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A competitive rate of corporate tax and an investment manager-friendly environment is keeping Gibraltar at the cutting edge of EU jurisdictions. Joey Garcia highlights the benefits
Gibraltar’s recently introduced Income Tax Act 2010 marks a definitive step forward for the jurisdiction, not just in terms of the new legislative tax framework and reduction of corporation tax from 22 per cent to 10 per cent, but also in representing a shift from an ’offshore’ to an EU international finance centre.
The 10 per cent corporate tax rate is 2.5 per cent lower than the Irish rate currently under pressure from Germany and France, but keeps corporate tax within a sustainable long-term level. Gibraltar recorded economic growth of 5.4 per cent in the past financial year, with a budget surplus of £29.4m on a GDP of £848m and a public deficit of only 15.2 per cent.
So what does this mean for Gibraltar?
The game’s afoot
The small jurisdiction continues to be the premier destination for blue-chip gaming companies, with most of the biggest in the world conducting their business out of Gibraltar - Ladbrokes, William Hill, Bwin.party Digital Entertainment and recently Betfair to name but a few.
Similarly, a very strong insurance sector has also helped to lay the platform for development and to highlight the benefits of access to the EU market through Gibraltar as a viable and alternative low-tax onshore jurisdiction that complies with all international and Organisation for Economic Cooperation and Development codes of conduct relating to tax behaviour and exchange of information agreements.
Building on this strong infrastructure there has been, and continues to be, strong growth in the investment management and funds industry in Gibraltar. The benefits are obvious.
The position of an investment manager in Gibraltar is increasingly attractive. Gibraltar is part of the EU by virtue of Article 355(3) (formerly 299(4)) of the EC Treaty. As such, an investment manager based in and licensed from Gibraltar has access to full passporting rights of their investment management licence throughout the EU.
However, as well as enjoying the low-tax corporate regime, managers, traders or potentially high-level employees should be able to apply (subject to certain conditions being met) for specific residency status as higher executives. This would cap their assessable income to the first £120,000, which means a maximum capped tax liability of £32,550.
The licensed companies themselves will also not suffer tax in Gibraltar on the activities they undertake through a branch or permanent establishment outside Gibraltar. This is on the basis of a territorial system of taxation that only taxes income “accrued in” or “derived from” (as defined under the new act) Gibraltar.
Interestingly, this is a system that the UK Government has consulted on with a view to promoting the UK as a location for international groups (and ensuring that anti-avoidance rules apply only where profits are diverted artificially from the UK).
In terms of investment managers, there has not been the exodus from London as envisaged at one point, but the moves that have materialised have to a large extent been driven by tax.
Regulatory arbitrage between jurisdictions is less relevant, in particular with the advent of the Directive on Alternative Investment Fund Managers and the requirements that will be placed on third-country managers seeking to do business in the EU. However, the line between EU and non-EU appears to be thickening continually and Gibraltar offers an excellent entry point.
For funds, Gibraltar has had its Experienced Investor Fund (EIF) legislation in place since 2005, which has driven tremendous growth. The EIF is the Gibraltar equivalent of the Irish Qualifying Investor Fund, the Luxembourg Specialised Investment Fund, the Jersey Expert Fund and the Malta Professional Investor Fund, but there are competitive advantages that Gibraltar has in place as a service jurisdiction for UK fund managers. Not least, the UK-based statutory framework and application of common law, as well as a UK-qualified and trained professional workforce.
In terms of the technical differences between the products, these are interesting, but the Gibraltar product is certainly a very strong offering and does not include the requirement for a Gibraltar-based depositary, as opposed to the products in Ireland and Luxembourg. In addition, versus non-EU jurisdictions Gibraltar offers the security that access to the single market brings, along with the transposition of all EU directives and the additional investor comfort that this offers.
Moving forward, the introduction of Undertakings for Collective Investments in Transferable Securities (Ucits) IV and the growth of the Ucits brand internationally, along with the ability to passport a Ucits management company under the new directive, should offer new possibilities for Gibraltar as a jurisdiction for EU funds. As the industry grows managers could look to alternative EU jurisdictions for Ucits, safe in the knowledge that the directive itself is prescriptive enough to ensure compatibility and the passporting ability within the Ucits universe.
All in all, Gibraltar continues to offer itself as an alternative EU jurisdiction, attached to mainland Europe and not an island (as many incorrectly believe), which slowly but surely continues to move from strength to strength.
Joey Garcia is a senior associate at Isolas