Contributed By Hassans International Law Firm
Businesses generally adopt a corporate form which has a separate legal personality and is taxable as a separate legal entity. The 2014 Companies Act allows for the incorporation of both private companies and public companies.
A private company under Gibraltar law is a company that restricts the right to transfer its shares and does not offer its shares to the public. Four types of private companies may be incorporated under the 2014 Companies Act s 4(2), namely:
A public company under Gibraltar law is a company whose certificate of incorporation states that it is a public company, has a share capital and meets the requirements of the 2014 Companies Act in terms of share capital and net assets.
Two types of public companies may be incorporated under the 2014 Companies Act s 4(1), namely:
Shares of different classes are permitted, including preference and redeemable shares, and shares with limited or no voting rights. Shares of no par value, however, are not allowed.
Gibraltar companies need only one shareholder. Nominee shareholdings are permitted. The names of registered shareholders must be included in the annual report filed with the Registrar of Companies, which is available for public inspection.
There are no formal minimum capital requirements and it is possible for an entity to have an authorised share capital in most major currencies (including USD, EUR, GBP, etc).
Limited partnerships are commonly used and are regulated by the Limited Partnerships Act 1927. Under Gibraltar law, a limited partnership must consist of one or more general persons or 'general partners' (who are liable for all debts and obligations of the limited partnership and are responsible for its management) and one or more persons called 'limited partners' (the limited partners must at the time of entering such a partnership contribute either a sum or sums as capital, or property valued at a stated amount, and their liability to creditors is limited to the capital that they have introduced). Accordingly, this vehicle is typically used in order to limit the liability of limited partners, and in some tax planning structures.
Limited Liability Partnership
Limited liability partnerships are regulated under the Limited Liability Partnerships Act 2009. All of the partners in a limited liability partnership benefit from limited liability in respect of the partnership. Their liability is limited to funds they have invested in the partnership, undrawn profits and any guarantees they have given to raise finance. All of the partners may participate in the entity's management.
A popular vehicle in tax planning is the Gibraltar trust, which is based on the English trust and is mainly regulated by the Trustees Act.
The Private Foundations Act 2017 provides the legal framework for the establishment and operation of foundations. A foundation has a separate legal personality and as such can hold property in its own right, as the absolute and beneficial owner. The Foundation Charter and Foundation Rules establish the foundation, and set out its purposes and the rules for its administration. They also set out details of the beneficiaries and the guardian. The founder provides the initial assets as an irrevocable endowment, and may reserve powers for themselves, such as the ability to appoint or remove the guardian or councillors, or to amend the constitution.
Gibraltar is not a party to any double taxation treaties. However, tax relief is available in respect of foreign income tax paid, deducted from or liable to be paid on income which is similarly chargeable to Gibraltar tax, up to whichever is lower – Gibraltar tax or foreign tax on the income (although this only applies where the jurisdiction imposing the foreign tax is the same jurisdiction in which the income is generated). Gibraltar also transposes European directives into Gibraltar law (including but not limited to the Parent-Subsidiary Directive).
The tax residence of a company is determined by reference to where the company is managed and controlled, and not by reference to its jurisdiction of registration. Ultimately, determining tax residence is a question of fact.
Gibraltar applies a territorial system of taxation whereby companies are taxed only on income that is accrued in or derived from Gibraltar. As a result, income that is not accrued in or derived from Gibraltar is not taxable in Gibraltar. 'Accrued in or derived from' is defined in terms of the location of the activities giving rise to the profits or gains.
Specific rules apply to companies carrying out activities that are subject to licensing or regulation in Gibraltar, or that are passporting activities into Gibraltar through a branch or permanent establishment in Gibraltar that would otherwise be subject to licensing or regulation in Gibraltar. Such income is deemed to accrue and derive in Gibraltar.
Royalty income and intercompany interest income of a company registered in Gibraltar is deemed to have accrued in and derived from Gibraltar, regardless of the source of the royalty or interest.
All companies can be charged a tax rate of 10% on taxable profits, except for utility, energy and fuel supply companies and companies deemed to be abusing a dominant market position, which are subject to tax at a rate of 20%.
Partnerships, limited partnerships and limited liability partnerships are treated as transparent entities for the purposes of taxation. As such, their partners – whether corporate entities or individuals – are assessed for tax purposes on any taxable profits that are generated by the partnership.
Trusts and Foundations
Trusts and foundations are treated in a very similar manner to each other for tax purposes. They are both taxable entities in their own right with any taxable profits being taxed at a rate of 10%.
A trust or foundation that is resident in Gibraltar is generally taxed on a worldwide basis. A trust or foundation that is not resident in Gibraltar will only be taxed on income accrued in and derived from Gibraltar, although the income of trusts and foundations is often classed as income that is not subject to tax.
A trust or foundation is treated as resident in Gibraltar if one or more of the beneficiaries is ordinarily resident in Gibraltar, or where the class of beneficiaries (other than those irrevocably excluded from benefit) may include an individual who is ordinarily resident in Gibraltar.
Distributions received by beneficiaries who are ordinarily resident in Gibraltar and who are paid by a trust or foundation out of taxed/taxable profits of the trust or foundation, are assessable for tax on those distributions. Those beneficiaries are, however, entitled to a tax credit in respect of the tax suffered by the trust or foundation. The distribution of profits that are not subject to tax on the part of the trust or foundation, would not be taxable on the beneficiary. Detailed rules apply to how distributions are allocated to taxable or non-taxable profits.
An individual who is present in Gibraltar for at least 183 days in a tax year, or more than 300 days in total during three consecutive tax years, is deemed to be ordinarily resident in Gibraltar. 'Present' means being in Gibraltar at any time during a 24-hour period commencing at midnight and whether or not accommodation is used. An individual who is ordinarily resident is taxable in Gibraltar on their worldwide income (subject to double-tax relief and with the exception of rental income, which is only taxable if the property is located in Gibraltar or is deemed in the nature of a trade). An individual who is not ordinarily resident is only taxable on income from Gibraltar. The tax year runs from July 1st to June 30th and tax is payable on the actual taxable profits for the year. Individuals have the choice of being taxed under either an allowance-based system or under a gross income-based system, and will be assessed for tax under the system that results in lower tax. Where a taxpayer is taxed under the gross income-based system and their spouse is taxed under the allowance-based system, restrictions apply on the allowances available to the spouse under the allowance-based system. Different tax rates apply to income bands under both systems, but the result is that, for resident individuals, the effective (overall) tax rate never exceeds 25%.
Capital Gains Tax
Capital gains are not taxed, either for individuals or companies.
Withholding tax is not imposed on the payment of interest or dividends.
On share or loan-capital transactions, the fixed amount per transaction is GBP10.
On the purchase of real estate in Gibraltar:
For other buyers:
Tax on Receipt of Income from Royalties
Effective from 1 January 2014, royalty income received or receivable by a company registered in Gibraltar (irrespective of the source of the royalty) is taxable.
Tax on Receipt of Interest
Interest income is taxable on companies if:
Tax on Sale of Shares
Tax is not payable on the transfer of shares in a Gibraltar company unless that company owns Gibraltar real estate (directly or indirectly), in which case stamp duty would generally apply on the underlying real estate.
Withholding tax is not imposed on the payment of dividends. Dividends paid to shareholders who are ordinarily resident in Gibraltar have a tax credit equal to the tax paid by the company on the profits from which the dividend is being paid. Dividends received by a company from another company are not taxable.
Taxable profits are based on Gibraltar, UK or international accounting standards, or other such accounting standards as approved by the Commissioner of Income Tax, and as adjusted according to specific provisions in the Income Tax Act 2010.
Adjustments include non-deductibility of certain costs, for example depreciation and amortisation; costs not incurred wholly and exclusively in the production of income; taxation charged in Gibraltar on profits; certain entertaining expenses; restrictions on deductibility of costs incurred in respect of connected companies that are not on an arm's-length basis; and capital losses.
Adjustments are also made for income not assessable to taxation, for example many types of investment income (including dividends and bank interest); capital gains; and income accrued or derived from activities outside Gibraltar.
Profits are generally taxed on an accruals basis, as the calculation is based on accounting profits (subject to adjustments as described here).
There are no special incentives in Gibraltar for technology investments.
There are no special incentives in Gibraltar that apply to specific industries, transactions or businesses.
Losses can be carried forward indefinitely against future profits of the same company, unless within a period of three years there is both a change in ownership of the company and a major change in the nature of the company or the way the company conducts its activities. Losses cannot be carried back.
A budget measure was announced by the Gibraltar government in July 2018 that would allow companies to carry forward losses against a business’s future profits when the business has been transferred to another company as part of a group restructure. This would only apply where there is no change in ultimate ownership and no change of business within a period of three years. The legislation to put this into effect is not yet in place, and few details are currently available.
The general rule for expenses is that, unless the Act states to the contrary, they are deductible if they are wholly and exclusively incurred for the purposes of generating the income of a trade, business, profession or vocation.
A literal interpretation of the legislation may be that interest expense is not deductible against non-trading interest income (Class 1A – interest on inter-company loans and advances). The Commissioner of Income Tax has stated that this restriction does not apply if the interest income is taxable (as published in the Gibraltar Society of Accountants newsletter, dated 12 August 2013).
A deduction is not allowed for any interest paid or payable to a person not resident in Gibraltar if and so far as it is interest at more than a reasonable commercial rate.
A deduction is not allowed for any interest paid or payable on money borrowed other than for the purposes of the trade or profession which generates the income, or acquiring the capital employed in acquiring the trade or profession which generates the income.
Where a person (eg, an individual or a company) has interest income that is not taxable, no deduction is allowed for any interest expense incurred for the purpose of generating the interest.
Interest paid to a connected party in excess of an arm’s-length amount may be deemed:
As well as the general arm's-length rule above, thin-capitalisation rules apply in limited circumstances, again where interest exceeds an arm's-length amount:
In such cases the interest will be treated as a dividend paid by the company to the connected individual if the loan capital to equity ratio is greater than five to one. Credit institutions or deposit takers regulated under the Banking Act are an exception to this rule. Regardless of accounting treatment, preference shares are treated as equity for the purposes of the thin capitalisation rules.
The interest on a loan will not be deductible where a person is paying interest to an arm's-length lender (eg, a bank) and a substantial part or all of the loan is secured by:
There is no provision in Gibraltar legislation for tax consolidation or for group relief.
Capital gains (and losses) are outside the scope of taxation in Gibraltar.
Other taxes that may be payable on a transaction include:
Other than what is stated in 2.8 Other Taxes Payable by an Incorporated Business above, incorporated businesses are not subject to any other notable taxes.
Most closely held local businesses operate in corporate form.
Where the facts and circumstances indicate that an individual is an employee, their employer is required to deduct tax at source by the Pay As You Earn (PAYE) system. However, there are no specific rules to stop self-employed professionals from generating income through a company, although on receipt of personal income (eg, salary, director’s fees or dividends) they will be taxed at personal tax rates.
There are no specific rules to prevent closely held corporations from accumulating earnings for investment purposes. There are general anti-avoidance provisions, however, which apply to transactions or arrangements deemed to be artificial or fictitious.
There are no specific rules relating to individual's tax on dividends and the sale of shares in closely held corporations.
Resident individuals are taxed on dividends at normal personal tax rates, with a tax credit given for Gibraltar tax suffered by a company in generating the profits being distributed. Generally, only profits which were taxable in Gibraltar on an underlying company are taxable on the individual once distributed.
Capital gains are outside the scope of taxation in Gibraltar, therefore the gain on the sale of shares would not be taxable, subject to general anti-avoidance provisions, which apply to transactions or arrangements deemed to be artificial or fictitious.
Dividends from a company whose shares are quoted on a recognised stock exchange are not taxable. Likewise, capital gains are outside the scope of tax in Gibraltar.
There is no withholding tax in Gibraltar on dividends, interest or royalties.
Gibraltar has no double tax treaties.
As Gibraltar has no double tax treaties, local tax authorities cannot challenge the use of treaty country entities by non-treaty country residents.
There is currently relatively little focus on transfer pricing by the Gibraltar tax authorities, given the relatively low tax rate in Gibraltar (there is therefore usually little incentive to bias pricing to the detriment of profits in Gibraltar). If issues arise, they are generally with significant management and similar charges from overseas group companies, and head office charges to branches in Gibraltar.
There is likely to be more focus in future on transfer pricing as a result of the Organisation for Economic Co-operation and Development's (OECD) initiatives on BEPS, and the forthcoming implementation of legislation following such initiatives.
There are no provisions in Gibraltar's legislation that pertain specifically to related-party limited risk distribution arrangements, nor is this an area on which the tax authorities tend to focus.
The legislation provides that its general anti-avoidance provisions shall be construed in a manner that is consistent with publications by the OECD. To date, there has been relatively little focus on OECD transfer pricing rules, but it seems likely that more specific legislation, in line with the OECD’s initiatives on BEPS, will be implemented at some point in the future.
There is very limited application of specific transfer pricing mechanisms.
The income of any company – whether a Gibraltar company or an overseas company – that falls within any of the taxable classes of income is assessable to tax if it is accrued in or derived from Gibraltar.
Important points to note regarding branches include:
Capital gains are outside the scope of tax in Gibraltar.
Stamp duty is payable on the transfer of ownership of real estate located in Gibraltar, even where such ownership is indirectly held through intermediate holding companies.
A change in control – direct or indirect – can result in tax losses not being available for set-off against future profits, where within a period of three years there is both a change in ownership of the company and a major change in the nature or conduct of the activities of the company.
Formulas are not used by the tax authorities to determine the income of foreign-owned local affiliates (although a taxpayer could of course decide to base their transfer pricing on a formula).
If accepted by the tax authorities to be on an arm's-length basis, there is generally no limitation in allowing management and administrative expenses incurred by a non-local affiliate to be deducted for payment by local affiliates. Where not accepted to be on an arm's-length basis (or in practice, voluntarily agreed by the taxpayer) there is a restriction to the lower of 5% of turnover, or to 75% of the profit before taking into account the expenses in question.
There is an automatic restriction on the deduction available to branches for head office expenses (as defined in the Income Tax Act 2010) to 5% of turnover.
A tax deduction is not allowed for any interest paid or payable to a person not resident in Gibraltar if and so far as it is interest at more than a reasonable commercial rate.
See other restrictions on the deductibility of interest expense in 2.5 Imposed Limits on Deduction of Interest.
Income not accrued in or derived from Gibraltar is not taxable.
Expenses that are not wholly and exclusively incurred in the production of taxable income are treated by the tax authorities as non-deductible.
Dividends received by a company from another company are exempt from tax. In addition, dividends that are the distribution of profits that were not subject to tax in Gibraltar are not assessable to tax.
In practice, intangibles can be developed by local corporations to be used tax-free by non-local subsidiaries, as the tax authorities are unlikely to determine there are royalties or fees for tax purposes when no royalties or fees are payable.
Local corporations are not taxed on the income of their non-local subsidiaries, unless any activities of the non-local subsidiaries or branches are located in Gibraltar.
There are no specific rules that relate to the substance of non-local affiliates.
Capital gains are outside the scope of tax in Gibraltar.
General anti-avoidance provisions empower the Commissioner of Income Tax to disregard part or all of any arrangements or transactions which are deemed to be artificial and/or fictitious and whose purpose is to reduce or eliminate tax payable.
In particular, deductibility of expenses in relation to connected companies, where not on an arm's-length basis (see 5.6 Deductions for Payments by Local Affiliates above), would normally be subject to restrictions and limitations pursuant to the application of general anti-avoidance principles.
It is required that promoters of a scheme disclose to the commissioner any 'notifiable arrangement' or 'notifiable proposal'.
There is no routine audit cycle in Gibraltar. Queries are frequently raised by the tax authorities, but normally on an ad hoc and relatively informal basis (ie, references to 'tax audit' or 'investigation' are infrequent).
So far, the implementation in Gibraltar of BEPS recommended changes has been carried out through the adoption of EU Directives. These include:
Gibraltar’s government appears to recognise that many of the BEPS recommendations are inevitable and it has stated and clearly indicated by its actions that it is fully committed to complying with international obligations. There is also a feeling that Gibraltar has to – and does – go further than many jurisdictions to prove that it is compliant, due to its small size.
International tax has a relatively high profile in Gibraltar. It is a small jurisdiction, with significant activity in sectors such as financial services, tourism, internet gaming and, more recently, distributed ledger technology. Therefore, much of its business caters to international markets and/or is the subject of inward and outward investment.
Other factors influencing the implementation of BEPS recommendations include:
It is reasonable to say that one of Gibraltar's key objectives is to offer a business-friendly jurisdiction. Keeping taxation to a level that does not discourage economic activity, whilst remaining internationally compliant, is part of this objective.
Key features of Gibraltar’s tax system include:
The implementation by Gibraltar of BEPS recommended changes has so far been carried out through the adoption of EU Directives. This includes implementing the anti-avoidance amendments to the Parent-Subsidiary Directive, designed to ensure that where dividends paid between EU Member States receive a deduction in one Member State, they will be subject to tax in the recipient Member State.
Gibraltar has a territorial tax system for companies. Its tax legislation already contains a number of provisions to restrict deductions claimed for interest where these are higher than an arm's-length rate. There is little evidence that investment in Gibraltar is currently encouraged by any ability to claim deductions for interest paid.
The impact of the CFC proposals on Gibraltar, given its territorial tax regime, will depend on how the proposals are implemented in practice, and how this compares to CFC rules that are already applied in many jurisdictions.
Gibraltar has no double tax treaties with any other jurisdiction, so anti-avoidance rules applied to DTAs are unlikely to impact Gibraltar directly.
It is likely that more specific transfer pricing requirements will be introduced to Gibraltar, given that there are presently few specific provisions in place. Although this could significantly increase the amount of documentation required to be compiled by local entities who are part of multinational groups, it remains to be seen whether this would have any other impact on such entities.
Regarding profits from intellectual property, there are no specific beneficial regimes in place. Royalties received or receivable by Gibraltar-registered companies are taxable at a rate of 10%. There is little evidence to suggest that intellectual property is being moved to Gibraltar for tax purposes, therefore it appears that there will be little negative impact on Gibraltar from BEPS proposals involving intellectual property.
Gibraltar’s government appears to be fully committed to tax transparency. All EU Directives in this respect, including country-by-country reporting, have been implemented.
No changes have been made to the taxation of transactions in relation to digital economy businesses operating from outside Gibraltar, and there do not appear to be any proposals in this respect.
As with many tax-related measures, the impact of the BEPS process on Gibraltar will largely depend on how specific details are implemented.