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Gibraltar: Country and Foreign Investment

Executive Summary

Gibraltar Is In The EU . . .

Gibraltar is self governing but remains a colony of the United Kingdom, and entered the EU along with the UK. It does not belong to the EU's VAT, CAP or common external tariff regimes. However Gibraltar has implemented much EU financial legislation and can apply Common European Passport regulations in the insurance, banking and fund management spheres. In practice there are sometimes difficulties connected with the long-running row between the UK and Spain over Gibraltar's status.

In a referendum held by the Gibraltar government in November, 2002, nearly 99% of votes were cast against the joint sovereignty being planned between Britain and Spain.

By mid-2003 it was clear that the age-old stalemate between Britain and Spain had been re-established, and British Foreign Office minister Denis MacShane suggested that there was unlikely to be a resolution to the Gibraltar question for at least thirty years. "I don't think the people of Gibraltar will approve any steps on sovereignty until there has been a long period of calm and good relations with Spain," said Mr McShane at the time.

In September 2006, agreement over a number of outstanding issues relating to Gibraltar was reached between the UK's Minister for Europe, Geoff Hoon, Spanish Foreign Minister Migel Angel Moratinos and Gibraltar's Chief Minister, Peter Caruana.

Areas covered by the agreements included the expanded use of Gibraltar Airport, the full inclusion of Gibraltar in EU air liberalisation measures, recognition by Spain of Gibraltar's '350' international dialling code and unblocking by Spain of Gibraltar mobile telephone roaming in Spain.

Meanwhile, in December 2006, Gibraltarians accepted a new constitution for the jurisdiction, which aimed to give it more autonomy from the United Kingdom over its own internal affairs. In a referendum, 60.24% of those who turned out voted 'yes' to the new constitution, while 37.75% voted to reject it. 60.4% of Gibraltar's 20,061 registered voters turned out to vote.

The constitution, agreed in April of that year by then UK Foreign Secretary Jack Straw and Peter Caruana, and between Gibraltar's two main political parties later in the year, saw the UK retaining international responsibility for Gibraltar. However, the new constitution ceded certain powers previously in the possession of the British government to Gibraltar, and allowed the jurisdiction to have its own independent judiciary.

The official language is English but Spanish is widely used. The British military and naval base once dominated Gibraltar's economy but no more, leaving behind a highly-educated population with high unemployment. The excellent port facilities have not yet been fully re-utilised. Tourism has become a major contributor to the economy, particularly visits by cruise ships. The airport connects with the UK and some other destinations, but it's necessary to cross into Spain for wider connections.

. . . But Its Economic Future Is Dependent On Offshore

Gibraltar was one of the first of the British dependent territories to develop tax-exempt corporate forms for offshore business. It has quite high internal income taxes, but offers low-tax regimes to both companies and individuals, as well as incentives for incoming investment. It is probably the cheapest European offshore jurisdiction in which to operate but is smaller than many of its rivals.

There is a sophisticated business and professional infrastructure. Business sectors with offshore activity include banking, insurance, investment fund management, trust management, shipping, and investment holding companies. In the past decade, there has been an influx of UK betting and gaming operations fleeing high taxes and using the very good telecommunications facilities to offer Internet betting services.

Gibraltar's situation within the EU is unique. On the one hand, its legislative endeavours would seem to have established it as a very cost- and tax-effective base for European trading and financial operations, and unlike some European IOFCs it is not overcrowded; on the other hand, it is vulnerable to pressure from the UK and the EU.

In July 2002 Gibraltar's Chief Minister, Peter Caruana announced a new corporate taxation policy setting a zero rate of corporation tax for all companies but introducing new taxes on company personnel and property occupation which were to be capped at 15% of profits. The existing corporate forms which allowed zero taxation, the Exempt and Qualifying companies, would be abolished.

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 GIP1.5 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.

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."

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 his 2009 budget speech, Caruana confirmed that a 10% corporate tax would apply in the jurisdiction from January 1, 2011, 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.”



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