GIBRALTAR: PERSONAL TAXATION

Several key changes to Gibraltar's personal tax regime were introduced by Chief Minister, Peter Caruana in his 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 is a new Gross Income Based system, in which the taxpayer receives no allowances, but pays 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 would be increased from GBP14,000 per annum to GBP18,000 per annum and the taxable income level increased from GBP50,000 to GBP60,000.

Category 3 status was abolished for new entrants. Existing Category 3 holders will 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 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 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 reduced from 42% to 40%.

The standard tax rate band (on which tax is paid at 30%) was to 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 would 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.

• By GBP880 for taxpayers with incomes below GBP8000. This meant that people with income less than GBP7,500 would pay no tax at all.
• By GBP300 for taxpayers with incomes between GBP8,000 and GBP17,500
• By GBP250 for taxpayers with incomes between GBP17,500 and GBP18,500
• By GBP150 for taxpayers with incomes between GBP18,500 and GBP19,500

In June 2009, Caruana announced further changes to the personal income tax system in his Budget announcement for that year.

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.

The GIB system, effective July 1, works as follows:

• For persons whose gross income does not exceed GIP16,000 (USD26,000) per annum, a new band of GIP10,000 will be added on which tax will be paid at 10%.
• For persons with incomes between GIP16,000 and GIP25,000, new bands will be added as follows on which tax will be paid at 0%:
  • Income of GIP16,000 to GIP17,000, on the first GIP5000 - 0%
  • Income of GIP17,000 to GIP18,000, on the first GIP4000 - 0%
  • Income of GIP18,000 to GIP19000, on the first GIP3000 - 0%
  • Income of GIP19,000 to GIP20,000,on the first GIP2000 - 0%
  • Income of GIP20,000 to GIP25,000,on the first GIP1000 - 0%

According to government statistics, these new bands will benefit 3,600 taxpayers by between GIP40 and GIP640 per annum. For example a single person earning GIP16,000 per annum will pay GIP640 less tax, a 22% reduction in tax.

There were also alterations made to the upper income tax bands under the GIB system as follows:

• The 30% band, on income exceeding GIP25,000, but less than GIP100,000, has also been reduced by 1% to 29%. This is expected to benefit 4,000 taxpayers by up to GIP750 per annum.
• The top band rate, levied on income exceeding GIP100,000, will be subject to a reduced rate of 35%, from 38%.

The attractiveness of the existing Allowances Based System has also been improved - the government has announced that all personal allowances will be increased by 2.8% with immediate effect.

Although the reforms will reduce the income tax burden on most taxpayers, High Net Worth Individuals (HNWIs) and Category Two Individuals, will see marginal increases in their tax burden. The 2009 budget increased the minimum amount of tax they must now pay from GIP18,000 to GIP20,000, while the maximum amount of their income on which they pay tax has also increased from GIP60,000 to GIP70,000. Both changes were effective from July 1, 2009.

The budget, announced on June 26, 2009, also increased the maximum weekly social insurance contribution by 4% in respect of both employers’ and employees’ contributions with immediate effect. This is expected to amount to an increase of GIP1.15 per week for employers and GIP0.91 a week for employees. Licensing fees for gaming machines were doubled to GIP1,000 and duties on petrol and cigarette products were marginally increased.

The remainder of this page deals primarily with the Gibraltar personal taxation system prior to the introduction of the above changes.

Individuals have traditionally paid quite high taxes on their income in Gibraltar unless they are able to take advantage of High Net Worth Individual status or gain exemption as an expatriate executive. Import duties are quite high on some items. However there is no capital gains tax, wealth tax, or sales taxes.

The budget announced in July, 2005, contained a number of changes affecting individual taxation, including the abolition of tax on savings income and increases in personal allowances.

In December 2005, it emerged that an agreement had been reached between the governments of Gibraltar and the United Kingdom over the Rock's obligations under the EU Savings Tax Directive, which came into force in July of that year.

The jurisdiction had come under fire from the Channel Islands, as its legal status in relation to the UK and European Union meant that the Directive did not apply to it in quite the same way.

However, under the deal announced by the UK's then Paymaster General, Dawn Primarolo and Gibraltar's Chief Minister, Peter Caruana , Gibraltar and the UK exchange information about the returns on savings under the Directive, or, in Gibraltar's case only, if the savers so choose, impose a withholding tax on returns on savings of UK residents with accounts there.

The rate was set at 15% from April 1 2006 to June 30 2008, following which it increased to 20% for the next three years, rising to 35% thereafter.

In a statement released in the summer of 2005, responding to the Channel Islands' criticism, the Gibraltar authorities announced that:

"The Government of Gibraltar notes statements in the Channel Islands which refer to a 'last minute problem' and 'an initial difference of views between the UK and Gibraltar' in the implementation of the Taxation of Savings Directives between the UK and Gibraltar and demanding a 'quick resolution to the problem'. There have even been calls for UK to 'force' Gibraltar to comply with the Directive."

"These remarks are based on lack of familiarity with the facts. Gibraltar already is within the ambit of and complies with the Savings Directive. There has been no 'last minute problem', nor any difference of views. Nor, as has been said has 'Gibraltar signed up to the Directive'. The Directive applies, and has always applied to Gibraltar as of right and obligation because Gibraltar is an integral part of the EU. However, as was stated jointly by the Gibraltar Government and the UK Government in a joint press statement issued by them on 1st July 2005, the Directive does not apply as between the UK and Gibraltar because we are not separate member states in relation to each other."

"Nevertheless, as announced jointly on 1 July 2005 the two governments are in discussion to agree appropriate arrangements for exchange of information between them outside of the legal framework of the Directive, which does not apply between them. The two Governments have jointly announced that they are working together with a view to agreeing such arrangements during the next few months. Expectations by ill informed third parties that this should happen by the end of this month are as inappropriate as they are unrealistic."

Gibraltar Residence and Liability for Taxation

• dividends arising from investments quoted in a recognised stock exchange;
• interest paid directly or indirectly –
  (i) by banks, building societies or other financial services institutions licensed in Gibraltar or in any other recognised jurisdiction to undertake deposit-taking or investment business; or
  (ii) arising from investments quoted on a recognised stock exchange; or
  (iii) by the Gibraltar Government Savings Bank.

Tax is charged on employment income on a current year basis through a 'PAYE'-style system; other types of income are assessed on a previous year basis, with special provisions for the opening and closing years of a source of income. The income tax year runs from 1st July to 30th June in the following year.

There are allowances for single and married persons, children, dependent relatives etc. Mortgage interest and life assurance premiums are deductible, as are pension contributions and building society interest (all of these subject to some limits and conditions).

The tax allowance for medical and health insurance premiums was increased from GBP500 pa to GBP1000 pa in 2005.

The general rates of income tax, as from 2003, were as follows (however, see above for changes to these rates put in place by the 2007 budget):

Income Band, G£	Tax Rate, %
0 - 4,000	17
4,001 - 10,000	30
10,001 - 15,000	35
15,001 upwards	45

The Main Basic Allowances - after changes in the Budget 2005 - were:

Personal allowance = £2,578 pa
Allowance for wife = £2,414 pa
First child only = £902 pa
One-parent family = £2,414 pa

Home purchasers allowance = £14,000

Senior citizens’ allowance = £10,000 pa

Child abroad allowance = £1,015 pa

Disability allowance = £2,500 pa.

Mortgage interest: 100% is allowed for Gibraltar property only.

Home purchase one-off allowance on the first time purchase of a property in Gibraltar = £10,000

NB. Life Insurance premiums are 100% allowed subject to premiums not exceeding 1/6th of assessable income or 7% of capital sum assured.

In December 2005, the Government published a new Stamp Duties Ordinance implementing the Budget Measure to abolish stamp duty on all instruments except those relating to real estate in Gibraltar.

The Bill maintained the language of the old Ordinance but deleted provisions no longer applicable. It also modernised certain aspects of stamp duty administration.

Gibraltar Social Insurance

There are two contributory schemes of social insurance, both of which are offered in return for regular weekly contributions:

The Employment Injuries Insurance Scheme provides cash benefits for: people who are unable to work (due to an accident at work for example), people with disabilities, and for widows, widowers and dependants of industrial casualties.

The Social Insurance Scheme provides allowances in the event of widowhood and for guardians or orphans, payment at childbirth and death, unemployment benefit and pensions on reaching pensionable age.

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