6 November 2006
Gibraltar continues to adapt and react to the needs of the financial services market and has recently introduced a number of amendments to its fiscal legislation. The common theme behind these developments, both legislative and political, clearly point towards the one goal - to enhance and develop Gibraltar as an EU finance centre.
The new developments create new opportunities to use Gibraltar in international tax planning structures while continuing to attract and develop investment opportunities. Gibraltar is required to meet EU standards of regulation, but in fact maintains the same standard of financial and supervisory regulation as the UK, which in many instances are higher than EU requirements. Gibraltar is part of the EU, after joining in 1973 under the British Treaty of Accession, but it retained the benefit of fiscal and administrative autonomy from the UK and the power to legislate on such matters.
The Gibraltar tax-exempt company was launched in 1967 and for more than two decades it proved to be the backbone of the finance centre. However, the legality of the exempt status regime in Gibraltar was challenged in July 2001 by the European Commission under EU state aid rules, and although the challenge was initially defended against successfully on 18 February 2005, a positive agreement was reached with the Commission for Gibraltar's exempt company to be phased out of existence by 31 December 2010. No new exempt company certificates were permitted to have been issued since 30 June 2006.
Various steps have been taken to maintain Gibraltar's edge as a finance centre, and although a proposed new zero tax rate on profits proposed by the Gibraltar government as an alternative to the exempt company regime was rejected by the Commission on the grounds of infringement of EU state aid rules, this decision has been contested and referred to the European Court of Justice (ECJ) by both the UK and Gibraltar governments.
The fight for independence
The decision on 6 September of the ECJ backing the Commission's decision against tax cuts in the Azores, a Portuguese dependency, has in fact strengthened the Gibraltar government's arguments as to its entitlement to have a separate and different tax regime to that of the UK. In the Azores decision the ECJ considered whether the fiscal policy approved by the Azores legislative body had been adopted in the exercise of sufficiently autonomous powers in relation to the central government of Portugal, and decided that the fiscal measures were linked and dependent on budgetary transfers from the central government. In contrast, Gibraltar is not a region of the UK and is also politically, constitutionally and economically separate from the UK. The Gibraltar and UK governments maintain that Gibraltar is entitled to its own distinct tax system. The Gibraltar case will be heard before the ECJ sometime in 2007.
It is likely that Gibraltar will eventually adopt a low-tax, rather than a no-tax, regime as Gibraltar has moved from an offshore centre to a finance centre within the EU that is fully compliant with all applicable EU directives. This enables Gibraltar to take full advantage of banking, insurance and investment services passporting into the EU, allowing banks, insurance companies and investment companies to market their products directly into the EU.
The Gibraltar 'company'
The Gibraltar 'company' still offers certain attractions, not least as profits from trading activity and sources of income arising outside Gibraltar are not subject to Gibraltar income tax, even when such profits and incomes are remitted to Gibraltar. This follows the Privy Council decision in the Hang Seng Bank case, where the Hong Kong Ordinance contained similar wording to that in Gibraltar's Income Tax Ordinance.
An ordinary resident company is only taxable on profits arising in, derived from or received in Gibraltar. The receipt of funds to a Gibraltar bank account will not be considered as remitted to Gibraltar unless the money is used in Gibraltar or derived from Gibraltar source income (interest excluded) or made available to a Gibraltar resident.
continued #+ continued Income will not be regarded as accrued and derived in Gibraltar if it is from non-Gibraltar sources. This effectively means that a company may be controlled and managed from Gibraltar, but profits that are remitted locally will not be taxable if they accrue and derive outside Gibraltar.
The Income Tax (Amendment) (No2) Ordinance 2005 has effectively abolished tax in respect of interest or dividend payments. Although the breadth of changes brought in under the new legislation are outside the scope of this article, ultimately the aim has been to establish a situation where both individuals and companies are not taxable in Gibraltar on income arising from their investment portfolios. Non-resident individuals should also consider the effect of Council Directive 2003/48/EC (the Savings Directive), which came into Gibraltar by virtue of the Taxation (Savings Income) Ordinance 2004, and may result, under exchange of information provisions, in income being taxed in the individual's country of residency.
Another example of change and development within the Gibraltar financial services sector is the Experienced Investor Fund (EIF), which allows qualifying investors to set up an operational fund within a short period of time.
Once the requirements have been met and the necessary offer documents and agreements prepared, the fund becomes operational. The fund administrator need only notify the regulator within 14 days of establishment and provide the fund's offering documents along with an opinion from counsel that the fund complies with the relevant provisions. The Gibraltar Commissioner of Income Tax has confirmed that a fund falling within the scope of the EIF regulations warrants tax exemption as a result of its investment income, and will be issued with the appropriate certificate to this effect. Furthermore, the EIF will not be required to withhold tax from any distribution of income or capital gains made to shareholders of the fund.
The very recently concluded Tripartite Forum of Dialogue on Gibraltar in Cordoba, Spain, gives further encouragement for the attraction of Gibraltar as a finance centre. Following the agreements concluded on 18 September, Gibraltar's suspension from all existing EU aviation measures, including Single Skies and Open Skies, will be removed. Spain had previously been able to exclude Gibraltar from European-wide deregulation initiatives, which prevented the possibility of direct flights from Gibraltar to the rest of the EU (other than the UK). The practical result of the agreement is that Gibraltar will now benefit from all EU aviation measures and is ensured against being excluded from any future measures. Normal flight operations may now take place between Gibraltar and all other countries. The first Gibraltar-Madrid flight is scheduled for December this year.
It is hoped that the dialogue and agreements reached will lead to a new era of understanding between Gibraltar and Spain, although both sides have reserved their positions with regard to the thorny issue of sovereignty. These developments, along with the proposed Gibraltar Stock Exchange (Gibex), means that exciting times lie ahead.
Joseph Garcia is an advocate at Isola & Isola