GIBRALTAR: TAXATION

Debate between the Gibraltar government and the European Commission took place over several years (finally seeming to reach a resolution in December 2008 -- see below for more details), but in the meantime, the Brussels officials agreed that the existing situation (confusing as it was) should 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.

The Gibraltar Government and the UK Government were challenging the EU Commission decision which stated that under EU law Gibraltar is not entitled to have a tax regime different to the UK’s.

“This oral hearing is very much the final stage of this litigation," Caruana commented.

"Under the EU court system the exchange of written arguments is the main part of the procedure. The oral hearing is quite brief. It’s a different system to ours. During the written argument stages Gibraltar has formulated and submitted an impressive array of arguments, all of which are supported by the recent landmark ruling by the European Court of Justice in the Azores case. We are thus confident in the merits of our case," he explained.

In the Azores case the ECJ had to determine the principles that apply in deciding whether a tax regime is in breach of state aid rules on grounds of Regional Selectivity. Portugal had permitted the legislative assembly of the Azores to cut rates of income tax by as much as 30% in 1999 in recognition of the unique structural difficulties of its economy. However, under European Union state aid rules, member states are only permitted to grant special tax regimes to certain regions or industries if they are proportionate and in keeping with the current tax system in place in that country, in the interests of maintaining a level tax playing field.

Major changes to Gibraltar's corporate tax regime were announced in 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 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.

"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 Gibraltar there is no capital gains tax, sales tax or VAT. The main tax for companies is corporation tax, and there are withholding taxes; there are also stamp duties on certain transactions, and property taxes ('rates').

Assessment and collection of tax is administered by the Commissioner of Income Tax; the tax year runs from 1st July to the following 30th June.