Economic substance rules’ impact on family offices

Sharon Cleal discusses how the economic substance rules affect family offices, based in the Channel Islands, and what impact they have on the offices’ activities.
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Published 25 June
3 mins

Economic substance legislation came into effect across the Channel Islands in January 2019, meaning companies must now demonstrate they meet these rules if they are relevant, including family offices.

The rules only apply to companies that are based, managed and controlled in Guernsey and Jersey, and who carry out at least one of the nine relevant activities listed.


While family office arrangements are unique, they often incorporate different wealth structures, such as companies, foundations and trusts. For family structures, the most relevant activities are ‘pure equity holding’ and ‘finance and leasing’.

How do the rules apply to family structures?

The guidance states “a company will be regarded as a [pure equity] holding company if its primary function is to acquire and hold equities, and the equities in question are controlling stakes in other companies”. A company only holding real estate assets is not in scope, and neither are those only holding minority interests in private or listed companies.


The guidance also implies that a private trust company (PTC) is not defined as a holding company on the basis that a PTC – a common feature of family offices – is not the beneficial owner of the assets held, and typically has no gross income. Instead, its primary function is to act as trustee of various family trusts. That being said, however, a PTC could be subject to the legislation if it carries out another of the relevant activities.


Finance and leasing companies are subject to the legislation if they offer credit facilities or financing of any kind. A company held by a family trust providing loans to beneficiaries is not in scope if its loans are interest free, unsecured and repayable on demand. However, if the loan is agreed on commercial terms (e.g. if interest is due and accrued on the capital amount), it brings the company into scope.

Structuring family affairs

If a family is looking to structure its affairs in the Channel Islands, it has to consider whether its proposed activities are subject to the legislation.

If it is carrying out relevant activities that provide an income in an accounting period, the company then has to demonstrate adequate substance requirements, and that they are proportionate to its activities. This includes that it:

  • is directed and managed on the islands;
  • has an adequate number of (qualified) employees;
  • has adequate expenditure;
  • has an adequate physical presence on the islands; and
  • conducts core income-generating activity in the islands.

Established family structures also should now be reviewed to ensure the tax residency and economic substance requirements are met and, if necessary, make changes. A company that cannot demonstrate adequate substance, in an accounting period, could be subject to sanctions and may need to exchange information with authorities in other jurisdictions, receive financial penalties and/or be struck off the companies register by the courts.

Good governance

Board composition is another consideration, as well as how meetings are conducted. The majority of meetings need to be held on the islands, with a quorum of directors physically present. Similarly, family structures that engage local corporate service providers, on the islands, should make sure employees have the required knowledge, experience and understanding of the local laws and regulatory framework.

Documentation is crucial for a structure running a relevant activity, detailing how its operations and policies and procedures meet the requirements, as well as providing any additional required information, such as the substantial connection to the islands. These need to be declared in the 2019 tax returns and in the future.

Outsourcing is permitted, but any arrangements must be carefully considered, especially if multiple jurisdictions are involved. This is because the third party interaction could put the entity’s management and control in a different location- not necessarily the desired one – which could be punitive from a tax point of view.

Should you require any further information as to how we help family offices, please contact your usual Nedgroup Trust relationship manager who would be happy to discuss examples of the support we provide and help you understand the different options available to you.


Or, if you are not a client, but would like to find out about Nedgroup Trust’s services, please get in touch using the links to the forms towards the end of the page.

The structures and wrappers used are provided for illustrative purposes only, and are not to be read as an invitation or inducement to buy a service. This content does not constitute advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

about the author

Sharon Cleal

Sharon Cleal

Sharon joined Nedgroup Trust in 2000 as a trust and company administrator, having dealt with corporate entities during her time in the legal sector. She has over 24 years’ experience with trust and corporate structures, including employee benefit trusts. She has a broad knowledge and has administered structures across a range of jurisdictions.


Sharon oversees a large administration team and has dealings with high-net-worth and ultra-high-net-worth private clients. She is a qualified Chartered Secretary and Chartered Governance Professional, having graduated with a Masters in Corporate Governance, and is a Fellow of the Institute of Chartered Secretaries and Administrators.

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