Gibraltar: Offshore Legal and Tax Regimes
Major changes to Gibraltar's corporate tax regime were announced in Chief Minister 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."
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 (a zero rate of corporation tax for all companies and the introduction of new taxes on company personnel and property occupation which were to have been capped at 15% of profit) 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, the 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.”
“This is a huge and vital victory for Gibraltar. A threat to our economic, social, and thus political well-being, has, once again, been successfully seen off. I believe that the economy of Gibraltar now has the opportunity to forge ahead to the next level of growth and development, to fulfil its great potential and thus to guarantee that we shall bequeath economic and social prosperity and stability to our children, grand children and future generations. “
”Once again, this small community has demonstrated that, when right is on our side, and we hold our nerve and we behave reasonably and intelligently, we have the ability and determination to defend our rights and interests as a people, even when they are challenged by more powerful entities and forces.”
”On behalf of the people of Gibraltar, I wish to thank all those companies in the financial services and gambling sectors and other sectors of the economy that have had the faith and confidence in us to stay with Gibraltar during these difficult and uncertain times.”
“The threat that Gibraltar has faced cannot be understated, nor therefore, can the importance of this victory to Gibraltar and its people and our future.”
In his 2009 budget speech, Caruana confirmed that a 10% corporate tax would apply in the jurisdiction, and that the Exempt Company regime would be rescinded by the end of 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,” he told the House.
“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.”
The following section deals with the corporate tax regime as it stood prior to the entry into force of the Budget 2007 changes.
The term 'offshore' is not used in Gibraltar legislation or in describing company forms. The main forms useful for offshore operations in Gibraltar are the Exempt Company (but see above for changes to this corporate form), the Qualifying Company (abolished), the Gibraltar 1992 Company and the Trust. Non-resident companies also escape taxation on foreign income.
Gibraltar dissolved its qualifying companies tax regime in January, 2005, as negotiations continued in Brussels. In a move that cost the Gibraltar government an estimated "1.5 million in annual tax revenues, the remaining qualifying companies, of which there are about 80, switched to the 'exempt' companies regime. Each qualifying company has been dealt with on an individual basis and alternative arrangements made," Caruana added.
Later in the month, it was announced that Gibraltar had been given until 2010 (2007 for new companies) to phase out its exempt company tax regime after the European Commission ruled that the scheme violated EU state aid rules.
The government of Gibraltar welcomed the European Commission's approval of the Exempt Company Status Agreement as an acceptable compromise. Peter Caruana observed that:
"Given the hostility to any such agreement by powerful sections of the EU Commission, and the extremely tough and difficult negotiation that has been required, this represents a reasonably good arrangement which avoids the worst consequences for Gibraltar. It is an excellent agreement which delivers absolute legal certainty to exempt companies compared to what the position would be if we had not reached any agreement."
He went on to add: "This agreement does not deliver everything that we wanted, but it avoids the worst consequences and enables the Finance Centre, and other sectors of the economy to continue while the European Court rules in the regional selectivity case. We have thus been able to avoid the worst case scenario which would have required us to close the exempt status regime and not be able to replace it with anything competitive for the Finance Centre and other businesses."