Businesses generally adopt a corporate form that 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" (at the time of entering such a partnership, the limited partners must 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 partnerships may be treated as transparent, in which case the partners are the taxable persons in respect of their share of taxable income generated by the partnership.
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 its management.
Limited liability partnerships may be treated as transparent, in which case the partners are the taxable persons in respect of their share of taxable income generated by the partnership.
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 trustees of a trust are chargeable for tax on any taxable income of the trust.
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 the details of the beneficiaries and the guardian. The founder provides the initial assets as an irrevocable endowment, and may reserve powers for him or herself, such as the ability to appoint or remove the Guardian or Councillors, or to amend the constitution.
A foundation is not transparent for tax purposes; any taxable income of a foundation is chargeable on the foundation itself.
A company is ordinarily resident in Gibraltar if it is managed and controlled in Gibraltar, or if it is managed and controlled outside Gibraltar by persons that are ordinarily resident in Gibraltar. “Managed and controlled” refers to the highest level of oversight, generally determined in accordance with United Kingdom case law on the matter. There is no separate concept of “residence” as opposed to ordinarily resident.
A trust is resident in Gibraltar if one or more of the beneficiaries is ordinarily resident in Gibraltar, or if the class of beneficiaries (other than those irrevocably excluded from benefit) includes an individual who is ordinarily resident in Gibraltar.
A foundation is resident in Gibraltar unless persons who are ordinarily resident in Gibraltar and the issue of such persons have been irrevocably excluded from benefit.
All companies are chargeable for taxable profits at a rate of 10%, 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%. Profits or gains of a company are only taxable if the income is “accrued in or derived from” Gibraltar. This is interpreted in terms of the location of the activities giving rise to the profits, subject to specific rules for inter-company interest income and royalty income.
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 assessable for tax on any taxable profits that are generated by the partnership. The tax rates that apply are those that apply to the partners – ie, either corporate rates as described above, or personal tax rates of tax that apply to them as individuals, as described below.
Trusts and Foundations
Trusts and foundations are treated in a very similar manner to each other for tax purposes, albeit that in the case of a trust it is the trustee that is chargeable for tax in respect of the trust. Any taxable profits or gains of a trust or foundation are taxed at a rate of 10%.
Individuals are taxable at different tax rates, depending on the level of taxable income and the tax status of the individual. The effective (overall) tax rate never exceeds 25% (the exceptions to this are a non-resident’s rental income from property located in Gibraltar, and the income of a “Category 2” individual from employment, business or rental income from Gibraltar; Category 2 is a special tax status that must be applied for).
Capital Gains Tax
Neither individuals nor companies are taxed on capital gains.
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.
The following percentages of stamp duty apply to 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 is taxable, irrespective of the source of the royalty.
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, such as 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 the deductibility of costs incurred in respect of connected companies where not on an arm's-length basis; and capital losses.
Adjustments are also made for income not assessable for taxation, such as 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 above).
There are no special incentives for technology investments.
There are no special incentives that apply to specific industries, transactions or businesses.
Losses can be carried forward indefinitely against future profits of the same company, unless 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, within a period of three years. 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 the income of a trade, business, profession or vocation.
A literal interpretation of the legislation would be that interest expense is not deductible against non-trading interest income (ie, interest on inter-company loans and advances, which, although taxable, is not trading income). Established practice is that this restriction does not apply if the interest income is taxable, on the basis that this was not the intention of the restriction. (The restriction pre-dates the introduction of inter-company interest as a taxable class of income, but was not amended when that class of income was introduced).
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 that generates the income, or for acquiring the capital employed in acquiring the trade or profession that 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:
As well as the general arm's-length rule, 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. There is an exception for credit institutions or deposit takers regulated under the Banking Act. Regardless of accounting treatment, preference shares are treated as equity for the purposes of the thin capitalisation rules.
Where a person pays interest to an arm's-length lender (eg, a bank loan) and a substantial part or all of the loan is secured by a cash deposit made with the lender, or a connected person of the lender, or by a person connected to the borrower, or secured by certain investments, and the income from those cash deposits or investments is not taxable, then the interest will not be deductible.
Gibraltar has implemented the EU Anti-Tax Avoidance Directive (2016/1164), which contains interest limitation rules that in Gibraltar apply to accounting periods commencing on or after 1 January 2019. Financial undertakings and standalone entities are excluded from the scope of the rules. For entities within the scope of the rules, a deduction for interest is restricted to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA) or EUR3 million (the latter being for the entire group), whichever is greater. This does not apply to loans contracted prior to 17 June 2016 (excluding any subsequent modifications to such loans), nor to certain long-term public infrastructure projects. Excess (non-deductible) borrowing costs may be carried forward indefinitely. Unused interest capacity in a given tax period may be carried forward for a maximum of five years.
There is no provision in Gibraltar legislation for tax consolidation or 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 above, incorporated businesses are not subject to any other notable taxes.
Most closely held local businesses operate in a corporate form.
Employees are required to be taxed at source under the Pay As You Earn (PAYE) system. There are no specific rules to stop self-employed professionals generating income through a company; however, where the facts and circumstances indicate that an individual is in substance an employee, the employer is required to treat them as such for PAYE purposes. Where a corporate vehicle is used in such a manner, the individual would be taxed at personal tax rates upon the receipt of income personally from the company (for example salary, director’s fees or dividends).
There are no specific rules to stop 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 that apply in this respect to closely held corporations.
Ordinarily 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 that 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, so the gain on a sale of shares would not be taxable, subject to the general anti-avoidance provisions that 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. Capital gains are outside the scope of taxation in Gibraltar, so the gain on a sale of shares would not be taxable.
There is no withholding tax on dividends, interest or royalties.
A double tax treaty was agreed with the United Kingdom in October 2019, and an agreement was signed between Spain and the United Kingdom concerning Gibraltar in March 2019. However, at the time of writing neither of these are in force (pending certain ratification formalities). No other double tax treaties are in place with Gibraltar.
Although Gibraltar signed a Double Tax Treaty with the UK in October 2019, this is not yet in force. Gibraltar has no double tax treaties in place with any other jurisdiction, so it is too early to comment on whether local tax authorities are likely to 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 (therefore, there is usually little incentive to bias pricing to the detriment of profits in Gibraltar). If issues arise, they generally concern significant management and similar charges from overseas group companies, and head office charges to branches in Gibraltar.
There is likely to be more focus on transfer pricing as a result of the Organisation for Economic Co-operation and Development's (OECD) initiatives on Base Erosion and Profit Shifting, and the forthcoming implementation of legislation following such initiatives.
There are no provisions in the legislation specifically regarding related party limited risk distribution arrangements, nor is it an area on which the Gibraltar tax authorities tend to focus.
Although the legislation provides that its general anti-avoidance provisions shall be construed in a manner that best secures consistency between those provisions and publications by the OECD, to date there has been relatively little focus on OECD transfer pricing rules.
It seems likely that more specific legislation will be implemented at some point in the future that is in line with the OECD’s initiatives on Base Erosion and Profit Shifting.
There is very limited application of specific transfer pricing mechanisms.
The income of any company – whether a Gibraltar company or an overseas company – falling within any of the taxable classes of income is assessable for tax if it is accrued in or derived from Gibraltar.
Important points to note regarding branches include the following:
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 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, within a period of three years.
Formulas are not used by the tax authorities to determine the income of foreign-owned local affiliates (though a taxpayer could of course decide to base their transfer pricing on a formula).
Where a company incurs expenses in favour of a connected party and the Commissioner regards the arrangements as being in place in order to reduce taxation, there is a restriction on the deduction for such expenses. That restriction is the lower of 5% of turnover (as defined) or 75% of the profit before taking the expenses in question into account.
There is an automatic restriction on the deduction available to branches for head office expenses (as defined in the Income Tax Act 2010) of 5% of the gross income of the branch.
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.
For other restrictions on the deductibility of interest expense, see 2.5 Imposed Limits on Deduction of Interest.
Income not accrued in or derived from Gibraltar is not taxable, subject to CFC rules (see 6.5 Taxation of Income of Non-local Subsidiaries Under CFC-Type Rules).
Expenses that are not wholly and exclusively incurred in the production of taxable income are treated by the tax authorities as non-deductible. Therefore, local expenses attributed to exempt foreign income would not be 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 for 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 deem there to be royalties or fees for tax purposes when no royalties or fees are payable. This may be subject to change in principle going forward, although there is little evidence to suggest that this scenario is widespread or involves significant amounts.
Gibraltar has implemented the EU Anti-Tax Avoidance Directive (2016/1164), which contains provisions relating to CFCs that apply to accounting periods commencing on or after 1 January 2019.
Where the tax paid by a CFC (as defined) of an entity is less than 50% of the tax that would be paid in Gibraltar on the CFC’s income, the non-distributed income of the CFC arising from non-genuine arrangements put in place for the essential purpose of a tax advantage will be included as income of the entity. This does not apply in the case of a CFC with accounting profits of no more than EUR750,000 and non-trading income of no more than EUR75,000, nor to a CFC whose accounting profits are no more than 10% of its operating costs (as defined).
There are specific rules detailing how any tax payable in respect of a CFC would be calculated.
The CFC rules apply to a permanent establishment resident outside of Gibraltar in essentially the same manner as they apply to an entity resident outside of Gibraltar.
There are no specific rules that relate to the substance of non-local affiliates, other than the impact that a lack of significant people functions may have in determining whether an arrangement is “non-genuine” for the purposes of applying the CFC rules described in 6.5 Taxation of Income of Non-local Subsidiaries Under CFC-Type Rules.
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 that are deemed to be artificial and/or fictitious, the purpose of which is to reduce or eliminate the tax payable.
“Artificial and fictitious” is defined as meaning not real and not genuine, or not consistent with the arm’s length principle as defined by the OECD in its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The deductibility of expenses in respect of connected companies is subject to restrictions and limitations if the Commissioner of Income Tax regards the arrangements as being put in place in order to reduce taxation (see 5.6 Deductions for Payments by Local Affiliates).
There is no routine audit cycle. Queries are frequently raised by the tax authorities, but normally on an ad hoc and relatively informal basis (ie, reference to “tax audit” or “investigation” is very infrequent).
The implementation in Gibraltar of BEPS recommended changes so far has been carried out by the adoption of EU Directives, including the following:
Gibraltar’s Government appears to recognise that many of the BEPS recommendations are inevitable, and 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 the small size of the jurisdiction.
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 a key objective of Gibraltar is to offer a business-friendly jurisdiction. Keeping taxation to a level that does not discourage economic activity is part of this objective, but that is not inconsistent with being internationally compliant.
Key features of Gibraltar’s tax system include the following:
The implementation by Gibraltar of BEPS recommended changes so far has been carried out by the adoption of EU Directives, including:
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 at more than an arms-length rate. There is little evidence that investment in Gibraltar is currently encouraged by any ability to claim deductions for interest paid.
The OECD’s Action Plan in respect of CFC appears to be logical for the most part.
The focus of the Action Plan (and the EU CFC rules) on a scenario with a parent resident in one jurisdiction with a CFC that is resident in another jurisdiction appears to be based on a presumption that entities are subject to tax on the basis of residence. This could lead to some anomalies when applied to a territorial jurisdiction that applies tax on the basis of location of activity rather than residence. It is yet to be seen how this may operate in practice.
The idea of a “sweeper” rule that would apply CFC provisions regardless of the substance located in a particular jurisdiction may lead to tax arising overseas on the profits of businesses that operate wholly on a local basis and with local customers, purely because the parent is located in a country with relatively high tax. This does not appear to be consistent with the primary objective of BEPS, and would go beyond dealing with the issues that BEPS aims to address.
Proposed DTC limitation of benefit and anti-avoidance rules are unlikely to have a significant impact in the short or medium term, as Gibraltar has only recently agreed a Double Tax Agreement with the United Kingdom, which is not yet in force, and has no other Double Tax Agreements in place (a form of tax agreement has been signed with Spain, but this is not yet in force either).
It is likely that more specific transfer pricing requirements will be introduced in Gibraltar, given that there are 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.
There are no specific beneficial regimes in place for profits from intellectual property. 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, so there is 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 have been implemented, including country-by-country reporting.
No changes have been made in relation to the taxation of digital economy businesses operating from outside Gibraltar, and there are no proposals in this respect, as far as is known.
No specific position has been taken by Gibraltar in relation to BEPS proposals for digital taxation.
There are no provisions in Gibraltar’s tax legislation that deal specifically with intellectual property deployed within Gibraltar. However, in the case of a company incurring expenses in favour of a connected party and where the Commissioner regards the arrangements as being in place in order to reduce tax, there is a restriction on the deduction for such expenses, which is either 5% of turnover (as defined) or 75% of the profit before taking the expenses in question into account, whichever is lower.
As with many tax-related measures, the impact depends a great deal on the specific detail.