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Tax on the Rock

  • Author : Chris White
  • Date : November 2010
ABOUT THE AUTHOR: Chris White is a partner in the Tax and Overseas Property Department at Hassans.

On 16 June 2010 the long-awaited text of Gibraltar’s new Income Tax Act was published as a draft for public comment. Shortly after, on 1 July, the 2010 budget was announced. In the first week of September following a consultation period, a revised Income Tax Bill was published. The Bill came before Parliament in the middle of October and was enacted on the 1st November

The publication of the draft Income Tax Act signalled the end of Gibraltar as a tax jurisdiction that attracted inward investment by reliance on administrative and statutory ring fencing of foreign investment and impenetrable tax exempt companies and trusts. By creating a level playing field for both local and inward investors, Gibraltar swept away the obstacles to it taking full membership of the company of respectable jurisdictions, which no other jurisdiction had grounds to black list or censure.

Corporate rate

Although the European Court of Justice had not denied Gibraltar the opportunity to implement the zero/eight regime, which had previously been prepared for legislation and submitted for EU approval, the decision taken by the government was that it would be a more responsible approach and more consistent with the modern requirements for the acceptability of international finance centres to retain the principles of the current Act, modernise it and reduce the rate of tax chargeable on corporate entities from 22 per cent to 10 per cent. A penalty rate of 20 per cent will apply to utility companies and any company that has a dominant market position and abuses it.

The government has decided to retain the territorial basis of taxation and will only tax income that accrues in or derives from Gibraltar

Although the rate does not apply to corporate trustees, the position of trusts has been improved by other measures. The government has decided to retain the territorial basis of taxation and will only tax income that accrues in or derives from Gibraltar. The new Act defines the concept of ‘accrued in’ or ‘derived from’ to amplify on the meaning from case law on which reliance was previously placed. The programme of removing streams of savings or passive income from taxation has also continued.

Sustainability of low tax/territorial rate

Announcing a low tax rate and the continuation of a territorial system is easy enough to do; the difficulty is sustaining either over a long time.

A low tax rate requires an economy that can sustain it.

That the 10 per cent tax rate is sustainable over the long term was demonstrated by the details of the state of the Gibraltar economy announced in the budget. At a time when most of the economies of the Western World are in trouble, the economy of Gibraltar is alive and well.

In the year to 31 March 2010, economic growth was 5.4 per cent and the budget showed a surplus of GBP29.4 million on a Gross Domestic Product of GBP848 million. Public debt represented 15.2 per cent of GDP. The comparison is that the UK and much of the rest of the developed world are struggling with huge deficits; debt is 70 per cent or more of GDP in the UK and in many countries, approaching 100 per cent.

A territorial basis needs some sort of seal of approval that it is acceptable tax behaviour. Other jurisdictions already operate a territorial basis to some degree or other, but it is interesting and re-assuring to note that the UK government has recently launched a consultation paper exploring the possibility of moving parts of its own tax system to a territorial basis.

Overall advantages for individuals

This state of economic health has enabled not only the reduction of the corporate tax rate to 10 per cent, but also has several subsidiary effects.

The opportunity has been taken to continue the government’s programme of reducing the taxation of savings and passive income by removing from chargeability to tax all interest on investments (i.e. interest other than interest earned by banks and moneylenders as part of their trading income), royalties and the part of a dividend paid by a company which relates to its non taxable profits.

The government’s emphasis on doing away with the taxation of savings income is, in itself, not only an incentive for the population of Gibraltar to invest for their future but also when combined with the lack of capital gains tax or any sort of estate/wealth tax a powerful attraction for those with savings income who wish to relocate from a high tax jurisdiction to a more economically friendly jurisdiction. The reduction of taxation in this form also has a clear effect on the ability of trustees to invest in a tax efficient way.

The budget also went on to announce reductions in the tax rates applicable to individuals who have income that is taxable. The top rate of tax for those earning up to GBP353,000 will be 29 per cent. Above that level tax rates begin to fall. The effective rate of tax on earnings of GBP1 million is 20 per cent, anything above that is charged at 5 per cent.

The quid pro quo for the significant reductions in the levels of corporate and personal taxation is that the government has taken measures to make sure that it will be able to collect the tax it intends to collect and has introduced self assessment, legislation to facilitate the collection of tax and extensive measures to counter the avoidance or evasion of tax.

Trusts

Although the taxation of trusts and beneficiaries of trusts has been clarified, the taxation position remains as advantageous as it was before where the beneficiaries of a trust are outside Gibraltar.

Taxation on the income of a trust is limited to those trusts that have Gibraltar resident beneficiaries (for this purpose, those High Net Worth Individuals who have Category 2 status and their spouse and children are treated as not resident). If a trust has Gibraltar residents amongst its beneficiaries or potential beneficiaries, the absence of taxation on savings or passive income applies just as much to the trust as it would to an individual.

The taxation on the beneficiaries of a trust rather than the trust itself is limited to those beneficiaries (other than the Category 2 individuals and their families) who are resident in Gibraltar and even this is restricted to taxing the distributions that can be matched with the taxable income of the trust and the offsetting of any underlying tax which has been paid by the trust.

If neither the trust nor the beneficiaries are subject to tax, a professional trustee will have no need to make returns for the trust or to make the trust known to the Commissioner of Income Tax.

Funds

The principle of reducing the taxation of savings and passive income is carried on into funds and their investors.

The position of the fund itself is unchanged by the new Act and the same exemptions apply as before strengthened by the further exclusion of categories of savings and passive income from taxation.

In the case of the investor into a fund there are changes that make the trust regime even more attractive.

Income from a fund that is available to the general public is no longer taxable regardless of how the income arose in the fund.

If a fund is not available to the general public, a look-through basis is used and taxability is limited to whatever the tax would have been if the recipient would have received the income from the entity underlying the fund. Again the entity will have the advantage of the absence of tax on savings and passive income, which means that with very few exceptions (e.g. a fund investing in Gibraltar real estate) there will be no tax payable by the investor.

Treasury/holding companies

Taxation on interest is limited to that interest received by banks or moneylenders as trading receipts. In the case of both, trading receipts are defined to exclude the interest which would arise from a Treasury function. This gives banks and moneylenders the same advantages as all other companies where the possibility of using Gibraltar as a Treasury base arises. Effectively a non-Gibraltar group company can borrow money from the Gibraltar Treasury company receiving a deduction in accordance with the laws of its jurisdiction, and the Treasury company will not be taxed on the receipt of the interest.

The changes made in the new Act are also beneficial for those companies receiving dividends from their subsidiaries.

Gibraltar is already in the position that it does not tax the receipt of dividends from EU subsidiary companies, it has added to this by taking away the taxing rights to any part of a dividend received from a company which carries out its profit making activities elsewhere. With neither liability to tax nor withholding on dividends paid to non-residents, group profits can flow through or be invested in Gibraltar without taxation.

Conclusion

There is a lot more detail to the legislation, but, all in all, its aim is to create a corporate low tax environment and lay the foundations for not only the security of the corporate environment, but also the continued reduction in the tax burden on individuals.

The environment created by the new legislation not only places Gibraltar amongst those jurisdictions who comply with all international codes of conduct relating to tax behaviour, but also leaves it as an attractive and tax efficient location for individuals and businesses who wish to locate either in whole or in part to a pleasant, tax efficient, new home.


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