Gibraltar: Offshore Tax Regime

In this Section:

- Gibraltar Forms of Offshore Operation
- Gibraltar Tax Treatment of Offshore Operations
- Gibraltar Tax Treatment of Foreign Employees of Offshore Operations
- Gibraltar High Net-Worth Individuals
- Gibraltar Offshore Activities
- Gibraltar Employment and Residence

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."

The following section describes the offshore corporate tax regime as it existed historically.

Gibraltar Forms of Offshore Operation

Offshore operations may take place within the following forms:

• Exempt private company (See above for changes)
• Branch
• Gibraltar 1992 Company
• Qualifying Company (See above for changes)
• Non-Resident Company
• Trust

Click on the appropriate form for details of its legal basis in Forms of Company.

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Gibraltar Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of Gibraltar corporate taxation, which also apply to offshore entities except as indicated below.

Offshore Gibraltar companies are taxed as follows:

• Exempt private companies, which can be resident or non-resident, traditionally paid no tax on their income (other than the yearly registration fee of GIP300), and applied no withholding tax to payments made. No stamp duty was payable on any document or transaction relating to the exempt company's shares; however an exempt company did pay, like all companies, GIP0.50 capital duty per GIP100 of its authorised share capital on incorporation. This was the most commonly used corporate form in Gibraltar; Captive insurance companies, for example, would normally be exempt companies. An exempt company must obtain a certificate of tax exemption, which is valid for 25 years, from the Financial and Development Secretary.
  
• Branches of overseas incorporated companies, which have to be registered with the Registrar of Companies, and pay an annual registration fee of GIP300, can also be exempt and benefit from the same tax exemptions as an exempt company. Branches also must obtain a certificate of tax exemption from the Financial and Development Secretary.
  
• Gibraltar 1992 Companies, although they are not 'offshore' in the usual sense of the word, and indeed pay normal rates of corporation tax in Gibraltar, were brought into being to allow efficient low-tax passage of dividends through Gibraltar, when the EU Parent/Subsidiary Directive 90/435 came into force. Exempt and qualifying companies could not benefit from the Directive because they were not 'normal' tax-payers, while 'normal' Gibraltar companies deducted high rates of withholding tax. The 1992 company was 'normal' but deducted withholding tax at only 1%; thus as a holding company the 1992 was traditionally a highly efficient means of extracting dividends from EU companies with only 1% withholding tax.
  
• Qualifying Companies (or indeed branches), registered under the Income Tax (Qualifying Companies) Rules 1983 (cost £250) and paid tax on their profits at the 'prescribed' rate (ie at the rate stated on their certificate, obtained as with exempt companies from the Financial and Development Secretary). The rate could be anywhere between 0% and 35%, as agreed between the company and the Secretary. Withholding tax rates applicable to qualifying companies normally followed the prescribed mainstream rate. The purpose of qualifying companies, which were essentially a form of exempt company, was to pay enough tax to bring them within the 'normality' criteria of CFC (Controlled Foreign Corporation) rules in their home country and/or to obtain beneficial treatment of dividends paid to investors in their home countries. Qualifying companies needed to submit accounts to the Gibraltar Commissioner of Income Tax, and normal income tax legislation applicable to resident companies was applied to calculate the assessable profits of the company. Although the qualifying company is subject to tax at a variable rate, as explained above, most of the current qualifying companies are taxed at 5%. NB: The UK Chancellor announced changes to the UK CFC rules in October 1999, naming Gibraltar as one of the territories affected, but the precise impact of the changes was not immediately clear. NB: Qualifying Companies were abolished in January, 2005.
  
• Non-Resident Companies are not liable to taxation, other than on income accruing in, derived from or received in Gibraltar, or income arising directly or indirectly through their Gibraltarian agents. However, some types of Gibraltarian income are exempted, including income from the ownership, chartering or operation of any ship, and interest income from bank deposits and tax-exempt Government bonds. Assessments on non-resident companies may be made in their own name or in the name of their agent in Gibraltar.
  
• Trust income is exempt from tax under the Income Tax (Allowances, Deductions and Exemptions) Rules 1992 if:
  • the trust is created by or on behalf of a non-resident person; and
  • the income either accrues or is derived outside Gibraltar, or in the case of income received by a trust would, if it had been received directly by the beneficiary, not be liable to tax under the Income Tax Ordinance; and
  • except in the case of a trust created before 1/7/83, the terms of the trust expressly exclude residents of Gibraltar (as beneficiaries).

  NB: Interest income received from a Gibraltar bank is normally exempt from taxation.

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Gibraltar Taxation 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.

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.

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Gibraltar High Net-Worth Individuals

The Gibraltar government, wanting to encourage wealthy individuals to establish residences there, introduced a special taxation regime for 'High Net-Worth Individuals' (HNWI) conforming to the following guidelines (they are not all statutory):

• The person must not have been a resident of Gibraltar in the 5 years preceding an application to be an HNWI;
• The person must have a residence available for his exclusive use for at least 7 months during the tax year for which he wishes to be treated as an HNWI;
• The person and his family must have adequate medical insurance;
• The person must have sufficient means to maintain himself and his family; however, a declaration of world-wide wealth is not required;
• The person must not engage in a trade, business or employment in Gibraltar other than duties which are incidental to any trade, business or employment based outside Gibraltar or duties as a director of a Qualifying or Exempt Company.

An individual with HNWI status has traditionally paid tax according to the following table (however, see above for changes to these rates introduced in 2007):

There is no capital gains tax in Gibraltar, and an HNWI is also exempt from Estate Duty.

An application for HNWI status is made to the Financial and Development Secretary under the Qualifying (High Net Worth Individual) Rules of the Income Tax Ordinance. There is a GIP500 non-refundable application fee (GBP1,000 as from July, 2004), and the application must be accompanied by two references, one from a banker.

Tax status certificates, which previously had no expiry date, are now issued for a period of three years. However, there is no need to reapply as a fresh certificate will be issued once the authorities receive a declaration from the individual that they are compliant with the tax rules.

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Gibraltar Offshore Activities

High Net-Worth Individuals are permitted to hold shares in an exempt company or a qualifying company, and to hold deposits in Gibraltar banks; income from these sources is only taxable (for the company) if paid to the HNWI for his own use in Gibraltar.

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Gibraltar Employment and Residence

There are no special privileges for the employees of non-resident or offshore entities in Gibraltar, but see above for the rules regarding High Net-Worth Individuals and Expatriate Executives. See also Personal Taxation - Residence and Liability for Taxation.

For taxation purposes, an individual is either resident or non-resident, and nationality is not a factor in determining tax status. An individual is considered resident in Gibraltar if he resides there for more than 183 days in any one tax year (1st July to 30th June in the following year).

A non-resident individual will be taxed on income derived from, accrued or received in Gibraltar; however payments from exempt or qualifying companies are tax-exempt, as is bank interest.

Property bought by a non-resident may be owned by an individual applicant or joint applicants, or alternatively, in the name of a company of which the applicant is the 100% beneficial owner and over which he/she has full and effective control. In fact there are tax advantages if the property is purchased through a Gibraltar company. It is not essential that the property be purchased prior to approval of an application. However, the property to be purchased must be stated before an agreement will be entered into between the applicant and the vendor of the property so that on payment of a refundable deposit the property would be reserved for the applicant until the application is considered by the Government. Once the application is approved the applicant, on completion of the purchase of the property, will obtain a permit of residence.

A permit is renewable after a specified term providing the requirements are met and the property is owned by the applicant. The holder of a residence permit need not live in Gibraltar and is not automatically entitled to social security or citizenship. However, the resident's children may attend local schools and are entitled to the same benefits as other local residents.

If a non-EU national wishes to stay in Gibraltar other than through the property 'doorway', he must try to find employment, for which he will receive a work permit only if there are no Gibraltarians able and willing to perform it. Such individuals will be given residence permits for shorter or longer periods depending on the nature of the work for which they have a permit. The government can deny a non-EU national the possibility of buying residential property.

Non-Gibraltarians need work permits, issued under the Control of Employment Ordinance. A work permit cannot be refused to an EU national.

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