The Benefits of Using Guernsey Companies

KEY TAKEAWAYS

• Guernsey companies are extremely popular, and are used for a wide variety of purposes.

• Guernsey companies can be incorporated quickly and a large number of corporate services providers offer day-to-day administration services.

• This guide provides an overview of key features of Guernsey companies and other features that may be relevant when considering using a Guernsey company.

Guernsey offers a pragmatic and responsive regime for the incorporation and day-to-day administration of companies.

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.

Key features

Guernsey companies are incorporated under and governed by the Companies (Guernsey) Law, 2008 (as amended) (the "Companies Law"). Key features of Guernsey companies include:

• In most cases, the income of Guernsey companies is taxable at 0% and there is no separate corporation, capital gains, inheritance, capital transfer, value added or general withholding taxes in Guernsey.

• Separate legal personality.

• No stamp duty is chargeable in Guernsey on the issue, transfer or redemption of shares.

• It is possible to incorporate a Guernsey company within 24 hours, or even 15 minutes for a fast tracked incorporation.

• The ability to have single member companies (ie companies that only require one shareholder and one director, who can be the same person) which have limited liability.

• Membership can be transferred easily.

• The ability to incorporate companies with limited liability, unlimited liability, mixed liability and liability limited by guarantee.

• No authorised capital or capital maintenance requirements, other than a statutory solvency test on distributions. In turn, this means no share premium account requirements and the ability to redeem or repurchase shares out of any capital account.

• No financial assistance restrictions other than satisfaction of the solvency test.

• Standard constitutional documents available by default.

• Unrestricted company objects.

• The ability to indefinitely waive annual general meeting, directors' report and audit requirements.

• No statutory codification of directors' duties.

• Minority shareholders squeeze-out provisions on a take-over.

• The ability to migrate (ie to transfer the registration of the company) in and out of Guernsey, with compatible jurisdictions.

• The ability to amalgamate Guernsey companies with other Guernsey and non-Guernsey companies.

• The ability to incorporate companies as protected cell companies ("PCCs") and incorporated cell companies ("ICCs").

• It is possible to voluntarily strike dormant companies off the Guernsey Register of Companies (the "Register") without a formal and costly liquidation process.

Benefits of using Guernsey

The advantages of using Guernsey as a jurisdiction for incorporation and administration of a company include:

• A mature financial services sector.

• Experienced professional legal and accounting infrastructure.

• Well-established and wide-ranging company administration across a range of different corporate structures.

• Thorough and pragmatic regulation.

• Straightforward and swift incorporation process.

• Tax-neutral environment for companies.

• Internationally recognised jurisdiction.

• The International Stock Exchange (formerly known as the Channel Islands Securities Exchange) is a recognised exchange for UK tax purposes, is an affiliated member of IOSCO and is based in Guernsey.

• Geographical proximity to London and continental Europe.

• Outside the European Union.

• London time-zone.

• Availability of innovative corporate vehicles, namely PCCs and ICCs

Incorporation

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.

Share capital

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.

Redemptions

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.

Transfers

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.

Purchases of own shares

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).

Distributions

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:

• the company must be able to pay its debts as they become due;

• the value of the company's assets must be greater than the value of its liabilities; and

• in the case of a GFSC regulated company, the company meets any other solvency requirements imposed upon it.

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:

• an issue of fully or partly paid bonus shares;

• a redemption or acquisition of any of the company's shares;

• financial assistance for the acquisition of the company's own shares;

• a reduction of share capital; or

• a distribution of assets to members for the purposes of its winding up, or pursuant to an administration or receivership order.

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.

PCCs and ICCs

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.

PCCs

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:

• Avoidance of contagion risk (see above).

• Lower cost of establishing new cells (as opposed to setting up an entirely new company).

• Faster regulatory consent for new cells established as investment funds (usually five working days).

• Integrated marketing of a variety of investment strategies in one corporate entity.

• Cost savings in the areas of corporate governance and company administration (for example, common board of directors and company secretary and only one set of articles).

• Considered a single legal entity for Guernsey tax purposes.

• Each cell can have appointed different service providers, such as investment advisers or managers.

• Cells can be converted into stand-alone companies under a specific statutory procedure. Further, Walkers is experienced in advising on the transfer of cells from one PCC to another PCC via a scheme of arrangement. These aspects of a PCC give additional flexibility to the use of PCCs and cells for structuring corporate arrangements.

ICCs

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:

• Cells may enter into legal contractual obligations with one another (such as providing guarantees or loans or acting as feeder funds based in different currencies).

• Cells have a separate legal identity and can therefore contract with third parties in their own right.

• Reduced costs of audit fees and account preparation, annual return fees and administration of separate boards and shareholder registers.

• Groups of companies can amalgamate into an ICC by producing a "transfer agreement" approved by the directors of the non-cellular company, and those of the ICC, by a special resolution of both companies and the lodging of certain information with the Registrar. A conversion of a group of companies into an ICC may result in significant cost savings - for example there would only be the need for a single set of accounts, annual validation and share register. Each cell will continue to be a separate legal entity. This could be attractive for a corporate structure that needs the ability for the cells to contract freely with each other but also wanting the cost benefits of a single cellular company.

• ICCs can also act as "nurseries" for new corporate vehicles, which might start out as cells of an ICC but, when certain economies of scale have been realised, be converted into separate non-cellular companies in their own right.

Tax treatment

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.

Accounts, audit and general meetings

Accounting records

Guernsey companies are required to keep accounting records that are sufficient to:

• show and explain their transactions;

• disclose with reasonable accuracy the financial position of the company; and

• enable the directors to ensure that any accounts for the company are properly prepared.

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.

Accounts

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.

Directors' report

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.

Audit

General meetings

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.

Winding up

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".

Summary

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).

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