GIBRALTAR: OFFSHORE TAX REGIME

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."

"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."

In his budget in June 2008, Peter Caruana announced his intention to bring forward a 3% cut in corporate tax originally scheduled to take place in 2009, meaning that the corporate rate would drop by 6% that year.

"Last year, and in order to signal the Government’s seriousness of purpose in reducing corporate tax rates, I reduced corporate tax rates to 33%, and said that I would reduce it further this year to 30%, with a signalled reduction to 27% next year," Caruana told Parliament in his budget speech.

"In order to further signal the Government’s commitment I am advancing that timetable by one year, and therefore the corporate tax rate is now reduced by 6% from 33% to 27% with effect from this year that is the year of assessment 2008/09," he added.

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.”

The following section deals with the corporate tax regime as it stands 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

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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 this year's budget. The alternative system is a new Gross Income Based system, in which the taxpayer will receive no allowances, but will pay tax on gross income at the following rates: 20% on the first GBP25,000; 30% on the next GBP75,000; 40% above GBP100,000.

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 GBP25,000 per annum would pay more than 20% income tax; no taxpayer with income below GBP50,000 would pay more than 25% income tax; no taxpayer with income below GBP100,000 would pay more than 27.5% income tax; and no taxpayer with income below GBP125,000 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 GBP14,000 per annum to GBP18,000 per annum, and the taxable income level was increased from GBP50,000 to GBP60,000.

Category 3 status was to be abolished for new entrants. Existing Category 3 holders would be able to retain that status until expiry of their current certificate or for two years until 30 June 2009, whichever is the longer. However, the amount of tax payable was to rise with effect from 1 July 2007 from GBP10,000 to GBP15,000 per annum.

A new category called ‘High Executive Possessing Specialist Skills’ (HEPSS) was to be established for:

Tax would be payable only on the first GBP100,000 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 to be abolished for new entrants with effect from 1 July 2007. Existing holders may retain the status until the end of the current certificate or 30 June 2009, whichever is the longer. However, minimum tax payable was to increase with effect from 1 July 2007 from GBP5,000 per annum to GBP7,500 per annum.

Caruana also announced rate cuts in the ordinary income tax system. The top rate of tax was to be reduced from 42% to 40%.

It was further announced that the standard tax rate band (on which tax is paid at 30%) would be widened by GBP3,000 from the present GBP4,000 to GBP13,000 to GBP4,000 to GBP16,000.

As a result of changes to the low income tax credit system, no tax was to be payable by anyone with income below GBP7,000 per annum. Caruana also announced that the principle of tax cuts targeted to the lower paid, currently limited to people who earn less than GBP8,000, would be extended to people who earn up to GBP19,500 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 to be reduced with effect from 1st July 2008 from 40% to 38%.

Under the measures announced by Caruana, tax payable by low income earners would be further reduced by increasing Low Income Earners’ Allowance with effect from 1st July 2008 as follows:

The remainder of this section details the personal tax regime in for expat workers as it existed prior to the introduction of the 2007 changes.