(as published on the Gibraltar Chronicle)
I’ve heard that for companies, some profits are taxable in Gibraltar and some are not. How does the new Income Tax Act determine this? The new Act sets out the classes of income that are taxable on companies. However, liability to Gibraltar tax would only be triggered if that income is “accrued in or derived from” Gibraltar. So, firstly you have to determine if the class of income could be taxable and, secondly, if it could be, then it depends on the location of the activities giving rise to that income.
What classes of income are not taxable in Gibraltar? Non-trading investment income is not taxable. Broadly speaking, this means dividends and interest income – unless, in the case of interest income, the company is a bank or in the business of lending money to the public.
Dividends received by a company are not taxable. Royalty income is not mentioned in the Act, and is therefore not taxable.
As before, gains of a capital nature are not taxable – for example, the profit from the disposal of a building - as long as that is not part of the trade of the company.
So, if the income is one of the classes mentioned in the Act as being taxable...? If the profits are made from activities carried out outside Gibraltar, the profits are not taxable here. Examples are the trading income of a Spanish branch of a Gibraltar company, or rental income from property in the UK.
Is it always clear cut? No – it could be that to generate profits from a transaction, part of the activity is in Gibraltar and part is outside. The Act refers to the “location of the activities or the preponderance of activities” that are carried out, so some judgement may be needed to decide if those activities are taxable in Gibraltar or not.
Where the activities carried out require a licence and regulation under Gibraltar law, then the activities are deemed to take place in Gibraltar. This would include banks, insurance companies, gaming companies and other regulated entities. This rule does not apply to the profits of a branch or permanent establishment of such a company that is located outside Gibraltar.
Also bear in mind that where there are any activities outside Gibraltar, profits may be taxable somewhere else.
How does a company allocate costs between taxable and non-taxable activities to work out taxable profit? The wording of the Act states that all deductible expenses must be apportioned between chargeable and non-chargeable income on a pro-rata basis. A recently issued guidance note by the Income Tax Office ("Guidance Notes for Companies") is consistent with this. The implication is that expenses allocated to non-chargeable income would not count as deductible expenses. This is at odds with the general expectation that costs would be apportioned on a direct (as far as possible) basis, rather than on a pro-rata basis.
The Chief Minister has indicated in a recent speech that this was being looked at, so watch this space… |
