This article gives a brief outline of taxation laws in Gibraltar and is not meant to replace detailed professional advice which should be sought by all interested parties.

Note
The tax rates and allowances described in this article which relate to 2009/2010 are based on the Budget Measures as announced by the Government in June 2009 and may require amendment once the corresponding legislation is published.

Background

Gibraltar taxes are generally modelled on those in the United Kingdom.  However, in certain areas Gibraltar enjoys a more liberal fiscal regime.  In particular, there are no capital taxes such as Capital Gains Tax, Wealth Tax, Inheritance Tax or Estate Duty.  In addition as from 1 July 2005 certain types of investment income, principally bank and building society interest, and dividends from listed investments are exempt from tax.  Specific legislation has also been enacted to make Gibraltar attractive for high net worth individuals wishing to take up residence on the Rock.  (see B 1 b).

In July 2005 the Gibraltar Commissioner of Income Tax formally confirmed his acceptance of precedents established in cases decided in the UK courts or by the Privy Council which turn on wording similar to that used in the Gibraltar Income Tax Act.  In certain areas he will be prepared to give advance rulings.  The effect of this is to provide greater fiscal certainty and a more user-friendly fiscal administration for local and international business.

Though Gibraltar is a part of the European Union under Article 299(4) of the Treaty of Rome, it is specifically excluded from the regulations concerning the Common Agricultural policy, Value Added Tax and the Common Customs Tariff.

Tax Reform

In 2002 the Gibraltar Government prepared detailed proposals to reform the tax system to make it fully EU compliant.  However after two years of deliberation the European Commission rejected the proposals and declared that they were contrary to EU State Aid Rules.  This decision was successfully challenged by the Gibraltar and UK Governments in the European Court of First Instance.  On 18 December 2008 the Court annulled the decision of the Commission.  The Government of Gibraltar has subsequently confirmed that it will implement a new low tax regime as from 1 January 2011.  Under the new regime the headline Corporation Tax rate will be reduced to 10% except for energy and utility providers which will be subject to a rate of 20%.

Double-Tax Treaties and Exchange of Information

Gibraltar does not have double-tax treaties with any other jurisdiction.  However tax relief is available in respect of income tax paid or payable in other jurisdictions, up to the lower of the tax payable in Gibraltar on that income or the tax suffered in the other jurisdiction.

Gibraltar has signed OECD-style Exchange of Information agreements with thirteen countries to date - Australia, Austria, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Ireland, New Zealand, Portugal, United Kingdom and the United States.

The possibility of entering into agreements with Spain covering both exchange of information and double taxation issues is being explored.

Income Tax

The taxation of income of both companies and individuals is governed by the Income Tax Act (1984 reprint) as amended by various Income Tax (Amendment) Acts.

Income tax is charged on most classes of income “accruing in, derived from, or received in Gibraltar”.  The year of assessment runs from 1 July in any year to 30 June of the next year.  Taxation in any year of assessment is normally levied on income derived from the preceding year except in the case of income from employment which is subject to deduction on an actual basis via a Pay-As-You-Earn system.

There are no double-tax treaties in force between Gibraltar and any other country.  However, tax relief is available in respect of income tax paid or payable in other jurisdiction and chargeable to Gibraltar tax up to the lower of that tax or tax in the other jurisdiction.  In certain cases, income earned, taxed and retained overseas is not taxable in Gibraltar.

A.    Taxation of Companies

1.    Resident Controlled Companies

In general companies are chargeable to Corporation Tax on their worldwide income after deduction of all expenses which are wholly and exclusively incurred in the production of that income.

The rate of Corporation Tax on adjusted company profits is currently 22%, to be reduced to 10% in 2011.

Small companies are chargeable to a reduced rate of Corporation Tax of 20% on adjusted company profits.  This lower rate applies to companies whose taxable profits do not exceed £35,000 and which derive at least 80% of their turnover from trading.  Marginal relief is applied to trading companies whose profits lie between £35,000 and £44,333.

Start-ups

Businesses which set up in Gibraltar after 1 July 2007 are subject to Corporation Tax at the rate of 10% for the year of assessment commencing 1 July 2009.

Apart from normal business expenses, allowable expenses include:
Depreciation of plant machinery, including fixtures and fittings, motor vehicles etc.

(i)    Assets acquired prior to 1 July 1999 continue to be depreciated at the previously applicable rates (10% - 25%).
(ii)   As from 1 July 1999 the first £30,000 of assets acquired in a year of assessments is fully deductible within one year
(iii)   As from 1 July 2001 the first £50,000 of qualifying capital expenditure on Information Technology investment is fully deductible within the year.

The balance of expenditure over the £30,000 and £50,000 limits, respectively, is deductible at the rate of 25% per annum on a straight line basis.
Losses can be carried forward indefinitely to be offset against future profits, but cannot be carried back and offset prior year profits.

Dividends paid by Gibraltar companies are not subject to withholding tax.  Such dividends are taxable in the hands of the recipient if this person is ordinarily resident in Gibraltar or is a permitted individual, but not otherwise.

Interest payments by Gibraltar companies are subject to a withholding tax which is levied at the standard rate of the recipient (company 22% and individual 30%) unless the situs of the loan on which the interest is paid is outside Gibraltar (see below).  Also interest and royalty payments made by a Gibraltar company to an associated company in another EU member state are not subject to withholding tax or chargeable to Gibraltar Corporation Tax provided certain conditions are met.

In July 2005 the tax authorities stated that they accept that the precedent created by the Privy Council decisions in Hang Seng1 and HK-TVB2 applies in Gibraltar.

Therefore, it is accepted that where activities which give rise to income take place outside Gibraltar then the income is not subject to Corporation Tax in Gibraltar.  These activities include, inter alia, the letting of property where that property is situate outside Gibraltar, trading in certificates of deposit outside Gibraltar, the lending of money outside Gibraltar and the oversight of a construction operation outside Gibraltar.  However, it is necessary to look at the specific circumstances of each case and the Commissioner of Income Tax will give advanced rulings provided all the facts are put before him.

Loan interest is not taxable in Gibraltar provided that the situs of the loan is outside Gibraltar.  Therefore interest paid by a Gibraltar company to a non-resident bank on a loan for the purchase of, and secured against, real property situated outside Gibraltar will not be subject to Gibraltar tax.

The commissioner has clarified that where someone buys and sells stocks and shares on his own account, either as an individual or through a corporate entity of his, the activities will not amount to a trade (and will therefore not be subject to tax) unless there is a high level of professional organisation involved.  The level of turnover is not relevant.

1. Commissioner of Inland Revenue v Hang Seng Bank Limited {1990} STC 733
2. Commissioner of Inland Revenue v HK – TVB International Limited {1992} STC 723

II.    Non-resident Controlled Companies

Non resident owned and controlled companies incorporated in Gibraltar which do not trade, or earn income in Gibraltar are not liable to Corporation Tax.

III.    Exempt Companies

An ‘Exempt Company’ is a Gibraltar incorporated company or a registered branch of an overseas incorporated company which is registered under the Companies (Taxation and Concessions) Act.  Such registration entitles the company and/or beneficial owner to exemption from all Gibraltar income tax.  Though applications for registration have not been entertained since 1 July 2006 existing exempt companies will continue to enjoy this preferential tax status for several years (see below).

The main requirements for exempt status are that no Gibraltarian or Gibraltar resident has a beneficial interest in the shares of the company and that the company does not (without the approval of the authorities) trade or carry on business in Gibraltar.  However, the Company can maintain office premises in Gibraltar for the purposes of transacting business with non-residents or with other exempt companies.  There are no restrictions on the appointment of directors or officers of an exempt company (but either the company secretary or a director must be a Gibraltar resident) and meetings may be held inside or outside Gibraltar thus allowing the company to be managed and controlled locally.  A secrecy provision in the Act prevents the disclosure of details concerning the beneficial owners of the Company.

A fixed annual tax of £450 is payable by the company

If, with the approval of the Financial Centre Director, the company is carrying on trade or business in Gibraltar then any income arising from this activity will be taxed in the same manner as if it were not an exempt company.

The Exempt Company is being phased out in accordance with measures agreed by the European Commission.  Companies which became exempt prior to 19 February 2005 will continue to enjoy this status until 31 December 2010 provided they do not change their legal or beneficial ownership and/or activity.

B.    Taxation of individuals

I.    Residents

a.    General

An individual is regarded as being resident in Gibraltar if he resides in Gibraltar except for “temporary absences which are considered reasonable by the Commissioner of Income Tax” (ie. generally if he resides in Gibraltar for more than six months in the year).  A resident is chargeable to income tax on his worldwide income (with certain exceptions) after deduction of all expenses which are wholly and exclusively incurred in the production of that income.

As from 1 July 2007 a taxpayer (whether resident or non-resident) can elect to be assessed under either:-

(i) The traditional allowance-based system with his/her income being assessed at the income tax rates specified in table 1 and subject to the various applicable reliefs and allowances also specified in that table in the case of residents and in table 2 in the case of non-residents; or
(ii) a new Gross Income-based system.  Under this system of assessment no allowances or reliefs are granted and the tax rates applicable are as follows:-

(a) Persons on gross Income up to £16,000

Taxable income band                Rate
£0-£10,000                             10%
£10,001-£16,000                     20%

(b) Persons on Gross Income between £16,000 and £25,000

Gross income between
£16,001 - £17,000        Tax at 0% on first £5,000 and 20% on balance
£17,001 - £18,000        Tax at 0% on first £4,000 and 20% on balance
£18,001 - £19,000        Tax at 0% on first £3,000 and 20% on balance
£19,001 - £20,000        Tax at 0% on first £2,000 and 20% on balance
£20,001 - £25,000        Tax at 0% on first £1,000 and 20% on balance

(c) Persons on Gross Income over £25,000

Taxable income band                Rate

£0 - £25,000                           20%
£25,001 - £100,000                 29%
Over £100,000                        35%

b. Qualifying (Category 2) Individuals

Individuals who have obtained a Category 2 Individual certificate are subject to a special tax regime. They are liable to a minimum charge of £20,000 and an effective maximum of £26,000 for a full tax year.  Such individuals must have approved residential accommodation in Gibraltar available for their exclusive use and that of their families, but must not have been resident in or engaged in trade, business  or employment in Gibraltar suring the preceding five years.

Category 2 individuals may 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 an Exempt Company.

c. Qualifying (Category 3) Individuals

An Exempt company with a physical presence in Gibraltar may apply for a certificate designating an individual as a Category 3 Individual.

This certificate fixes the amount of tax payable by the individual from emoluments earned from the Exempt Company and most other classes of income to £15,000 per annum only.  The individual must have skills or experience which are essential to the operation, not currently available in Gibraltar and important for the economic regeneration of the territory.  In addition they must have accommodation available for their use in Gibraltar and should not have been employed locally during the previous five years.

This status has now been closed to new entrants.  Existing certificate holders can retain their status until expiry of their certificate.

d. Qualifying (Category 4) Individuals

A Category 4 individual is assessable to income tax at the rate of £7,500 per annum if his taxable income for the year does not exceed £50,000 and at a rate of £15,000 per annum otherwise.

The rules and conditions pertaining to this status are similar to those pertaining to Category 3 individuals.  However, the company making the application must also satisfy the Government that connected with the appointment of the Category 4 individual it has created a new additional employment in Gibraltar.

This status has now been closed to new entrants.  Existing certificate holders can retain their status until expiry of their certificate.

e. High Executives Possessing Specialist Skills (HEPPS)

With effect from 1 July 2007 a new category has been established for individuals who possess skills not available locally and which are of particular economic value to Gibraltar, who will occupy a high executive or senior management position, and who will earn more than £1000,000 per annum in Gibraltar.  The individuals must have approved accommodation available for their use in Gibraltar and should not have been resident locally during the previous three years.  HEPPS individuals are subject to tax under the Gross Income Based system (see below) on the first £100,000 per annum of income only.  Existing Category 3 individuals who earn more than £100,000 may apply to transfer to this category.

II Non-Residents

Non-residents may elect to be assessed under either the new Gross Income based system (see B.I.a. above) or the Allowance Based system in which case they will be able to claim the allowances shown in table 2.

Trusts

Trusts may be formed in Gibraltar under the Trustee Ordinance which allows (inter alia) discretionary powers to trustees.  The perpetuity period in Gibraltar is a life in being and one hundred years.

The income received by any trust or beneficiary under a trust is exempt from taxation provided:-

(a) it is created by or on behalf of a non-resident of Gibraltar (other than a category 2 individual); and
(b) residents of Gibraltar (other than category 2 individuals) are expressly excluded as beneficiaries either specifically or under the discretionary powers of the trustees

The capital of a trust is not liable to tax in Gibraltar.

Development Aid

The 1981 Development Aid Act provides that licences may be granted for certain development projects.  A Development Aid licence entities the developer to exemption from income tax in respect of any gains or profits from the relevant development until aggregate on the project.  In addition, the profits of the concern may be distributed to the beneficial owners free of any taxes up to the amount granted under the licence.