6. Taxation
A. Introduction
The principal tax statute is the Income Tax Act (ITA)
2010, which became effective on 1 January 2011. There is
no capital gains tax, inheritance tax, wealth tax or VAT. The ITA
amends and consolidates the previous Act, while maintaining the
source base of taxation in a more defined form and promotes a
climate of compliance amongst the tax paying population. It
introduces a low rate of corporate tax of 10 per cent and the end
of the tax-exempt company regime.
B. Tax System
I. General Concepts Of Tax Liability
Persons (i.e. individuals and companies) are subject to income
tax in Gibraltar on income accruing in or derived from Gibraltar.
An ordinarily resident individual is also generally liable to
income tax on certain types of income from non-Gibraltar sources
(e.g. dividends, employment, self-employment income, etc).
Nonetheless, certain exemptions from tax apply, for example for
bank and building society interest, dividends from quoted
companies, dividends paid by one company to another, dividends paid
to non-residents, etc.
Ii. Residence Of Individuals – A New
Definition
An individual will be ordinarily resident in Gibraltar if they
are present in Gibraltar for a period of, or periods together
amounting to, at least 183 days in any year of assessment or over
300 days in a period of three consecutive years of assessment.
It is important to note that any part of a 24-hour-period
commencing at midnight shall be counted as a day of presence,
whether or not accommodation is used in Gibraltar.
Iii. Taxation Of Companies
For companies, whether business profits are taxable or not
requires an examination of what a company has done to earn the
profits and where the company has done so. This 'territorial' basis
of taxation means that Gibraltar companies trading internationally
may achieve a low effective tax rate.
Iv. The Judgement Of The European Court Of
Justice
On 18 December 2008 the ECJ finally gave its long awaited
judgement concerning Gibraltar. The ECJ annulled in its entirety
the European Commission's decision, which claimed that the proposed
reform of corporate tax (in fact income tax for companies) in
Gibraltar constituted unlawful State Aid.
In its judgment, the ECJ confirmed that Gibraltar is indeed free
to introduce a new harmonised tax system, which differs from the
UK's, as always argued by these parties. This new tax system has
now been introduced and is enshrined in the Income Tax Act
2010 (effective from 1 January 2011).
V. Individual Tax Rates
For individuals, there is a choice of two income tax
systems.
1) An allowance-based system under which various deductions and
personal allowances are allowed against assessable income, and the
rate of income tax applied to taxable income ranges from 17 per
cent to 40 per cent.
2) A flat-rate system (called Gross Income Based or GIB System)
under which no deductions or allowances are available:
8 |
10,001 – 16,000 |
20 |
Gross income 16,001 – 100,000 |
Income 16,001 – 17,000: |
|
First 6,000 |
0 |
Remaining 10,001 – 11,000 |
20 |
Income 17,001 – 18,000: |
|
First 5,000 |
0 |
Remaining 12,001 – 13,000 |
20 |
|
First 4,000 |
0 |
Remaining 14,001 – 15,000 |
20 |
|
Income 19,001 – 20,000: |
|
First 3,000 |
0 |
Remaining 16,001 – 17,000 |
20 |
|
First 2,000 |
0 |
Remaining 18,001 – 23,000 |
20 |
|
Income 25,001 – 35,000 |
18.4 – 20 |
35,001 – £100,000 |
20 – 26.25 |
0 – 25,000 |
20 |
25,001 – 353,000,000 |
29 |
353,001 – 704,800 |
20 |
704,801 – 1,000,000 |
10 |
Excess over 1,000,000 |
5 |
Therefore, the effective rate on 1 million of gross income is 20
per cent with any excess taxed at 5 per cent.
The flat rate system generally favours 'frontier workers', i.e.
those who work in Gibraltar but live in Spain.
For pensioners aged 60 or over, income received from a Gibraltar
approved pension is taxed at the rate of 0 per cent. In addition,
there is no taxation of lump sums. Residents who have accrued
pension rights overseas (e.g. the UK) may be able to transfer these
rights to an approved Gibraltar pension scheme. In addition, new
legislation for Personal Pension Schemes is being introduced.
Vi. Company Tax Rate And Income Chargeable To
Tax
The new Income Tax Act introduces a company tax rate of
10 per cent for most companies (utility companies will pay tax at
20 per cent). This corresponds with the abolition of the tax exempt
company regime.
The territorial basis of taxation is 'enshrined' in the Act and
confirms that income accrued in and derived from Gibraltar will be
taxable for companies.
Capital gains, interest income (other than trading income) and
royalties will not be subject to tax in Gibraltar.
Taxable profits shall be calculated in accordance with
International Accounting Standards.
Expenses will be deductible if they are 'wholly, necessarily and
exclusively laid out or expended for the purposes of the trade,
business, profession or vocation'. However, business entertainment
will generally be disallowed unless it falls within specific
rules.
The preceding year basis of tax assessment is abolished in
favour of an actual basis.
No withholding tax is to be deducted from dividends or royalties
paid by companies, and no tax is payable on inter-company
dividends.
Vii. Filing Requirements
The Gibraltar income tax year runs from 1 July to 30 June. The
concept of self assessment is introduced such that individuals and
companies are now required to make returns of their taxable income
and calculate their own tax liability for each year.
Persons other than companies, i.e. individuals, sole traders and
partnerships are required to submit the tax return by 30 November
each year and accounts must be drawn up on the actual basis, i.e.
to 30 June each year.
Companies will be taxed by reference to their accounting period
on a current year basis and will be required to submit accounts and
the tax return within six months of the year end.
The payment of tax is required at the same time the tax return
is submitted but the Act also introduces payments on account for
both companies and individuals. Companies are required to make two
payments on account in each calendar year; one on 28 February and
the other on 31 August. Individuals will make payments on account
on 31 December and 30 June of the relevant year. Each payment will
be equal to 50 per cent of the tax payable for the previous
accounting period.
There will be detailed transitional provisions in relation to
the change of basis of assessment i.e. from preceeding year to
current year. There is no withholding tax on dividend or interest
payments.
Viii. Anti-avoidance
The Act includes general and very specific anti-avoidance
provisions, including:
- transfer pricing
- thin capitalisation
- deemed distributions
- transfer of assets abroad
- dual contracts, and
- back-to-back loan arrangements.
Ix. Surcharges, Penalties, Offences And
Miscellaneous
There is a system of penalties, which can be both daily
penalties and also tax-geared penalties of up to 150 per cent of
the tax liability, in relation to a failure to comply or for false
returns, with criminal liability for prolonged failure to comply
with information notices or a requirement to notify tax avoidance
arrangements. Criminal offences are also introduced for fraudulent
evasion of tax and failure to pay tax and social insurances
withheld or collected. High surcharges are also imposed on any late
payment of tax. The Act also gives power to the Commissioner of
Income Tax to name and shame 'tax offenders'.
C. International
I. Non-resident Individuals
Non-residents are generally liable to tax on taxable income
accruing in or derived from Gibraltar.
Ii. Permitted Individual Status (i.e. For
Non-residents Carrying On A Trade, Business Or Employment In
Gibraltar) Is No Longer Available.iii) Qualifying (category 2)
Individuals
An individual who satisfies certain criteria may be granted
qualifying (Category 2) individual status and treated as a resident
of Gibraltar for tax purposes.
An application will be considered by reference to personal and
financial factors. The applicant must have a net wealth exceeding
GBP2 million in order to satisfy the financial requirements.
Approved residential accommodation in Gibraltar (bought or rented)
must be available to the applicant for personal use for the whole
of the year of assessment (or for the remaining part of the year of
application).The individual must not have been resident in
Gibraltar or engaged in any trade, business or employment in
Gibraltar in any of the previous five tax years. Certain duties are
excepted.
While Category 2 resident, the individual must not generally
engage in any trade, business or employment in Gibraltar. There
are, however, exceptions to this and in September 2008 government
guidance was issued. This was timely, given the phasing out of the
tax exempt status regime for Gibraltar companies and it recognises
the growing trend of entrepreneurial high-net-worth-individuals who
wish to establish themselves in Gibraltar and yet still carry out
important economic activity.
Category 2 individuals pay tax by reference to the
allowances-based system in Gibraltar, with their tax capped at a
taxable income level of GBP80,000. Annual tax liability is between
a maximum of GBP29,880 and a minimum of GBP22,000. In the first and
last years of assessment, the minimum tax payable is pro-rated for
each month (or part) for which the certificate is in force.
Iii) Qualifying (categories 3 And 4)
Individuals
These regimes are now closed to new entrants.
Iv) High Executive Possessing Specialist Skills
(hepss)
This status is for people with specialist skills of exceptional
economic value to Gibraltar, earning more than GBP100,000 per
annum. Their income is capped at GBP120,000 with tax payable in
accordance with the GIB system resulting in a maximum effective tax
rate of 27.125 per cent. Similar to the Category 2 status, a HEPSS
individual must retain suitable approved accommodation in Gibraltar
(either bought or rented).
V. Exempt Companies
The exempt company status has been phased out and all remaining
exempt companies lost their exempt status on 31 December 2010 at
the latest.
Vi. Gaming Companies
Gaming tax (capped at GBP425,000) is chargeable at 1 per cent of
online casino gaming yield or online betting, with a minimum
payable of 20 per cent of the cap.
Vii. Tax Treaties
There are no double tax agreements in force between Gibraltar
and any other country; however, unilateral tax relief is available
to companies in respect of foreign taxes paid by them.
Viii. Eu Tax Directives
As it is required, Gibraltar has transposed all relevant EU law
into local law, meaning that Gibraltar companies may benefit from
tax directives including the Parent & Subsidiary, Interest
& Royalty and Mergers & Acquisitions directives.
Ix. Tieas
As at 6 June 2011 Gibraltar had signed 20 agreements to allow
the exchange of information on tax matters between countries. The
majority of the TIEAs commenced as of 28 January 2010. Gibraltar is
on the OECD 'white list'.
D. Taxation Of Trusts
A trust is resident in Gibraltar where it has one or more
beneficiaries who is/are ordinarily resident (Category 2 residents
are not treated as residents for this purpose). Trustees of such a
trust will be charged to tax on any taxable income accruing in and
deriving from Gibraltar. Income from such a trust received by a
beneficiary ordinarily resident in Gibraltar will also be
taxable.
E. Taxation Of Estates
There is no wealth tax, inheritance tax, death tax or estate
duty in Gibraltar, and accordingly there is no tax to pay in
Gibraltar on an estate, otherwise than in respect of certain income
arising to the estate of a Gibraltarian or resident of
Gibraltar.
F. Stamp Duties
Stamp duty is restricted to the transfer of title on Gibraltar
real property.
G. Social Insurance
Those over the age of 15 employed in Gibraltar, whether resident
in Gibraltar or not, are subject to the social security legislation
and, apart from certain limited categories, are liable to pay
social security contributions at specified rates.