The optimism over Gibraltar's on-going economic growth and the development of the jurisdiction as a leading and well regulated finance centre has continued in 2005 despite some uncertainty surrounding the final outcome of a legal ruling on Gibraltar's proposed new measures on corporate taxes.
The strong growth of the economy was stressed by the Government when, in June, it delivered what has been described as one of its most exciting Budgets to date and a small surplus for the 2004/05 fiscal year allowed the Government to introduce several tax concessions.
As well as benefits for Gibraltar's pensioners, the Budget included measures which struck an immediate cord with local and overseas investors. The Government also announced that the unilateral tax relief provisions currently applicable to certain countries only, would be extended to all countries.
The Government noted that the economy has continued to grow by a handsome margin in spite of adverse external factors including the adverse effect of the EU Savings Directive and the ever increasing impact on businesses of EU Environmental and health and safety regulations.
Many of the tax concessions and adjustments in the 2005 Budget were welcomed by most of the financial services players.
A significant aspect of the measures was the abolition of tax on investment income. And this was defined as:
- dividends arising from investments quoted in a recognised stock exchange;
- interest paid directly or indirectly by banks, building societies or other financial services institutions licensed in Gibraltar or in any other recognised jurisdiction to undertake deposit-taking or investment business;
- interest paid directly or indirectly arising from investments quoted on a recognised stock exchange;
- interest paid directly or indirectly arising from the Gibraltar Government Savings Bank.
The abolition of tax on savings income is clearly intended to encourage savings, a factor which will become increasingly significant as increased longevity and higher social expectations put more and more pressures on Gibraltar's pension structures.
Taxation was also abolished on dividends paid by one Gibraltar company to another Gibraltar company and on dividends and interest paid by a Gibraltar company to a non-resident recipient.
The requirement to withhold tax from dividends in accordance with Section 39 of the Income Tax Ordinance was also abolished. In the past Gibraltar's resident companies had to deduct withholding tax at 35 per cent from dividends paid out. If the tax deducted was more than the company's mainstream tax bill, the excess was payable. However, if the tax deducted was less than the company's mainstream tax bill, the difference was carried forward and set off against any future excess.
Other Budget measures included the abolishing of stamp duty on all transactions with the exception of real estate and share capital. Stamp duty on share capital, whether on initial creation or subsequent increase - will be GBP10, while that on real estate is structured in relation to the value of the deal. Where a property is sold for less than GBP160,000 the transaction is exempt from stamp duty.
On properties priced between GBP160,000 and GBP200,000 a 1.26 per cent stamp duty will be payable, while for properties above the GBP200,000 mark stamp duty is still to be fixed, but will be less than 2.5 per cent. As yet none of the stamp duty measures have been gazetted and local property pundits claim that some sales are being delayed by the buyers as they hope to benefit from the new measures when these are put in place.
Among other provisions were substantial increases in tax allowances for all senior citizens (men aged 65 or over and women aged 60 or over) bringing their total tax-free allowance to GBP10,000. Thus, effectively, all senior citizens of state pensionable age - regardless of their level of income will GBP10,000 and pay no tax on the first GBP10,000 of their income.
But with some of the measures, including those relating to savings, the devil may be in the detail. The intention behind the abolition of tax on savings income is not clear. If it is to encourage people to bring back cash to Gibraltar from overseas, it could be good for the economy and create more jobs in banking. If it is purely not to tax people, there's no real advantage to the economy as a whole though individuals may feel a benefit.
However local bankers believe the measure could be extremely good news for them and other local financial institutions, as it encourage Gibraltarians and other local residents whose money is held or invested elsewhere to repatriate that cash so benefiting the local economy.
It is generally felt that the new tax measures coupled with the absence of capital gains tax, the application of the EU Parent Subsidiaries Directive to Gibraltar resident (as recently confirmed in writing by the EU Commission) and the recent clarification issued by the Gibraltar tax authorities that resident companies, generally taxable at 35 per cent, will not be taxed on any income or profits which are not accrued or derived in Gibraltar even if these are actually remitted to Gibraltar, will reinforce Gibraltar's competitive position as a financial centre and European holding company jurisdiction.
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