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:

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.