The basis on which tax is determined is whether income accrues in or is derived from Gibraltar, regardless of the residence of the recipient.
The test for determining whether income accrues in or is derived from Gibraltar follows the established jurisprudence set out in various leading UK Privy Council decisions (binding in Gibraltar in the absence of any Gibraltar cases) and related authorities.2 Regard must, therefore, be had of the whole of the activities undertaken, where these take place and which activities give rise to the income in question.
Section 74 of the 2010 Act makes clear, however, that in the case of businesses that undertake licensed and regulated activities in Gibraltar, the profits from these activities accrue in or are derived from Gibraltar (provided they are not generated by a branch or permanent establishment outside Gibraltar).
The tax year runs from 1 July to 30 June, and tax is payable on the actual taxable profits for the year.
Various significant income streams are exempt from tax. There is no tax on passive investment income or the receipt by a Gibraltar company of dividends from any other company, regardless of where it is incorporated.
There is no tax on dividends paid by a Gibraltar company to another company and no tax (or withholding) on a dividend to any person not resident in Gibraltar.
Royalties received or receivable by a company in Gibraltar are chargeable to tax (at the usual corporate rate of 12.5 per cent).
As from 1 August 2022, all companies in Gibraltar are required to pay a covid recovery charge of £25 per week for the next two years, which shall be collected by Companies House, Gibraltar as part of the company annual return.
ii Individual taxation
An individual (not a company or trust) who is a tax resident as defined in the 2010 Act is also liable to pay tax on a worldwide basis in respect of the taxable heads of income.
There are certain incentives, however, designed to attract high net worth individuals and executives possessing particular skills. These make Gibraltar a very attractive base for suitably qualified individuals and their dependants or for retirees or entrepreneurs.
Generally, with regard to residence, the 2010 Act provides that an individual is ordinarily resident in Gibraltar if he or she is present in Gibraltar during any year of assessment for at least 183 days; and when considering three consecutive years of assessment, an individual has been present in Gibraltar for more than 300 days over that three-year period.
Any presence in Gibraltar in any 24-hour period commencing at midnight shall be counted as a day, irrespective of whether accommodation in Gibraltar is used or not.
The 2010 Act provides two main systems that individual taxpayers are able to choose between so as to ensure a lower tax payment. These are described respectively as the allowance-based system and the gross income-based system.
This allows an individual taxpayer to claim a large number of allowances and deductions against his or her chargeable income. These allowances include personal, spouse and civil partner allowances (£3,455 each), nursery allowance (£5,480) and blind persons allowances (£5,475), and in respect of one child (£1,190) and for each child studying abroad (£1,355). Medical insurance premium payments (£5,395) and a one-off residential property purchase allowance (£13,000 spread over a number of years, and an additional allowance of £4,000 restricted to a maximum of £1,000 per year) are also allowed. Mortgage interest relief to acquire Gibraltar property to be used as a taxpayer’s principal residence is available on loans up to a value of £350,000.
In the 2022 Budget, the Chief Minister announced a temporary measure whereby the tax bandings under both the allowance-based system and the gross income-based system are increased by 2 per cent for the next two years.
The tax rates applicable to the allowance-based system are as follows:
|Taxable income bands||Standard rate (per cent)||Rate for next 2 years (per cent)|
|£16,001 and above||39||41|
Gross income-based system
This system allows for a much smaller number of deductions or allowances but applies reduced rates of tax on gross income as follows:
|Taxable income bands||Standard rate (per cent)||Rate for next two years (per cent)|
The gross income-based system is generally regarded as the most simple and beneficial for taxpayers. It is usually the case that this assessment will deliver the lowest level of income tax.
iii Developments related to personal taxation for individuals generally and in relation to gift and succession taxes
Gibraltar does not levy any gift, succession or inheritance taxes. It does not have any capital gains or wealth taxes. There is also no stamp duty in respect of share transfers other than on Gibraltar real estate transactions and nominal (£10) capital duty on the incorporation of a company.
There is no tax on passive investment income (including bank interest or dividends from quoted securities or funds invested in these).
Gibraltar does charge tax on intergroup corporate interest (subject, however, to a de minimis threshold of £100,000 per year interest) in respect of any such group lending.
As noted previously, there is no VAT.
iv Issues relating to cross-border structuring
The two main issues impacting on the nature of private client and corporate cross-border structuring are the inexorable drive towards (perhaps complete) transparency and international agendas designed to eliminate taxation arbitrage, which is regarded as overly aggressive.
We are also witnessing heightened levels of vigilance and scrutiny from certain European domestic tax authorities (e.g., Spain and Portugal), which are driving clients to reconsider their residence, family office and private holding structures. Gibraltar has been the beneficiary of some of these developments by providing a safe and convenient alternative. As described in Section II.vi, these developments have increased interest in and use of Gibraltar as a residential base and wealth planning platform. It is not uncommon for new Gibraltar residents who rent or have bought property in Gibraltar to spend some time in Spain or Portugal (a perfectly workable arrangement provided they are careful not to spend more than 183 days a year in Spain or Portugal and they do not have their centre of economic and family interests based in those jurisdictions). The Brexit vote has also increased the number of queries from British expatriates settled in the Iberian Peninsula. Gibraltar is regarded as a potential and close-at-hand alternative for those residing in either Spain or Portugal.
Gibraltar has adopted the EU Savings Directive, the Mutual Assistance Directive and the Mutual Legal Assistance Convention. It has also entered into an extensive network of tax information exchange agreements. There are now 28 bilateral tax information exchange agreements in place with various countries, including the United States, the United Kingdom, France, Germany and most other European territories. Further, Gibraltar is subject (by territorial extension of the United Kingdom) to the Multilateral Convention on Mutual Administrative Assistance, which facilitates international cooperation with 141 jurisdictions. The effect of Gibraltar’s adoption of various international conventions and directives is that exchange arrangements extend to a very large number of countries, including Spain.
Gibraltar has transposed EU Directive 2014/107/EU on automatic exchange of information with all Member States of the EU via the introduction of regulations. These Regulations implement the EU Common Reporting Standard into Gibraltar law. On 26 June 2017, the Register of Ultimate Beneficial Owners Regulations came into operation. These Regulations create a central register of beneficial owners. By doing so, Gibraltar aims to improve tax transparency within the jurisdiction.
A tax treaty relating to Gibraltar and Spain was signed and entered into force on 4 March 2021. The Gibraltar–Spanish tax treaty aims to eliminate uncertainty around the tax position of people who are treated as tax resident in both countries.
Gibraltar has entered into a double taxation agreement with the United Kingdom that came into effect on 24 March 2020. This agreement seeks to eliminate double taxation on income and capital and to prevent tax evasion and avoidance. The agreement covers both Gibraltar income tax and corporation tax.
On 30 January 2020, the government of Gibraltar published three pieces of tax-related legislation that derive from EU requirements. They are:
- implementation of the sixth EU Directive on Administrative Cooperation (DAC6): as part of the DAC6’s implementation, Gibraltar has implemented the new DAC6 mandatory disclosure regime with the Income Tax (Amendment) Regulations 2020. Under it, those entities that are described as intermediaries will be obliged to report any cross-border arrangement with which they assist that exhibits the pre-defined hallmarks of aggressive tax avoidance. Following recent developments, Gibraltar has aligned its reporting requirements with the OECD model in line with the United Kingdom;
- exit tax: as part of the final tranche of provisions in the Anti-Tax Avoidance Directive, the government published their implementation of the exit tax on 30 January 2020 in the Income Tax (Amendment No3) Regulations 2020; and
- hybrid mismatches: new rules have been implemented around hybrid mismatches. These were the third set of EU Directive-driven tax provisions that came into force on 30 January 2020.
Gibraltar is an excellent location for the headquartering of corporate activities. The combination of robust regulatory and governance regimes and competitive taxation work well to deliver a strong environment. The majority of the work being attracted to Gibraltar currently involves the establishment of a bricks and mortar presence. The fact that Gibraltar is not an island (but is physically connected to southern Spain) assists significantly in giving this process real traction. It effectively permits Gibraltar to act as an economic engine for the area (putting to use the surrounding area as a residential and facilities base). This commercial relationship has an almost unlimited potential for further growth for the benefit of both Gibraltar and the surrounding region.3
The OECD base erosion and profit shifting agenda and the related EU initiatives will continue to push cross-border corporate structures towards greater transparency and substance. The focus on ensuring no ‘double non-taxation’ and on the challenges posed by the digital economy are particularly significant. Gibraltar’s approach is to view these developments as an opportunity for a greater physical presence and more demonstrable control, management and regulatory accountability. This will affect various aspects of international families’ businesses and administration arrangements. In particular, the location, function and operation of family offices will require renewed consideration.
v Regulatory issues and special arrangements relating to high net worth individuals or specialist skills High net worth Category 2 individuals
The Qualifying (Category 2) Individuals Rules 2004 provide for a well-established regime that limits income tax for high net worth individuals wishing to reside in Gibraltar.
The Category 2 programme has enjoyed great success since it was first introduced in the early 1990s. To apply for a certificate, an individual is required to verify that he or she has a minimum net worth of £2 million (usually in bank deposits or securities) and is of good character. The holder of a Category 2 certificate is taxed in Gibraltar on the basis of the normal rates applicable under the gross income-based system but only on the first £118,000 of assessable income. There is, however, a minimum annual tax payment of £37,000. Any income in excess of £118,000 is not subject to income tax in Gibraltar (irrespective of whether the income is remitted locally or otherwise). This effectively gives rise to a maximum tax liability in the order of £44,740, irrespective of worldwide income (at current 2022/23 rates).
The benefits of a Category 2 certificate (which is a lifetime status subject to the eligibility criteria being satisfied on an ongoing basis) can extend to the worldwide income of a spouse or civil partner and of dependent children (up to 18 years or end of higher education).
A Category 2 individual is required to either rent or buy appropriate accommodation in Gibraltar for his or her exclusive use.
The general principle is that Category 2 individuals should not seek mainstream employment in Gibraltar or carry out business in competition with ordinary taxpayers. This principle holds whether the individual is carrying out business personally or via a legal entity such as a company.
Thus, it follows that a Category 2 individual should not derive earned income from activities in Gibraltar unless it can be proved, to the satisfaction of the Ministry of Finance, that there is exceptional economic benefit for Gibraltar, which, in the opinion of the Ministry of Finance, warrants a departure from the general principle. In practice, this latitude has developed to encompass what is currently a wide spectrum of activities.
There are, therefore, various examples of economic activity that a Category 2 individual can undertake in Gibraltar. These are in accordance with published guidelines and include the following:
- owning a Gibraltar company for investment purposes in, for example, bank deposits, equities and bonds;
- owning a Gibraltar company to invest and trade in properties throughout the world;
- owning a Gibraltar company for trading in goods outside Gibraltar;
- doing any of the above from a physical office set up in Gibraltar;
- receiving director’s remuneration as well as dividends in respect of any of the above;
- being only a shareholder in a company carrying out activities licensable in Gibraltar under applicable financial services or gambling legislation;
- being only a shareholder in a company carrying out a business in Gibraltar that is not in competition with other businesses in Gibraltar;
- investing, either personally or through a company or another entity, directly or indirectly, in the purchase of property situated in Gibraltar for investment purposes. However, the rental income arising from any such properties is taxable in Gibraltar either on the company or the individual and therefore does not form part of the individual’s tax shelter deriving from his or her Category 2 status;
- providing consultancy services to non-Gibraltar companies or receiving employment income from companies outside Gibraltar, as long as those services or employment are physically carried out exclusively outside of Gibraltar; and
- from within Gibraltar, providing consultancy services to companies or other entities trading outside Gibraltar if that individual owns and controls or is connected by a significant shareholding or ownership interest in such company or entity. Consultancy in this paragraph means consultancy to a company or entity itself and not the provision of advice or services to a client of that company or entity.
The profile of Category 2 residents has changed considerably over the past 25 years. Category 2 certificate holders now tend to become longer-term residents contributing to, and engaging socially, economically and often philanthropically with, Gibraltar. This has meant real estate of increasing quality has become more readily available locally, with a marked improvement in the entertainment, restaurant and cultural scene. The policy direction is to encourage further residence by such entrepreneurs and high net worth individuals and to underpin this drive with increased investment in Gibraltar’s infrastructure.
Entrepreneurs and individuals with specialist skills
Gibraltar is keen to continue to attract individuals who bring special skills not available locally. The HEPSS Rules 2008 provide a favourable tax regime for individuals who possess particular skills in key positions in a business established locally.
The basic requirements in respect of such applicants are the following:
- basic salary of over £160,000 per year;
- the skills must not be available in Gibraltar;
- exclusive accommodation must be arranged in Gibraltar (either rented or purchased); and
- the individual cannot have been resident in Gibraltar within the past 36 months.
A person in possession of a HEPSS certificate is only taxed (on the basis of the gross income-based system) on the first £160,000 of assessable income (including any bonuses, prerequisites and other benefits in kind connected with employment). As at June 2022, this would result in a maximum tax payment of around £40,000 per annum (with the amount for the next two years being increased by 2% to £43,140 per annum).
There are also various additional allowances (e.g., relocation provisions) to facilitate the attraction of specialist skills.
This HEPSS programme has played an important role in diversifying and widening the skills base of the Gibraltar economy. HEPSS status has been particularly relevant in the remote gambling and financial services sectors. The creation of a critical mass of specialists in particular areas (e.g., e-commerce and IT) has generated the growth of peripheral activities (ranging from services to family offices to payment-processing operations).