5.4 Taxation of Guernsey Resident Shareholders

The Document specifically sought views on how to tax the profits of companies that are owned by Guernsey resident individuals. The Steering Group presented two options:

• Guernsey resident individuals will be taxed on the profits of companies in which they are shareholders. Their proportionate share of the company’s profits would be treated as their own taxable income. This option has been termed “attribution”.
• Guernsey resident individuals would only be taxed on dividends received from companies carrying on trading activities. Any investment income would be taxed on an attribution basis. This option has been termed “distribution-only”, although it may be more accurate to describe the proposal as “attribution of investment income”.

A large majority of the respondents who expressed a view on this matter supported distribution-only. Many felt that it had the capacity to stimulate and encourage new entrepreneurial businesses, especially outside the finance sector. A common thread among respondents was a concern over the potential complexity of an attribution regime.

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The supporters of attribution generally felt that it could be an effective means of maintaining States revenues. It was felt that its absence could result in a much increased use of companies in tax planning. Many such respondents believed that business owners would use distribution-only to make payment of income effectively optional through accumulating profits until the sale of the business.

This Firm is very well acquainted with the complexities and potential difficulties of addressing this issue. Our experience indicates that there are a number of disadvantages with attribution as well as a number of advantages with distribution-only.
• Although attribution has the apparent attraction of maintaining tax revenues, it would require substantial policing and anti-avoidance legislation. In addition to this, successful operation would require an unprecedented level of disclosure by Guernsey taxpayers when making annual tax returns. These factors are likely to prompt a major change in the culture of tax compliance in the Bailiwick. Similar proposals made in Jersey and the Isle of Man have provoked significant concern among their business communities.
• There are significant legal obstacles (beyond the tax ones) that could potentially render attribution unworkable and expose the States to judicial challenge. Our understanding (based on discussions with legal experts) is that an attribution regime is potentially very vulnerable to challenge under both company law and human rights law.
• It is likely that enforcement of the attribution rules would require provisions forcing the company to act as agent for the resident shareholders in certain circumstances. It is doubtful that such provisions would comply with the Code of Conduct.
• It seems likely that distribution-only would be regarded as less unfair than attribution and has the potential to encourage investment in trading businesses.
• Distribution-only would require new legislation and administration. In particular, it would be necessary to define clearly what is meant by “trade” and “investment income”. Provisions would also be required to tax loans by companies to shareholders and the provision of assets and other benefits to shareholders to discourage abuse. However, this is still potentially less onerous than the provisions required to effect attribution, as it would reduce the population of taxpayers within the scope of the charge. Moreover, the proposal to tax investment income on an attribution basis may well deal with the potential tax leakage that some respondents identified.

In short, we felt that neither attribution nor distribution-only were perfect solutions but distribution-only was the less imperfect of the two. Furthermore, we did not identify any workable alternatives that complied with the overall objectives of tax reform.