Gibraltar: New Corporate Tax Regime Redefines Gibraltar

Last Updated: 4 October 2010
Article by Peter Montegriffo and Mark Henrich

Relocating to Gibraltar

There are many factors which would attract someone to relocate to Gibraltar. Situated on the southern tip of the Iberian peninsula, "the Rock" enjoys a temperate Mediterranean climate with mild winters and warm summers. The accessibility of nearby historical and cultural Andalucia in Spain, coupled with its spectacular scenery and wildlife, makes Gibraltar a popular destination.

Gibraltar is easily accessible from many European cities. There are regular scheduled flights from London, Manchester and Madrid. There are also frequent flights from many major cities to Malaga airport, which is just one hour's drive from Gibraltar.

The constitutional status of Gibraltar is unique. It is a British Overseas Territory and is part of the European Union (the EU), having joined in 1973 when the UK acceded to the EU. Although Gibraltar is not a separate Member State in its own right, it is a distinct jurisdiction with its own political institutions. Nationals of member states do not require a permit to work in Gibraltar.

Gibraltar is a common law jurisdiction and is almost entirely self-governing, with the Gibraltar Parliament enacting legislation in all areas of local concern. The UK retains responsibility in limited aspects such as foreign affairs and defence.

It is a thriving European financial centre and is home to many of the largest players in the international online gaming world. It has an excellent infrastructure and a lower cost of living than that of the UK.

At the time of writing, Gibraltar has entered into 17 Tax Information Exchange Agreements (TIEAs) with various countries, which fulfils the Organisation for Economic Cooperation and Development (OECD) requirement to be a party to a minimum of 12 TIEAs. Accordingly, Gibraltar is now on what is commonly known as the OECD's "white list" of jurisdictions, which are those which have substantially implemented the standard set by the OECD for transparency and effective exchange of information for tax purposes. This clear commitment of transparency will further strengthen Gibraltar's position as a first-class and internationally recognised global finance centre.

In addition to all of the lifestyle advantages, Gibraltar provides a tax efficient environment for individuals as well as companies.

Personal Taxation

The Government of Gibraltar (GoG) recently introduced a dual income tax system for ordinary taxpaying individuals, under which, such persons may elect the basis on which they will be taxed. One system, the Allowance Based System (ABS) has been established for some time. The second, more novel system, the Gross Income Based System (GIBS), applies lower tax rates but the taxpayer may not benefit from allowances and relief, such as personal and home purchaser allowances, available under the ABS. Regardless of the tax system elected, the Commissioner of Income Tax will calculate the final assessment based on the system which is most beneficial to the individual taxpayer.

In addition, there are two special tax regimes for individuals who move to Gibraltar. One of these systems, the Category 2 Individual regime, was established to attract high-net-worth retirees and entrepreneurs relocating to Gibraltar.

Under this regime, only the first GBP70,000 of assessable income is taxable, subject to a minimum payment of GBP20,000. In order for an individual to qualify for Category 2 Individual status, the applicant must:

  • have a minimum net wealth of GBP2million;
  • have accommodation in Gibraltar, which has been approved by the Finance Centre Director (FCD), available for his or her exclusive use throughout the entire tax year. This accommodation may be purchased or rented; and
  • not have been resident or worked in Gibraltar during the five years immediately preceding the application.

Executives and senior management personnel may avail themselves of the other special tax regime available to individuals, which was introduced by the High Executives Possessing Specialist Skills Rules.

Applicants under this scheme must, in GoGs view, possess specialist skills which are necessary to promote and sustain economic activity which is either: of particular economic value to Gibraltar; or is one, the development and growth of which GoG is encouraging.

Applicants under this scheme must earn a minimum of GBP100,000 per annum, have exclusive use of FCD approved accommodation and must not have been working in Gibraltar during the three years immediately preceding the application. Individuals who qualify under this scheme will have the amount of tax payable calculated on a maximum amount of GBP100,000, irrespective of worldwide income. At current rates, this would give rise to an annual tax liability of around GBP27,000. Tax would be payable under the GIBS.

In addition to the above, there is no capital gains tax, inheritance tax or other wealth taxes in Gibraltar. Stamp duty is only payable in respect of Gibraltar real estate. Furthermore, taxation on savings income (which includes bank deposit interest and dividends from quoted securities) has been abolished.

New Corporate Tax Regime

Gibraltar has, in recent years, been completing the process of repositioning itself away from a perceived tax haven to a financial centre of the onshore European variety. This development has most notably involved the abolishment of the nil-corporate tax regime, which was available to "tax exempt companies" as defined by the Companies (Taxation and Concessions) Act (some of which remain under grandfathering arrangements, but will be fully abolished on 31 December 2010).

In order to comply with the relevant EU guidelines, Gibraltar announced its decision several years ago to reform its corporate tax system. This proposed basis of the reform was challenged by the EU Commission on the grounds of "regional" and "material" selectivity and it was further determined that the proposed new system amounted to State Aid, in breach of the relevant EU rules. This finding was separately appealed by both the Gibraltar and UK governments.

In late 2008, the European Court of Justice, delivered a ruling which confirmed Gibraltar's right to retain and develop a corporate tax system distinct to that of the UK (the Ruling). This judgment makes it unambiguously clear that Gibraltar has the procedural, economic and administrative independence from the UK to allow it to develop its own taxation regime.

Following the Ruling, GoG has moved to, and is in the process of, reforming the corporate tax system which will, on 1 January 2011, deliver a new low corporate tax rate of 10%, in line with arrangements which already exist in the Republic of Ireland, Cyprus, Malta and several other EU countries.

All companies which currently enjoy tax exempt status will lose this status at the end of 2010 and will be taxed at the new 10% rate. As part of the transitional measures which have been implemented, no tax exempt certificates have been granted since 30 June 2006.

In anticipation of the introduction of the 10% rate, GoG has begun reducing the headline corporate tax rate. This staggered reduction has been reflected in the GoGs decision to, most recently, cut the corporate tax rate from 27% to 22%, with effect from 1 July 2009.

As a further transitional measure, and with a view to encouraging new business start ups, the 10% corporate tax rate is now available to any business established in Gibraltar after the 1 July 2009, subject to the following additional conditions:

  1. The company will be taxed on a preceding year basis, and not on an actual year basis in the context of existing commencement provisions;
  2. The first tax year for which the company will be liable to tax is 2008/09, and corporation tax will be payable in respect of this period at the rate of 27%; and
  3. In 2009/10, the tax rate payable will be 10%.

At the time of writing, GoG has not yet released the full details of the new legislation which will implement the revised corporate tax regime. This is expected to be published before the end of the current financial year, which in Gibraltar runs from 1 July to 30 June. GoG has, however, provided details of some of the principal features of the new tax regime namely:

  1. A low rate of 10%;
  2. The new rate will apply as from 1 January 2011, which means that the tax rate in respect of the first half of the tax year 2010/11 will be the applicable corporate tax rate for that year (it is widely expected that there will be a further reduction from the current 22%), and in respect of the second half of the tax year, will be 10%; and
  3. The preceding year basis of assessment will be abolished in favour of an actual basis. The existing commencement provisions will also be abolished.

GoG has indicated that transitional rules will also be implemented to deal with the changes.

It is not anticipated that the basis of taxation will change from its current source based system. Under Section 6(1) of the Income Tax Act (the Act), companies are liable to corporation tax in Gibraltar on specified sources of income which are "accrued in, derived from or received in" Gibraltar.

The Commissioner of Income Tax has given some guidance on the correct interpretation of the terms "accrue in" and "derive in" and stated that it is necessary to establish what the company has done in order to earn the relevant profit and, more importantly, where these activities have taken place.

There are other tax benefits available to Gibraltar companies. These include the absence of capital gains tax, which means that there is no tax or charge payable in respect of gains made by companies in relation to the disposal of capital assets.

Also, there are no indirect taxes such as VAT. Although Gibraltar is part of the EU, it is exempt from this common policy as well as the Common Customs Tariff and the Common Agricultural Policy.

Gibraltar does not impose withholding tax on dividend distributions made by Gibraltar companies. Furthermore, by virtue of being part of the EU, the Parent and Subsidiary Rules apply locally. These Rules, subject to certain conditions being met, abolish withholding taxes in respect of dividend payments from subsidiaries to its parent located in another EU member state.

Conclusion

It is widely expected that the introduction of the new corporate regime will significantly reinforce Gibraltar's position as an established international finance centre in the EU.

The jurisdiction continues to prosper economically and remains a stable location from which to do business. The advantageous tax environment will continue to be attractive to businesses wishing to utilise Gibraltar as part of their tax structuring or as a centre in which to establish their operations.

The geographical position of Gibraltar and its beneficial tax regime, amongst other positive factors indicates that Gibraltar will likewise continue to encourage individuals, particularly those qualifying as high-net-worth individuals, to relocate to the jurisdiction.

www.gibraltarlaw.com/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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