GIBRALTAR: TAX EFFICIENT E-COMMERCE

On this Page:

- GIBRALTAR PLANNING THE TAX STRUCTURE
- WHAT TO LOCATE IN GIBRALTAR
- GIBRALTAR OFFSHORE OPTIONS FOR E-BUSINESSPEOPLE

Gibraltar 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.

• A “Company Payroll Tax” (similar to what exists in Bermuda and elsewhere), introduced in respect of employees in Gibraltar and charged as a sum per annum per employee. This payroll tax is a tax on the company and is payable by the company only.
• A new Business Property Occupation Tax was introduced in respect of property occupied in Gibraltar by companies for business purposes.
• In addition, all companies pay an annual companies registration fee of £300 p.a. (if the company has income) or £150 (if the company has no income) inclusive of annual return fees.

In addition, and subject to EU clearance, two sectors of the economy only were to pay a new tax on profit. The sectors were financial services providers and utility companies.

Since the taxes were capped at 15%, local companies which used to pay 20% or 35% profits tax would be better off, while 'offshore' companies would be worse off only if they employed staff or occupy premises locally. Many companies, particularly those used to hold Spanish property interests, do neither.

In March, 2003, the EU's Council of Finance Ministers confirmed that the reforms did not constitute harmful tax measures. However, in April, 2004, the Commission argued that the new rules would give companies domiciled in Gibraltar an unfair advantage over their counterparts in the UK, under a principle known as 'regional selectivity'. The Commission also took issue with the fact that since the taxes were based on payroll and the occupation of business premises, offshore companies registered in Gibraltar would be unlikely to incur any tax liability. The EC therefore rejected the reforms, effectively suggesting that for taxation purposes, Gibraltar should be considered part of the United Kingdom.

Chief Minister, Peter Caruana slammed the EC for suggesting that the jurisdiction is fiscally part of the United Kingdom, pointing to its 1969 constitution, which gives the territory fiscal autonomy. The United Kingdom government is said to be “100% on-side” regarding the ‘regional selectivity’ debate, and Gibraltar is challenging the EC's view at the European Court of Justice. The issue will take years to resolve, and meanwhile Brussels officials seem to have agreed that the existing situation (confusing as it is) may be allowed to continue.

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 were 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 that 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.

Then in Chief Minister Peter Caruana's June 2007 Budget speech, major changes were announced to Gibraltar's corporate tax regime.

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."

Gibraltar, as a part of the EU, applies the Parent/Subsidiary Directive, so that a Gibraltar company with a 25% EU parent (or subsidiary) benefits from a preferential tax regime as regards dividends.

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.

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What to Locate in Gibraltar

To date, e-commerce companies have tended to focus on marketing and selling as the most likely business functions to locate offshore, but there is no reason why procurement, administration, payroll and other corporate functions should not be based offshore.

Since physical distribution can be outsourced, and in some countries doesn't even amount to a taxable presence, the use of offshore is by no means limited to digitally-downloadable products. Still, there is no doubt that the greatest cost and tax savings are available to those companies whose products can be delivered electronically, as in the following list:

Retail businesses dealing in intangibles or intellectual property, such as software or music
Electronic publishing enterprises
Online reservations
Telecommunications services
Language translation services
Education and Internet-based training
Online gift certificates

Online brokerages and other financial services, including insurance
Legal services
Software and other technical support
Research and online information services
Internet Service Providers (ISPs)
Metamediaries and access portals
Corporate services

Data warehouse centres for processing and storing data
Database management services
Certification and verification services for business and consumer documents
Hubs for secure transactions and communications
Supply chain management centres
Communications and billing hubs for fibre optic and satellite systems
Network monitoring facilities and services

In the case of Gibraltar, its physical proximity to EU markets, and its excellent port facilities mean that it can also be used as a trans-shipment or physical distribution centre for many types of product. Gibraltar's attractions in this respect would be considerably enhanced if the problems with Spain were to be resolved. Bottlenecks at the border and Spanish obstructionism create unnecessary difficulties at present.

Indeed, so far Gibraltar has proven attractive mainly to betting and gaming companies and to financial trading operations.

Trafalgar Financial Futures established operations in Gibraltar in 1999, and news of its success encouraged First Continental, a big player in the 'short end' of the Liffe market, to set up a trading operation in Gibraltar. Gibraltar was the first offshore centre to receive authorisation to trade on the London International Financial Futures Exchange.

In May, 2004, independent trading firm Mac Futures significantly expanded its presence in the jurisdiction of Gibraltar with the opening of a new 100-desk trading facility by Chief Minister Peter Caruana.

In May 1999, Victor Chandler sent shock waves through the betting industry by becoming the first big-name bookie to open an offshore service for UK clients.

It did not take long for others to join the offshore revolution and Chandler's arch-rivals Ladbroke and Coral subsequently established substantial operations in the territory.

During 2002 the offshore betting and gaming sector lost momentum, but in 2003 and 2004 Gibraltar appeared to be an increasingly popular choice again for online gambling firms.

In May, 2005, PartyGaming Plc, a Gibraltar-based e-gaming firm which owns the largest multi-player poker room on the internet, announced a healthy financial performance prior to its flotation on the London Stock Exchange. PartyGaming saw unaudited revenues of $602 million in 2004, deriving a profit before share option expenses of $391 million.

When the flotation took place in July, investors shrugged off fears that US regulatory barriers might shut off the firm's access to the lucrative United States market.

After completing the largest ever flotation on the London Stock Exchange, PartyGaming's shares finished the day 13% above its 113p listing price at 130.5p, with the initial public offering three times oversubscribed. By the end of Monday, the firm's market capitalisation stood at £5.2 billion - more than long established companies such as Marks & Spencer and British Airways.

The firm's chief executive Richard Segal pointed out that current US legislation bans online sports betting, not online poker. "What we do does not violate any federal law. US case law supports the view that internet poker is not illegal, only internet sports betting," he stated.

The company was subsequently dealt a blow by the introduction of US legislation in 2006 effectively banning online gambling involving US citizens.

However, in March, 2007, the firm announced strong growth in revenues and profits, as its decision to focus on other markets began to pay off.

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Gibraltar Offshore Options for E-Businesspeople

The object of setting up an e-commerce business, or part of one, in an offshore jurisdiction, is evidently to make money, and if the tax structure is correct, profits will accumulate in a local bank from which they can be freely invested according to an individual's preferences, either by being ploughed back into expansion of the business, or into income- or capital-generating investments.

There are as many different offshore investment situations as there are offshore investors, and anyone considering making offshore investments must absolutely take appropriate professional advice. But it can be useful to have a first idea of what kind of investment, and which offshore jurisdictions, might be suitable before approaching professionals.

For this reason, lowtax.net has opened a companion web-site called www.investorsoffshore.com, which explores the world of offshore investment from the perspective of an individual with say more than $100,000 to invest. The site has sections on the history of alternative investment and descriptions of the main types of investment, along with hints on how and where to invest.

Recognising that investment strategies are heavily dependent on a person's country of residence, life-style and future plans, InvestorsOffshore DIY Guide allows an individual to specify the broad outlines of his or her offshore investment profile, and receive in return some suggestions as to the most suitable investment route to be further explored with professional guidance.

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