The new Income Tax Act, which came into effect on 1 January 2011, has been in gestation for nearly a decade and is the culmination of a long process to reposition the Gibraltar finance centre away from tax haven activities and towards a mainstream European status. This is a process which began when the European Commission ruled that the two-tier company tax system under which offshore companies (owned by and trading with non-residents) pay no tax on profits while onshore companies pay Corporation Tax in the normal way constituted ‘unfair tax competition’. The Gibraltar Government responded with draft legislation for a system of company taxation which was not based directly on profits, but on other factors such as the number of employees and the size of commercial/office premises used by the company. This legislation for a ‘zero-tax’ regime was submitted to the Commission which, after considerable delay, rejected it on the grounds of material selectivity (the new laws were still discriminatory) and of regional selectivity (we were a region of the United Kingdom and should have the same tax laws and rates). The Gibraltar Government then appealed to the European Courts against the decision of the Commission. The Court eventually ruled against the Commission and in Gibraltar’s favour. The decision of the Court that we were not bound to follow UK tax law, but were free to set our own tax laws and rates independently was a great victory for Gibraltar. However, by this stage the Gibraltar Government had begun to reconsider the ‘zero-tax’ regime, favouring instead a ‘low tax’ system which would bring Gibraltar into line with mainstream European jurisdictions. In the meantime the Government negotiated with the European Commission a transitional period during which the tax-exempt regime would be phased out. That period came to an end on 31 December 2010, hence the need for the new legislation.

The new tax law provides that all companies, however owned, will be taxed on profits coming in or derived from Gibraltar thereby preserving the territorial basis of taxation. In the case of companies licensed and regulated under Gibraltar law, the profits are deemed to accrue in and derive from Gibraltar except for activities carried on outside Gibraltar by a branch or permanent establishment.

The New Act is a complex and extensive piece of legislation. Most companies will pay tax at the rate of 10% on taxable profits. However, utility companies (water, electricity, telecoms, sewage and petroleum) and companies which “abuse a dominant market position” will pay tax at the higher rate of 20%.

Though all companies will be treated in the same manner for tax purposes, the position as regards their shareholders will be very different. If the shareholders are resident overseas no Gibraltar tax is payable on dividends which they receive from their Gibraltar company. If the shareholders are Gibraltar resident individuals then they will have to pay tax on the dividends at their personal marginal rate (with a credit being given for the company tax already paid by the company). Therefore a shareholder on a personal marginal income tax rate of 29% will have to pay tax of 19% on any dividends received (net of the company tax credit of 10%). Given that there is a large difference between company tax (10%) and personal tax (maximum 40%) and between dividends paid to Gibraltar residents (up to 30%) and non-residents (nil) the new Act must of necessity include numerous rules to prevent residents from arranging their affairs so that they end up paying no tax on dividends. These include an enabling power to regulate and prevent the abuse of corporate structures by residents to avoid or defer personal taxation, rules to prevent tax avoidance by the  transfer of assets abroad for tax reasons,new rules on the taxation of Trusts and a and a widening of tax residence for individuals, amongst numerous other restrictions. 

The definition of tax residence (‘ordinarily resident’) has been amended to cover individuals who are ‘present’ in Gibraltar for at least 183 days in a tax year or over 300 days in a period of three consecutive tax years. ‘Presence’ in Gibraltar is defined as ‘any part of a 24 hour period commencing at midnight’ whether or not accommodation is used in Gibraltar. Therefore an individual living in Spain and working in Gibraltar will be tax resident in Gibraltar and subject to tax here on his world-wide income.

The Government is obviously convinced that there is a great deal of tax ‘leakage’ and has taken the opportunity to bring in tough rules and regulations to try to stem this flow. These also include rules to tighten up on tax deductible expenses, to restrict capital allowances and detailed definitions and quantification of benefits-in-kind such as company cars, living accommodation, employee and director loans, vouchers and tokens, and expense payments to employees and directors.

Companies and the self-employed will be taxed on a ‘current year’ basis and will be required to make payments of tax on account during the year. In the case of companies, tax is levied on the net taxable income earned in the company's accounting year. In the case of the self-employed it is levied on the twelve month period ending on 30 June. A system of self-assessment has been introduced. Dates for payment of company tax and for filing of accounts and returns have been accelerated and are now laid down in law. 

Companies will be required to make payments on account of the tax due for that year. These payments are based on the tax liability for the previous relevant tax year, with 50% due by 31st August and 50% by 28th February. The return, including accounts, will have to be filed together with a cheque for any tax still due within six months of the end of the company’s accounting period. A further three moths is allowed to submit audited accounts*

*- the new income tax act exempts eligible companies which do have income assessable to tax, but whose turnover is less than £500,000, from the requirement to submit audited accounts. Such companies will be required to submit accounts accompanied by an independent accountant’s report.

In the case of the self-employed, the payments on account must be made by 31 December and 30 June respectively, in the year of assessment. Again, these are based on the tax liability for the previous relevant tax year, with any balance remaining being payable by 30 November in the year following the year of assessment.

There is a huge raft of prohibitive penalties and surcharges for failing to provide information requested by the Commissioner of Income Tax, for failing to make returns on time and for submission of incorrect information. Penalties for tax lost or delayed range from 5% for very small innocent errors to 150% for the most serious. In addition serious abuses will be dealt with on a criminal basis and could result in an extended stay at HM Prison Windmill Hill.

The Commissioner of Income Tax will have wide enforcement and information-seeking powers and, in serious cases, will be able to apply for a search warrant from the Supreme Court. He will also have powers to ‘name and shame’ those who do not pay over PAYE and other liabilities deducted from employees.