were a resident of the other Territory and the payments come from outside the Territory where they are studying.

Article 20: Other Income

Article 20 of the Agreement document specifies that income not dealt with in the previous articles, regardless of its source, are taxable only in the Territory of residence.

However, there are exceptions, notably when income is paid to a resident of one Territory from sources controlled by trustees or personal representatives who are residents of the other Territory. In such cases, the income is treated as arising from the same sources and in the same proportions as the income received by the trustees or personal representatives, with any tax paid by them on behalf of the beneficiary being treated as paid by the beneficiary.

Article 21: Miscellaneous Rules applicable to certain Offshore Activities

An enterprise conducting offshore activities in a different Territory is treated as having a permanent establishment there, unless the activities last less than 30 days in a fiscal year.

Profits from specific offshore services, like transportation or ship operations, are taxed solely in the resident Territory of the income recipient. Income from exploration rights or related property sales may be taxed where the activities occur.

Salaries from offshore-related employment are typically taxed where the work is done, except for those earned aboard ships or aircraft engaged in offshore operations, which are taxed only in the resident Territory.

The definition of offshore activities is given in the Article 3 of this document.

Article 22: Elimination of Double Taxation

The primary reason of the Double Taxation Agreement (DTA) is to make sure that individuals are not taxed in two separate territories. Article 22 of the Agreement explains how this is worked out in both of the territories.

To avoid double taxation in Guernsey:

  • Guernsey residents can deduct the income tax paid in the UK from their Guernsey tax for income that may be taxed in the UK.
  • The deduction cannot exceed the part of Guernsey tax attributable to the UK-taxed income.
  • If income is taxable only in the UK, Guernsey may consider it when calculating tax on the resident's remaining income.

Under UK law, to avoid double taxation:

  • Guernsey tax on profits, income, or gains from Guernsey is credited against UK tax on the same income (excluding dividend tax on profits used to pay the dividend).
  • Dividends from a Guernsey company to a UK company are exempt from UK tax if conditions for exemption are met.
  • Profits of a Guernsey permanent establishment of a UK company are exempt from UK tax if conditions for exemption are met.
  • For dividends not exempt under (2), paid by a Guernsey company to a UK company owning at least 10% of voting power, the credit for Guernsey tax includes the company's tax on profits used to pay the dividend.

However, the provisions for avoiding double taxation in Guernsey do not apply if the UK tax payable is solely because the income, profits, or gains are derived by a UK resident. Similarly, the provisions of avoiding double taxation in UK do not apply if the Guernsey tax is payable solely because the income, profits or gains are derived by a Guernsey resident.

Article 23: Entitlement to Benefits

An important disclaimer, in regard to the entitlement of tax benefits is provided on Article 23 of the Agreement.

A benefit under this Agreement will not be granted for income or capital gain if it is reasonable to conclude that obtaining the benefit was a principal purpose of any arrangement or transaction leading to that benefit, unless it aligns with the object and purpose of the Agreement's provisions.

entitlement-to-benefits

If a benefit under this Agreement is denied, the competent authority of the denying territory must still consider granting the benefit, or a different benefit, to the person upon request. This consideration is based on relevant facts and circumstances, assuming the benefit would have been granted without the disputed transaction or arrangement. Before rejecting a request from a resident of the other territory, the competent authority must consult with the competent authority of that other territory.

Article 24: Non-Discrimination

Article 24 of the Agreement document addresses that a person, partnership, or association recognised as such under the laws of one Territory should not face different or more burdensome taxes or related requirements in the other Territory than those faced by similar entities in that other Territory, especially regarding residency.

Similarly, the taxes on a permanent establishment of a business from one Territory, located in the other Territory, should not be less favourable than the taxes on businesses from the other Territory engaging in the same activities.

Article 25: Mutual Agreement Procedure

Article 25 of the agreement outlines the Mutual Agreement Procedure (MAP) for resolving taxation disputes between the involved territories. Unresolved cases are decided via arbitration between the competent authorities, provided that the cases are presented in time.

If a person believes they are facing taxation contrary to the agreement's provisions, they can present their case to either Territory's competent authority within three years of the taxation issue's notification.

The competent authorities will endeavour to resolve the case mutually, and if unsuccessful, will seek resolution with the other Territory's authority. Any agreement reached supersedes domestic law time limits.

Arbitration Process for Unresolved Cases:

If a taxation dispute remains unresolved after two years of the initial presentation, the case can be arbitrated upon the person's request. The arbitration decision becomes binding unless a directly affected person rejects the implementing mutual agreement.

The application of the arbitration process is determined through mutual agreement between the competent authorities.

Article 26: Exchange of Information

The necessity to exchange the information in between the competent authorities of two territories (defined in Article 3) is addressed in Article 26 of the Double Taxation Agreement (DTA). The relevant information will be exchanged for enforcing the provisions of the agreement. The article also stresses that the information received by a Territory must be treated as secret, similar to domestic tax information.

If a Territory requests information, the other Territory cannot refuse to supply it, and must use its measures to obtain it, even if it doesn't need it for its own tax purposes.

However, the territories are not obligated to do the following:

  • Carry out administrative measures that violate the laws or administrative practices of either Territory.
  • Supply information that is not obtainable under the laws or normal administrative practices of either Territory.
  • Provide information that would reveal trade secrets or contravene public policy.

Article 27: Assistance in the Collection of Taxes

Under Article 27 of the Agreement, the territories agree to help each other collect revenue claims, including taxes, interest, penalties, and collection costs, as long as this cooperation aligns with their laws and the Agreement. If a revenue claim is enforceable in one territory and the debtor cannot prevent its collection, the other territory will collect it as if it were their own tax.

assistance-in-the-collection-of-taxes

Similar to Article 25, Article 26 highlights that the territories are not obligated to certain practices, such as:

  • Perform actions against its laws or administrative practices.
  • Undertake actions contrary to public policy.
  • Assist if the requesting territory has not used all reasonable collection measures.
  • Assist if the administrative burden outweighs the benefit.
  • Assist if the taxes in question are considered contrary to generally accepted taxation principles.

Article 28: Entry to Force

Article 28 outlines the procedures for the Agreement's entry into force and its effective date.

Each territory will inform the other via diplomatic channels when their respective legal procedures for enacting this Agreement are complete. The Agreement will come into force on the later date of these notifications and will have the following effects:

In Guernsey:

  • Tax withheld at source: Affects the transaction on or after the first day of the second month following the Agreement’s entry to force.
  • Income Tax: Affects the year of charge on or after 1 January following the Agreement’s entry to force.

In the United Kingdom:

  • Tax withheld at source: Affects the transaction on or after the first day of the second month following the Agreement’s entry to force.
  • Income Tax: Affects the assessment year starting on or after 6 April following the Agreement’s entry to force.
  • Corporation Tax: Affects the accounting period starting on or after 1 April following the Agreement’s entry to force.

Notwithstanding the above provisions, the provisions of Articles 25 and 26 and Article 27 will be effective from the date this Agreement comes into force and from the date specified in an exchange of letters, respectively, regardless of the tax period involved.

The 1955 Arrangement between Guernsey and the United Kingdom for avoiding double taxation will cease to be effective from the date this new Agreement takes effect and will terminate on that date.

Article 29: Termination

Article 29 addresses the termination of the Agreement.

As the Agreement has already commenced, the Agreement will stay in effect until one of the Territories decides to terminate it. Either Territory can end the Agreement by giving a written notice at least six months before the end of any calendar year, but only after the Agreement has been in force for five years. Upon termination, the Agreement will cease to have effect:

In Guernsey:

  • Taxes withheld at source: For amounts paid or credited after six months from the notice date.
  • Income Tax: For any assessment year starting on or after 1st January following the notice date.

In the United Kingdom:

  • Taxes withheld at source: For amounts paid or credited after six months from the notice date.
  • Income Tax and Capital Gains Tax: For any assessment year starting on or after April 6th following the notice date.
  • Corporation Tax: For any financial year starting on or after 1st April following the notice date.

Conclusion

The Tax Information Exchange Agreement and the Double Taxation Agreement (DTA) between the UK and Guernsey is a significant step in fostering a transparent and cooperative fiscal relationship between the two territories.

This not only streamlines the tax obligations for residents but also encourages trade and investment, given the clarity on tax liabilities.

As international fiscal landscapes evolve, such agreements will continue to play a vital role in navigating the complex realm of global taxation.

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