Hammered out over the past year in protracted negotiations between Gibraltar, Britain and the European Commission, an agreement to extend the tax exempt status of 8,464 Gibraltar registered companies until December 2010 removes much uncertainty hanging over Gibraltar's Finance Centre.
The agreement, formally announced last month but reached in December, also provides for any existing companies which change ownership - or even the form of their activity - before 30 June next year to benefit from their tax exempt status until 31 December 2007. Uniquely, it also allows new exempt status business until 30 June 2006.
Essentially the arrangement provides Gibraltar's Finance Centre an important breathing space in which to prepare themselves and their clients for changes which have appeared inevitable since July 2001 when the EU Commission first challenged the legality of the Rock's exempt status regime under EU State Aid Rules. For, between now and New Year's Eve 2010, the Gibraltar Government plans to put in place new tax structures which will replace those which the EU has attacked. Low tax, rather than no tax is to be the order of the day.
Significantly, the agreement effectively allows for some new business to participate - the only case in which the Commission has agreed to new entrants in an agreement to end or avoid a State Aid investigation procedure. Whereas the Commission suggested in November 2002 that it would act to prevent the formation of new exempt companies within three months, under last month's agreement they can be formed until 30 June 2006. The agreement is certainly more favourable to Gibraltar's cause than many observers had anticipated.
Welcoming the agreement, Gibraltar's Chief Minister Peter Caruana described it as a "reasonably good arrangement which avoids the worst consequences for Gibraltar." It delivered "absolute legal certainty" to exempt companies and while it did not deliver all that Gibraltar wanted, it avoided the worst consequences and enabled the Finance Centre, and other sectors of the economy to continue while awaiting the European Court ruling on regional selectivity. This is expected to be handed down before the exempt companies' 2010 deadline and by then alternative arrangements will be in place.
Failure to have reached an agreement with Brussels would have required Gibraltar to shut down the exempt status regime without being able to replace it with a competitive alternative resulting in real and reputational damage to the Finance Centre and other businesses.
The issue has its roots in the European Commission's decision in July 2001, to challenge the legality of Gibraltar's exempt companies under a procedure that would have forced an immediate closure of the regime AND would have exposed tax exempt companies to the risk of recoverability – the repayment of all the tax saved over the years.
When the Gibraltar Government successfully challenged this in the European Court – allowing exempt companies to continue and eliminating the risk of recoverability – the Commission initiated the process to attack the tax exempt regime under the State Aid regulations. This is the process which Gibraltar and Britain are currently challenging in the courts.
The negotiated agreement makes the following provisions:
- The total number of exempt companies will be of 8,464.
- Existing exempt companies will be able to continue to benefit from their tax exempt status until 31 December 2010.
- Existing exempt companies that change ownership and/or activity after 30 June 2006 will lose their tax exempt status.
- Existing exempt companies that change ownership and/or activity before 30 June 2006 will be able to benefit from their tax exempt status until 31 December 2007.
- New exempt companies can be formed up to 30 June 2006 on the basis that the number of new exempt companies that can be formed this year shall not exceed 60 per cent of the number of exempt companies leaving the regime this year - or in any event 823. And from January to June next year the number of new exempt companies that can be formed shall not exceed 50 pert cent of the number of exempt companies leaving the regime during that period, or in any event the number of exempt companies admitted in 2005.
- New exempt companies will be able to continue to benefit from their tax exempt status until 31 December 2007.
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