Gibraltar offshore tax and legal regimes

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."

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.

In July, 2002, Gibraltar's Chief Minister, Peter Caruana announced the territory's 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 will be capped at 15% of profits.

The existing corporate forms which allowed zero taxation, the Exempt and Qualifying companies, were to be abolished.

The new taxes, which were originally intended to come into force from 1st January 2003, were:

A “Company Payroll Tax” (similar to what exists in Bermuda and elsewhere) will be introduced in respect of employees in Gibraltar. This will be charged at a sum per annum per employee. This payroll tax is a tax on the company and is payable by the company only.
A new Business Property Occupation Tax will be introduced in respect of property occupied in Gibraltar by companies for business purposes.
In addition, all companies will pay an annual companies registration fee of £300 p.a. (if the company has income) or £150 (if the company has no income) inclusive of current annual return fees.
In addition, and subject to EU clearance under State Aid Rules, two sectors of the economy only will pay a new tax on profit. The sectors are financial services providers and utility companies. The intended rate of profits tax for financial services providers is 8%, and will be subject, aggregated to the other taxes, to a maximum cap of 15% of profit.

Since the taxes were capped at 15%, local companies which paid 20% or 35% profits tax would be better off, while 'offshore' companies would be worse off only if they employed staff or occupy premises locally. Many companies, particularly those used to hold Spanish property interests, do neither.

In March, 2003, the EU's Council of Finance Ministers confirmed that the reforms did not constitute harmful tax measures. However, in April, 2004, the Commission argued that the new rules would give companies domiciled in Gibraltar an unfair advantage over their counterparts in the UK, under a principle known as 'regional selectivity'. The Commission also took issue with the fact that since the taxes are based on payroll and the occupation of business premises, offshore companies registered in Gibraltar would be unlikely to incur any tax liability. The EC therefore rejected the reforms, effectively suggesting that for taxation purposes, Gibraltar should be considered part of the United Kingdom.

Chief Minister, Peter Caruana slammed the EC for suggesting that the jurisdiction is fiscally part of the United Kingdom, pointing to its 1969 constitution, which gives the territory fiscal autonomy. The United Kingdom government is said to be “100% on-side” regarding the ‘regional selectivity’ debate, and Gibraltar is challenging the EC's view at the European Court of Justice. The issue will take years to resolve, and meanwhile Brussels officials seem to have agreed that the existing situation (confusing as it is) may be allowed to continue. This apparently means that Exempt and Qualifying companies will be allowed to continue in existence alongside the new tax regime, pending a judicial resolution.

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 remainder of this section describes the offshore tax regime as it existed historically.

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.

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, pay no tax on their income (other than the yearly registration fee of G£300), and apply no withholding tax to payments they make. No stamp duty is payable on any document or transaction relating to the exempt company's shares; however an exempt company does pay, like all companies, 50p capital duty per G£100 of its authorised share capital on incorporation. This is 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 G£300, 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 cannot benefit from the Directive because they are not 'normal' tax-payers, while 'normal' Gibraltar companies deduct high rates of withholding tax. The 1992 company is 'normal' but deducts withholding tax at only 1%; thus as a holding company the 1992 is a highly efficient means of extracting dividends from EU companies with only 1% withholding tax.
Qualifying Companies (or indeed branches), register under the Income Tax (Qualifying Companies) Rules 1983 (cost £250) and pay 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 can be anywhere between 0% and 35%, as agreed between the company and the Secretary. Withholding tax rates applicable to qualifying companies normally follow the prescribed mainstream rate. The purpose of qualifying companies, which are essentially a form of exempt company, is 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 need to submit accounts to the Gibraltar Commissioner of Income Tax, and normal income tax legislation applicable to resident companies is 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.

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 will 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 will "very significantly" reduce the tax payments of around 6,500 local taxpayers, and will 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 will pay more than 20% income tax; no taxpayer with income below GBP50,000 will pay more than 25% income tax; no taxpayer with income below GBP100,000 will pay more than 27.5% income tax; and no taxpayer with income below GBP125,000 per annum will pay more than 30% income tax.

Access to the Gross Income Based alternative will be subject to rules to prevent married couples and others living together from benefiting from both alternative systems.

Caruana also announced some amendments to the jurisdiction's' high-net-worth individual (HNWI) scheme. For HNWIs this scheme will remain largely intact except that with effect from 1 July 2007 the minimum tax payable is increased from GBP14,000 per annum to GBP18,000 per annum and the taxable income level is increased from GBP50,000 to GBP60,000.

Category 3 status is 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 rises with effect from 1 July 2007 from GBP10,000 to GBP15,000 per annum.

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

Existing Category three holders who earn more the GBP100,000 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 GBP100,000 per annum of income in Gibraltar.

Tax will 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 is 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 will 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 is reduced from 42% to 40%. The reduction in the top rate will thus have been reduced from 50% to 40% over the last 10 years.

The standard tax rate band (on which tax is paid at 30%) will be widened by GBP3,000 from the present GBP4,000 to GBP13,000 to GBP4,000 to GBP16,000. This measure will benefit 7,000 taxpayers, who will see the tax rate on the first GBP3,000 of taxable income after GBP13,000 reduced by 12% from 42% to 30% or by GBP120 per GBP1,000.

As a result of changes to the low income tax credit system, no tax will 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, will be extended to people who earn up to GBP19,500 per annum.

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.

There are no special rules applying generally to the foreign or Gibraltarian employees of offshore operations, who will pay tax according to the normal rules if they are resident in Gibraltar (see Personal Taxation); however there are some special arrangements for expatriate executives and other workers with specialist skills.

Subject to various conditions, such an individual who works for an exempt or qualifying company can apply to the Financial and Development Secretary for a certificate which limits their annual tax bill to G£10,000, regardless of income. A qualifying individual is known as a Category 3 Individual.

A comparable scheme exists for specially skilled individuals working for other types of company, limiting tax to £5,000 if income is up to £50,000, or £10,000 otherwise. Such individuals are known as Category 4 individuals.

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 have traditionally paid tax according to the following table (however, see above for changes to these rates introduced in 2007):

Taxable Income Band, G£	Tax Payable, %
0 - 7,000	30
7,001 - 12,500	35
12,501 - 15,500	40
15,501 - 19,000	45
19,001 - 45,000	50

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 G£500 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, will now be issued for a period of three years. However, there will be 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.

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.

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 in or received in Gibraltar; however payments from exempt or qualifying companies are tax-exempt, as is bank interest. Withholding taxes will be charged on payments from other Gibraltar companies, at 30% for an individual.

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 per cent 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.