GIBRALTAR: OFFSHORE BUSINESS SECTORS

Gibraltar was the first European financial centre to introduce the exempt company (although this is now being phased out as a corporate vehicle, and will have been removed completely by the end of 2010) as an offshore holding vehicle, and its unique status among IOFCs in relation to the EU makes it the jurisdiction of choice for certain types of investor or trader. However, the Rock's company formation regime remained, until December 2008, somewhat up in the air as a result of its dispute with the European Commission.

Gibraltar sued the EC and won (in May 2002) after it attacked Gibraltar's 'exempt' and 'qualifying' company forms. However, the government introduced a new regime as from July, 2003, including uniform rates of tax capped at 15% for companies, and abolition of the existing 'Exempt' and 'Qualifying' companies.

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 are 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 was 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. In the meantime, the Brussels officials have agreed that the existing situation (confusing as it is) may 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 £1.5 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.

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.

In his 2009 budget speech, Caruana confirmed that a 10% corporate tax would apply in the jurisdiction from January 1, 2011 (20% for energy and utility providers), and that the Exempt Company regime would be rescinded by the end of 2010.

As a multi-purpose financial centre Gibraltar is not perhaps as well-developed as some of its rivals, but it has well-regulated banking, investment management, insurance and shipping sectors. As with holding companies, Gibraltar's position vis-a-vis the EU is an advantage for some financial operators or their customers, especially now that the diplomatic hurdles to the 'passporting' of Gibraltar financial institutions throughout the EU have been removed. On the other hand there is always the fear that Gibraltar is vulnerable to pressure from the EU and especially from Spain.