Planning the Tax Structure
Gibraltar has traditionally had an 'onshore' tax structure quite similar to that of the UK so far as income and corporation tax is concerned, although there are no capital taxes.
In July 2002 Gibraltar's Chief Minister, Peter Caruana announced a new corporate taxation policy setting a zero rate of corporation tax for all companies but introducing new taxes on company personnel and property occupation which will be capped at 15% of profits. The existing corporate forms which allowed zero taxation, the Exempt and Qualifying companies, would be abolished.
Debate between the Gibraltar government and the European Commission took place over several years (finally seeming to reach a resolution in December 2008 -- see below for more details), but in the meantime, the Brussels officials agreed that the existing situation (confusing as it was) should be allowed to continue - at least as regards Exempt companies - until 2010 (2007 for new companies).
Gibraltar dissolved its qualifying companies tax regime in January, 2005. In a move estimated to have cost the Gibraltar government an estimated GIP1.5 million in annual tax revenues, the remaining qualifying companies, of which there were about 80, switched to the 'exempt' companies regime.
In March 2007, Gibraltar's Chief Minister Peter Caruana travelled to Luxembourg to give oral evidence at the court hearing of Gibraltar’s tax case against the European Commission in the European Courts.
The Gibraltar Government and the UK Government were challenging the EU Commission decision which stated that under EU law Gibraltar is not entitled to have a tax regime different to the UK’s.
“This oral hearing is very much the final stage of this litigation," Caruana commented.
"Under the EU court system the exchange of written arguments is the main part of the procedure. The oral hearing is quite brief. It’s a different system to ours. During the written argument stages Gibraltar has formulated and submitted an impressive array of arguments, all of which are supported by the recent landmark ruling by the European Court of Justice in the Azores case. We are thus confident in the merits of our case," he explained.
In the Azores case the ECJ had to determine the principles that apply in deciding whether a tax regime is in breach of state aid rules on grounds of Regional Selectivity. Portugal had permitted the legislative assembly of the Azores to cut rates of income tax by as much as 30% in 1999 in recognition of the unique structural difficulties of its economy. However, under European Union state aid rules, member states are only permitted to grant special tax regimes to certain regions or industries if they are proportionate and in keeping with the current tax system in place in that country, in the interests of maintaining a level tax playing field.
Major changes to Gibraltar's corporate tax regime were announced in Peter Caruana's June 2007 Budget speech.
Mr Caruana explained that:
"The Tax Exempt Company has been the backbone of the development and growth of both our finance centre and the online gambling industry, and thus of a very significant part of our economy. It continues to underpin thousands of jobs in Gibraltar and large amounts of Government revenue."
"In order to comply with EU law we must phase out the tax exempt company in 2010. However, in order to sustain our successful economic model we must retain a commitment to a very competitive corporate tax model."
Since it is no longer legally acceptable to have one tax model for ‘local’ companies and a different one for ‘foreign’ companies it is necessary to have a low tax system for all companies because without a low tax system for overseas companies they will leave, and our economy will suffer hugely. Thousands of jobs would be lost, as well as significant Government revenue. I have therefore already said, and I reaffirm now, that the Gibraltar Government is irrevocably committed to the principle of ‘low tax’ for our economic operators."
"By mid-2010 the Government will have introduced an across the board flat, low corporate tax rate. This will most probably be set at 10%, but in any event not higher than 12%. This will be similar to arrangements that already exist in Ireland, Cyprus, Malta and other EU Countries."
"In the intervening period, the Government will engage in an intensive, detailed and lengthy process of consultation with the different economic sectors."
"In order to signal the Government’s seriousness of purpose in this respect I am today taking the first step in the process of reducing corporate tax rates in Gibraltar, by 2% for the year of assessment 07/08 from 35% to 33%, and with effect from the year of assessment 2008/09 by a further 3% from 33% to 30%."
"I would also signal the intention of a further reduction the year after that to 27%, in anticipation of the introduction of the flat low tax rate in 2010."
In his budget in June 2008, Peter Caruana announced his intention to bring forward a 3% cut in corporate tax originally scheduled to take place in 2009, meaning that the corporate rate would drop by 6% that year.
"Last year, and in order to signal the Government’s seriousness of purpose in reducing corporate tax rates, I reduced corporate tax rates to 33%, and said that I would reduce it further this year to 30%, with a signalled reduction to 27% next year," Caruana told Parliament in his budget speech.
"In order to further signal the Government’s commitment I am advancing that timetable by one year, and therefore the corporate tax rate is now reduced by 6% from 33% to 27% with effect from this year that is the year of assessment 2008/09," he added.
Caruana explained that he envisaged a further cut in the rate next year, before moving to the rate of between 10% and 12% from 2010, adding that: "My strong preference will favour the bottom end of that range."
In December 2008, the European Court of First Instance ruled in favour of Gibraltar, stating that the European Commission was wrong to argue that the tax reforms proposed in 2002/03 were in breach of state aid rules, and effectively giving the jurisdiction licence to set its own tax rules.
The Court dismissed the EU Commission’s case, and stated that although the UK is representative of Gibraltar, Gibraltar does, however, have fiscal autonomy from the UK, and therefore can introduce its own individual tax system (the aforementioned 10-12% corporation tax).
In a statement to the press at the time, Peter Caruana, Gibraltar's Chief Minister, said he was "overjoyed" by the outcome.
"The Court has found in Gibraltar’s favour and has accepted our arguments on each and every issue, relating both to regional selectivity and material selectivity, and has ordered the commission to pay the Gibraltar government’s legal costs.”
“This needs to be clearly understood. Had Gibraltar lost the Regional Selectivity case, we would have had to adopt the UK’s company tax system and company tax rates. That would result in the bulk, if not all, of the finance centre and gambling companies leaving Gibraltar. That would have meant the loss of thousands of jobs throughout our economy, and a very large fall in government revenue. This in turn would have rendered unsustainable our current level of public services and public sector employment.”
In his June 26, 2009 budget statement, Caruana outlined plans for the reform of the jurisdiction’s tax system to apply a 10% corporate tax rate, and other incentives to allow it to compete with the world’s leading international finance centres. Explaining the new measures in an address to parliament, Caruana said:
“Mr. Speaker, as the House knows, the Exempt Status Tax Regime must end by December 31, 2010. It is essential for Gibraltar’s socio-economic prosperity that our corporate tax rate should be as competitive as is compatible with government’s revenue needs. Without this there would be large scale loss of economic activity and job losses.”
“Existing corporate taxpayers will be huge windfall beneficiaries of the need to eliminate tax exempt status, and its replacement with a low rate for all companies. The new rate will be 10%. Energy and utility providers will pay a 10% surcharge and will thus suffer a rate of 20%. These will include electricity, fuel, telephone service and water providers,” he explained.
Caruana reassured that the government would allow existing Exempt Status Companies to keep their tax benefits until 'the last possible minute': "Most Exempt Status companies currently hold exemption certificates that are valid, subject to repeal of the legislation, for 25 years. The Government therefore feels honour bound not to remove the tax benefit provided by the exemption certificate until the last possible moment. That will therefore occur at midnight on December 31, 2010, by means of a repeal of the Companies (Taxation and Concessions) Act.”
Gibraltar, as a part of the EU, applies the Parent/Subsidiary Directive.
There is a quasi-double tax treaty with the UK, but otherwise Gibraltar has no tax treaties, meaning that dividends or other types of income paid from Gibraltar to high-tax countries are going to be taxed in the hands of the recipient, depending on the local regime, even though they may have suffered tax in Gibraltar (not a problem for exempt companies, of course). Many high-tax countries have 'Controlled Foreign Corporation' legislation, meaning that undistributed profits in a Gibraltar (low-tax) subsidiary will be deemed to be taxable income in the high-tax residence country of a controlling owner (individual or company). The exact arrangements vary widely.
It follows that the owner of a business in a high-tax country who wants to transfer part or all of the business to a low-tax area such as Gibraltar must follow one of the following routes or some more-or-less complicated variation or combination of them (it must be understood that the right solution will depend completely on the circumstances of age, residence, country etc - these are just illustrative possibilities):
- Set up a new business in Gibraltar with ownership which falls outside the CFC rules, eg don't hold more than 40% from a high-tax country, and put remainder of shares in trust for children or in the hands of an offshore relative;
- Create a joint venture with other onshore companies or owners whereby ownership is sufficiently distributed to escape CFC rules;
- Owner (individual or company) move offshore (not necessarily Gibraltar), move business to Gibraltar and outsource high-tax area distribution (if physical);
- Transfer existing business into trust or other offshore ownership for inheritance tax purposes; set up new offshore business to handle expanded range of products or markets.
NB: Any transfer of all or part of a business away from a high-tax area is likely to trigger a disposal for capital gains, gift or transfer tax purposes - great care is needed to avoid this happening. Companies may be in a better situation than individuals to mitigate the effects of tax on a transfer; equally, companies with international subsidiaries may be able to make use of 'mixer' holding companies, and thus may not be so much affected by the CFC rules.
In fact there are numerous possibilities for arriving at an effective structure; it is normally possible to improve the tax performance of a business substantially by moving part or all of it offshore - but expert professional guidance is essential, and the suggestions above are no more than indications of the sort of thing that may be effective in some circumstances.