On 11 May 2021 the Guernsey Revenue Service issued Circular 18 to the GSCCA. The purpose of this Circular was to confirm the extension of Guernsey’s economic substance rules to partnerships (to date, these have applied only to Guernsey resident companies); the Economic Substance regulations will be amended to incorporate this change. It is expected that the amendment will meet the requirements of the EU Code Group, which in November 2020 made it clear that they expected partnerships to be subject to economic substance rules in all of the nil or only nominal tax jurisdictions.

These requirements are expected to be replicated in Jersey and the Isle of Man.

A summary of the new rules is provided below:

Which partnerships are in scope of the new Law?

The circular confirms that the term “partnerships” under this new guidance includes:

— General partnerships formed in Guernsey
— Limited partnerships (both with and without legal personality) formed under the
— Limited Partnerships (Guernsey) Law, 1995
— Limited liability partnerships formed under the Limited Liability Partnerships (Guernsey) Law, 2013
— Foreign partnerships (including limited partnerships and limited liability partnerships) formed outside of Guernsey which have their place of effective management in Guernsey and carry on business activity in Guernsey.

The term “place of effective management” (“POEM”), although appearing in a number of Guernsey’s double taxation agreements, is also new to Guernsey’s domestic tax law and has been defined as:

“a partnership’s place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the partnership’s business as a whole are in substance made”

The legislation confirms that a partnership can only have one place of effective management at any one time, even if there is more than one place where management decisions are made.

Guidance on the meaning of “place of effective management” will be provided in due course.

Which partnerships are outside scope?

All resident partnerships are in-scope, unless they are specifically excluded from the need to meet the economic substance test. The following are those partnerships that are excluded:

Wholly local partners exemption: where all the partners in a partnership are individuals subject to income tax in Guernsey.

Wholly domestic exemption: provided that the partnership is not part of a multinational group, where the partnership does not undertake business activities outside of Guernsey.

POEM exemption: as discussed above, where the place of effective management is in another jurisdiction. The economic substance regime only applies to partnerships that are Guernsey tax resident in Guernsey, in line with the application of this regime to companies.

Fund exemption: consistent with the rules for companies, the circular contains an exemption for Collective investment schemes regulated by the GFSC under the Protection of Investors (Bailiwick of Guernsey) Law, 1987

Gateway conditions to application of the economic substance test

Where a resident partnership is in scope, the remaining gateway conditions are consistent with the company rules, namely the partnership: (a) undertakes at least one of the nine relevant activities; and (b) receives gross income from the relevant activity.

Economic substance test

The economic substance test itself is also broadly the same as the company rules and consists of three elements: (i) managed in Guernsey; (ii) core income generating activities (“CIGA”) carried out in Guernsey; and (iii) adequate people, physical assets and expenditure in Guernsey. 

On the basis that the economic substance test is broadly similar, we have not reanalysed it in this briefing note, details can be found here.

It is noted that the differing governance structures for partnerships (as compared to companies) has resulted in some necessary alterations to the “managed test”, where the focus is on the partnership’s “governing body”, rather than the board of directors. The governing body is defined as “the person or group of persons responsible for making the partnership’s strategic and management decisions” and therefore in the context of limited partnerships we would ordinarily expect the general partner to be the “governing body”.

Sanctions regime

The sanctions regime is also broadly familiar, with initial penalties of up to £10,000 per financial period of failure to comply and the potential for exchange of information with tax authorities in other jurisdictions.

When do the new rules apply from?

For partnerships existing on 30 June 2021, these economic substance rules will apply to the first financial period commencing on or after 1 January 2022.

For partnerships established from 1 July 2021 onwards, these economic substance rules will apply to every financial period of the partnership.


There will also be changes to the reporting requirements of partnerships, which will include:

1. A requirement for all partnerships (including relevant foreign partnerships) to register with the Revenue Service.
2. An annual filing requirement for all partnerships confirming whether they need to file economic substance information, in the same timeframe as companies.
4. Mandatory online filing of partnership tax returns, accompanied by financial statements.

The economic substance return for partnerships would be substantially similar to the economic substance return for companies. 

KPMG in the Crown Dependencies and Economic Substance

KPMG in the Crown Dependencies is ideally placed to assist all entities (companies and partnerships) with the impact of the economic substance rules across the Crown Dependencies; from classification of entities through to assistance with preparation of tax returns.

KPMG in the Crown Dependencies have also developed the KPMG Economic Substance Tool to help entities to understand and manage the challenges posed by the economic substance rules. The Tool helps entities to identify their obligations, assess the likelihood of compliance and collate relevant information in preparation for the submission of subsequent tax returns and then report– all housed within an environment that has management review and control processes built into its core.