Gibraltar: Offshore Legal and Tax Regimes
Tax Treatment of Foreign Employees of Offshore Operations
In addition to the corporate tax changes mentioned above, several key changes to Gibraltar's personal tax regime were also introduced in the June 2007 Budget:
Acknowledging Gibraltar's relatively high headline rates of income tax, Chief Minister Peter Caruana announced a dual income tax system and changes to the high-net-worth individual (HNWI) scheme designed to make the tax system more attractive to expat workers employed in the jurisdiction's finance industry.
"Our tax system has very high ‘headline’ rates of taxation, but these are reduced to lower ‘effective’ rates by a generous system of tax allowances, the main ones of which are mortgage interest relief, life insurance premium relief, child allowances etc. This is all very well, but taxpayers who cannot benefit from these allowances because they are single, have no mortgage, no children or no life insurance are left to pay the very high ‘headline’ rates" Caruana told parliament in his budget speech.
"This is harsh on affected local residents, as well as being a disincentive for location in Gibraltar for companies that need to recruit specialist skills from abroad," he observed.
To remedy this, Caruana announced that from 1 July 2007, every taxpayer would be able to choose for each tax year between two systems to pay tax, and to choose the one that results in the lower tax payment, either of which can be paid through the PAYE system.
The first system is the existing Allowance Based System under current tax rates, which were reduced in that year's budget. The alternative system introduced was a new Gross Income Based system, in which the taxpayer receives no allowances, but paid tax on gross income at the following rates: 20% on the first GIP25,000; 30% on the next GIP75,000; 40% above GIP100,000.
Caruana said that the new Gross Income Based alternative would "very significantly" reduce the tax payments of around 6,500 local taxpayers, and would substantially redress the balance of taxation between those who enjoy certain allowances and those who do not. As a result, no taxpayer with income below GIP25,000 per annum would pay more than 20% income tax; no taxpayer with income below GIP50,000 would pay more than 25% income tax; no taxpayer with income below GIP100,000 would pay more than 27.5% income tax; and no taxpayer with income below GIP125,000 per annum would pay more than 30% income tax.
Access to the Gross Income Based alternative was to be subject to rules to prevent married couples and others living together from benefiting from both alternative systems, he announced.
Caruana also unveiled some amendments to the jurisdiction's' high-net-worth individual (HNWI) scheme. For HNWIs this scheme was to remain largely intact except that with effect from 1 July 2007 the minimum tax payable was increased from GIP14,000 per annum to GIP18,000 per annum, and the taxable income level was increased from GBP50,000 to GBP60,000 (GIP70,000 from 1 July 2010).
Category 3 status was abolished for new entrants. Existing Category 3 holders were able to retain that status until expiry of their current certificate or for two years until 30 June 2009, whichever was the longer. However, the amount of tax payable rose with effect from 1 July 2007 from GIP10,000 to GIP15,000 per annum.
A new category called ‘High Executive Possessing Specialist Skills’ (HEPSS) was established for:
- Existing Category three holders who earn more the GIP100,000 per annum;
- New applicants who possess skills not available in Gibraltar and, in the Government’s opinion, necessary to promote and sustain economic activity of particular economic value to Gibraltar, who will occupy a high executive or senior management position, and who will earn more than GIP100,000 per annum of income in Gibraltar.
Tax is payable only on the first GIP100,000 per annum of income under the dual choice tax system. New applicants may not have been resident in Gibraltar for any part of the period of three years immediately preceding the application.
Category 4 Status was abolished for new entrants with effect from 1 July 2007. Existing holders could retain the status until the end of the current certificate or 30 June 2009, whichever was the longer. However, minimum tax payable was to increase with effect from 1 July 2007 from GIP5,000 per annum to GIP7,500 per annum.
Caruana also announced rate cuts in the ordinary income tax system. The top rate of tax was reduced from 42% to 40%.
It was further announced that the standard tax rate band (on which tax was paid at 30%) would be widened by GIP3,000 from the present GIP4,000 to GIP13,000 to GIP4,000 to GIP16,000.
As a result of changes to the low income tax credit system, no tax was payable by anyone with income below GIP7,000 per annum. Caruana also announced that the principle of tax cuts targeted to the lower paid, at the time limited to people who earned less than GIP8,000, would be extended to people who earned up to GIP19,500 per annum.
Then in June 2008, the Chief Minister announced further cuts in personal income taxation in his Budget for that year.
These were mainly aimed at those on lower incomes, although the top rate of tax for taxpayers on the Gross Income Based System was also reduced with effect from 1st July 2008 from 40% to 38%.
As of July 1, 2009, the government introduced a dual tax system under which taxpayers may choose the basis on which they will be taxed. Taxpayers will be now able to opt for either a Gross Income Based (GIB) system, under which income tax rates will be reduced, but no allowances given, or retain the traditional Allowance Based System.
For the 2011/2012 tax year, bands were changed as follows:
- for people with gross incomes between GIP8,000 and GIP25,000 per annum, the first GIP10,000 will be taxed at 6% (previously 8%); the next GIP7,000 at 20% and the remainder at 28%
- for those with gross incomes of over GIP25,000, the following rates apply:
- The first GIP17,000, 16%
- The next GIP8,000 - 19%
- The next GIP15,000 - 25%
- The next GIP65,000 -28%
- The next GIP395,000 - 25%
- The next GIP200,000 - 18%
- The next GIP300,000 - 10%, and the remainder at 5%
The attractiveness of the existing Allowances Based System was also improved - the government announced a 2% tax cut or GIP300, whichever is the greater.
In the July 2010 budget, social insurance contributions were increased to 20% of gross earnings, capped at GIP32.97 for employer and GIP15.00 for employee.
The remainder of this section details the personal tax regime for expat workers as it existed prior to the introduction of the 2007 changes.
There were no special rules applying generally to the foreign or Gibraltarian employees of offshore operations, who paid tax according to the normal rules if they were resident in Gibraltar (see Personal Taxation); however there were some special arrangements for expatriate executives and other workers with specialist skills.
Subject to various conditions, such an individual who worked for an exempt or qualifying company could apply to the Financial and Development Secretary for a certificate which limited their annual tax bill to GIP10,000, regardless of income. A qualifying individual was known as a Category 3 Individual.
A comparable scheme existed for specially skilled individuals working for other types of company, limiting tax to GIP5,000 for income up to GIP50,000, or GIP10,000 otherwise. Such individuals were known as Category 4 individuals.