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."
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.”
In his 2009 budget
speech, Caruana confirmed that a 10% corporate
tax would apply in the jurisdiction, 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.”
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
Offshore operations
may take place within the following forms:
Click on the appropriate
form for details of its legal basis in Forms of Company.
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Gibraltar 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:
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Gibraltar 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 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 introduced
was a new Gross Income Based system, in which
the taxpayer receives no allowances, but paid
tax on gross income at the following rates:
20% on the first GIP25,000; 30% on the next
GIP75,000; 40% above GIP100,000.
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 GIP25,000 per annum would pay more
than 20% income tax; no taxpayer with income
below GIP50,000 would pay more than 25% income
tax; no taxpayer with income below GIP100,000
would pay more than 27.5% income tax; and no
taxpayer with income below GIP125,000 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 GIP14,000 per annum to GIP18,000
per annum, and the taxable income level was
increased from GBP50,000 to GBP60,000 (GIP70,000
from 1 July 2010).
Category 3 status
was abolished for new entrants. Existing Category
3 holders were able to retain that status until
expiry of their current certificate or for two
years until 30 June 2009, whichever was the
longer. However, the amount of tax payable rose
with effect from 1 July 2007 from GIP10,000
to GIP15,000 per annum.
A new category
called ‘High Executive Possessing Specialist
Skills’ (HEPSS) was established for:
- Existing Category
three holders who earn more the GIP100,000
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 GIP100,000
per annum of income in Gibraltar.
Tax is payable
only on the first GIP100,000 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 could retain the
status until the end of the current certificate
or 30 June 2009, whichever was the longer. However,
minimum tax payable was to increase with effect
from 1 July 2007 from GIP5,000 per annum to
GIP7,500 per annum.
Caruana also announced
rate cuts in the ordinary income tax system.
The top rate of tax was reduced from 42% to
40%.
It was further
announced that the standard tax rate band (on
which tax was paid at 30%) would be widened
by GIP3,000 from the present GIP4,000 to GIP13,000
to GIP4,000 to GIP16,000.
As a result of
changes to the low income tax credit system,
no tax was payable by anyone with income below
GIP7,000 per annum. Caruana also announced that
the principle of tax cuts targeted to the lower
paid, at the time limited to people who earned
less than GIP8,000, would be extended to people
who earned up to GIP19,500 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 reduced with effect from
1st July 2008 from 40% to 38%.
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.
For the 2010/2011
tax year, bands were changed as follows:
- for people
with gross incomes between GIP8,000 and GIP16,000
per annum, the first GIP10,000 will be taxed
at 8% (previously 10%) and the remainder at
20%
- for those with
gross incomes between GIP16,000 and GIP25,000,
new bands are introduced as follows:
- Income:
GIP16,000 - GIP17,000, on the first GIP6,000
- 0%
- Income:
GIP17,000 - GIP18,000, on the first GIP5,000
- 0%
- Income:
GIP18,000 - GIP19,000, on the first GIP4,000
- 0%
- Income:
GIP19,000 - GIP20,000, on the first GIP3,000
- 0%
- Income:
GIP20,000 - GIP25,000, on the first GIP2,000
- 0%, remaining income taxed at 20%.
- For individuals
with gross incomes between GIP25,000 and
GIP35,000 the maximum effective tax rate
is 20%. For individuals with gross incomes
between GIP35,000 and GIP100,000 the maximum
effective tax rate is 26.25%.
The top rate band of 35% for gross incomes
above GIP100,000 was abolished and replaced
with a top rate of 29%.
For incomes above GIP100,000 a year the
tax rates are 20% for the first GIP25,000,
29% for income between GIP25,001 and GIP353,000
(20% for income between GIP353,001 to
GIP704,800, 10% for income between GIP704,800
to GIP1 million and 5% on income in excess
of GIP1 million)
In the July 2009
budget, alterations were also 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, was reduced by 1% to 29%. This
was expected to benefit 4,000 taxpayers by
up to GIP750 per annum.
- The top band
rate, levied on income exceeding GIP100,000,
became subject to a reduced rate of 35%, from
38%.
The attractiveness
of the existing Allowances Based System was
also improved - the government announced a 2.8%
increase for all personal allowances with immediate
effect.
Although the reforms
reduced the income tax burden on most taxpayers,
High Net Worth Individuals (HNWIs) and Category
Two Individuals, saw marginal increases in their
tax burden. The 2009 budget increased the minimum
amount of tax they must pay from GIP18,000 to
GIP20,000, while the maximum amount of their
income on which they pay tax also increased
from GIP60,000 to GIP70,000. Both changes were
effective from July 1, 2009.
In the July 2010
budget, social insurance contributions were
increased to 20% of gross earnings, capped at
GIP32.97 for employer and GIP15.00 for employee.
The remainder
of this section details the personal tax regime
for expat workers as it existed prior to the
introduction of the 2007 changes.
There were no
special rules applying generally to the foreign
or Gibraltarian employees of offshore operations,
who paid tax according to the normal rules if
they were resident in Gibraltar; however there
were some special arrangements for expatriate
executives and other workers with specialist
skills.
Subject to various
conditions, such an individual who worked for
an exempt or qualifying company could apply
to the Financial and Development Secretary for
a certificate which limited their annual tax
bill to GIP10,000, regardless of income. A qualifying
individual was known as a Category 3 Individual.
A comparable scheme
existed for specially skilled individuals working
for other types of company, limiting tax to
GIP5,000 for income up to GIP50,000, or GIP10,000
otherwise. Such individuals were known as Category
4 individuals.
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Gibraltar
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 has traditionally paid tax according
to the following table (however, see above for
changes to these rates introduced in 2007):
| Taxable
Income Band, GIP |
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 GIP500 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, are now
issued for a period of three years. However,
there is 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.
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Gibraltar
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.
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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 or received in Gibraltar; however payments
from exempt or qualifying companies are tax-exempt,
as is bank interest.
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% 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.
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