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 one that restricts the right to transfer its shares and does not offer its shares to the public. The following four types of private companies may be incorporated under Section 4(2) of the 2014 Companies Act:
A public company under Gibraltar law is one whose certificate of incorporation states that it is a public company, has 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 Section 4(1) of the 2014 Companies Act:
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 permitted.
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 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.
In October 2020 a Bill was published, which, once passed by Parliament, will repeal the Limited Partnerships Act 1927 and replace it with the Limited Partnerships Act 2020. Amongst other things, this will provide for:
A Protected Cell Limited Partnerships Bill was also published in October 2020. Once this is passed by Parliament and becomes law, it will allow funds to use limited partnerships to create one or more cells in order to protect and segregate cellular assets from non-cellular assets and to keep each cell separate and separately identifiable from other cells.
Limited partnerships are generally treated as transparent for taxation; as such, 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 are generally treated as transparent for taxation; as such, 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 UK 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 (see 2.1 Calculation for Taxable Profits).
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 that apply to them as individuals, as described below.
Trusts and Foundations
Trusts and foundations are treated in a very similar manner 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 first and second-time purchase of residential real estate in Gibraltar:
For other buyers of real estate in Gibraltar:
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 generally calculated on an accruals basis; they are based on Gibraltar, UK or international accounting standards, or other such accounting standards as approved by the Commissioner of Income Tax, and then subject to any adjustments according to specific provisions in the Income Tax Act 2010.
Adjustments include the following:
Adjustments are also made for income not assessable for taxation, such as many types of investment income (including dividends and bank interest) and capital gains.
Gibraltar taxes corporations on a territorial basis, so any income that is not accrued in or derived from Gibraltar is not assessable to tax in Gibraltar. “Accrued in or derived from” is defined in terms of the location of the activities giving rise to the profits. Generally, this is interpreted by reference to case law, mostly from Hong Kong, applied to the relevant facts and circumstances. Exceptions to this are inter-company interest income (Class 1A) and royalty income, which are deemed to be accrued in and derived from Gibraltar where the company receiving the income is registered in Gibraltar. Also, where a company’s underlying activity requires a licence and regulation in Gibraltar, its activities are deemed to be located in Gibraltar, with the exception of the overseas activities of a branch or permanent establishment located overseas.
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. A Bill to amend the Income Tax Act 2010 to put this into effect as from 1 July 2018 was published in November 2020, but has not yet been passed by Parliament.
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 it 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:
Gibraltar has implemented the exit tax provisions contained in EU Directive 2016/1164, which applies an exit tax to the transfer of assets, business or residence from Gibraltar to another jurisdiction. A transfer of assets is defined as occurring for this purpose when Gibraltar loses the right to tax the assets in question, whilst the assets remain under the ownership of the same taxpayer. The tax is applied to the difference between the market value of such assets transferred, minus their value for tax purposes.
The fact that this does not apply to transfers from one legal entity to another, and that it only applies where there may have been assessable income arising from the assets in question, means that the exit tax is not expected to arise frequently. Instances where it is more likely to arise would include re-domiciliations of companies out of Gibraltar, or a move of a company’s residence from Gibraltar to another jurisdiction.
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.
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 dividends that represent the distribution of profits that were taxable in Gibraltar on the underlying company that generated those profits are taxable on the individual once distributed. There are specific rules that determine how a dividend is allocated to historic profits and between profits that were taxable and non-taxable on the company.
Persons not ordinarily resident in Gibraltar are not taxable in Gibraltar on dividends received.
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 2019 and entered into force on 24 March 2020.
A double tax agreement was signed between Spain and the United Kingdom concerning Gibraltar taxation and other financial matters in 2019, and ratified in the United Kingdom and Spain in March 2021. Under the terms of the agreement, it is therefore now in force although some of its provisions do not actually take effect until the start of the following tax year in the respective jurisdictions (namely 1 July 2021 for Gibraltar and 1 January 2022 for Spain).
No other double tax treaties or agreements are in place with Gibraltar.
Gibraltar’s double tax treaty with the United Kingdom entered into force in 2020 and its double tax agreement with Spain entered into force in March 2021 (save that, for the latter, some provisions do not take effect until the following tax year in each jurisdiction). Gibraltar has no double tax treaties or agreements in place with any other jurisdiction. 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 (BEPS), 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.
Gibraltar’s 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. The Commissioner may apply general anti-avoidance powers where a transaction or arrangement is artificial or fictitious. The definition of “artificial and fictitious” makes reference to being inconsistent with OECD Transfer Pricing guidelines. However, 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 BEPS initiatives.
Gibraltar’s double tax treaty with the United Kingdom entered into force in 2020 and its double tax agreement with Spain entered into force in March 2021 (save that, for the latter, some provisions do not take effect until the following tax year in each jurisdiction). Gibraltar has no double tax treaties or agreements in place with any other jurisdiction. The tax authorities in Gibraltar issued guidance on the use of mutual agreement procedures in March 2020. However, given the recent entry into force of Gibraltar’s only respective double tax treaty and agreement, no international transfer pricing disputes have been known to be resolved through the double tax treaty in place, nor through mutual agreement procedures.
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 (see 2.1 Calculation for Taxable Profits).
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 either 5% of turnover (as defined) or 75% of the profit before taking the expenses in question into account, whichever is lower.
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 (see 2.1 Calculation for Taxable Profits), 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 represent the distribution of profits that were not subject to tax in Gibraltar on the underlying company that generated those profits 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 having been put in place in order to reduce taxation (see 5.6 Deductions for Payments by Local Affiliates), and in respect of interest expenses (see 2.5 Imposed Limits on Deduction of Interest).
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:
The first deadline for disclosure is 30 January 2021.
Gibraltar’s government recognises 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’s government is to offer a business-friendly jurisdiction. Keeping taxation to a level that does not discourage economic activity whilst ensuring that the jurisdiction and its tax system remain internationally compliant form part of its strategy.
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 (see 2.1 Calculation for Taxable Profits). 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 CFCs 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, although there have been few issues in this regard to date.
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. Gibraltar has only one double tax treaty and one double tax agreement in force with the United Kingdom and Spain respectively.
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 were implemented up to the end of the Brexit transition period on 31 December 2020 and remain in place, with the exception of the Directive on Administrative Compliance (DAC6), which was implemented but subsequently amended to align with the OECD model rules on the Mandatory Disclosure Requirement.
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.
Gibraltar: Succeeding Brexit
Differentiated Schengen Arrangements
The Brexit issue has been (and may well continue to be) a vexing topic for the United Kingdom for quite some time. Gibraltar is the only British Overseas Territory that was erstwhile part of the European Union, pursuant to the UK’s membership. Nearly 96% of Gibraltarians voted against exiting the EU in the Brexit Referendum, with 83.64% of registered voters casting their ballot. This was perhaps unsurprising given Gibraltar’s physical connection to mainland Europe and its reliance on the free flow of (in particular) people across the land frontier with Spain. Indeed, approximately 15,000 people cross the border daily, primarily servicing Gibraltar’s financial services (including gaming, insurance, banking, e-money and more recently fintech) and tourism/hospitality industries, which are its key sectors. In fact, Gibraltar is the leading gaming jurisdiction of choice, with no VAT at all (including, crucially, on services), attracting the top multinational gaming companies to set up their primary operations on the Rock.
Gibraltar companies insure one in five cars in the UK, and the jurisdiction also created and continues to grow and evolve the first regulatory environment for the provision of financial services relating to distributed ledger technology.
The high levels of unemployment in neighbouring Spain (circa 35% in immediate neighbour La Linea, compared to circa 1% for Gibraltar), combined with Gibraltar accounting for 25% of the GDP of the wider Spanish Campo de Gibraltar, mean that the stakes are high on both sides of the frontier. An added complexity (even before Brexit) is the continuing irreconcilable positions of the UK and Gibraltar (on the one hand) and Spain (on the other) regarding the status of Gibraltar, which have plagued relations for over 300 years and hampered opportunities for concerted development of the wider region as a whole.
With Gibraltar not having been included in the UK-EU Trade and Cooperation Agreement reached on 24 December 2020, the prospect of a "hard Brexit" loomed upon the termination of the Brexit transition period at the end of 2020. It was against this backdrop that an in-principle agreement regarding a proposed framework for a UK-EU legal instrument setting out Gibraltar’s future relationship with the EU was reached and announced on the very last day: 31 December 2020. This preliminary accord has no doubt been a long time in the making (and the parties have given themselves a further six months within which to conclude the detail and form of the full treaty), but the very fact that the parties have (whilst fully maintaining their positions on the issues) demonstrated a pragmatic preparedness to work around their incompatible stances on the sovereignty, jurisdiction and control of Gibraltar (in a bid to seek constructive, practical solutions to a hitherto intractable and otherwise mutually problematic situation) augurs the most hope for its success.
The common intention is to seek to provide for an arc of shared prosperity covering Gibraltar and the nearby Spanish hinterland by “the application in Gibraltar of the relevant parts of the Schengen acquis necessary to achieve the elimination of the control on the movement of persons between Gibraltar and the Schengen area.” It also foresees “a bespoke solution, based on an adaptation of a customs union between the EU and Gibraltar,” allowing for the removal of “the physical barriers between Gibraltar and the EU, suppressing the customs checkpoint at La Linea and making unnecessary the control of people for the purposes of customs checks,” with authorisation and entry into Gibraltar and the Schengen area to be carried out cumulatively by first Gibraltar and thereafter Schengen operatives (using their respective databases) for arrivals at Gibraltar’s airport and port facilities.
The preliminary agreement also envisages Gibraltar authorities issuing residence permits (subject to alignment with EU and Spanish standards and based on the existence of real links with Gibraltar) allowing access to short- and long-term Schengen visas. All of this adds to the existing attractive proposition of Gibraltar for high net worth individuals, as well as others looking to relocate to a stable, tax-friendly, English-speaking, common law jurisdiction, with a Mediterranean climate, a variety of good private and state schools and other amenities (including its own modern airport), and with border-less travel within the Schengen area.
The text of the in-principle agreement also anticipates substantial future alignment by Gibraltar (including in terms of similar duties, trade policy and relevant EU customs, excise and VAT legislation, as well as on security, environmental, state aid, transport, IT systems, data and citizens’ rights matters, amongst others) in order to avoid distortions in the internal market, whilst yet affirming Gibraltar as “a separate customs territory from the EU.” How this materialises in practice will determine the precise scope and opportunities available as a result, but the express aspiration for a “bespoke solution”, acknowledgment of Gibraltar as a “separate customs territory” and the limitation of alignment re EU customs, excise and VAT measures to those that are “relevant” offers an indication that the architects of the treaty will be striving for a differentiated Schengen style agreement in relation to Gibraltar. The expectation is that VAT measures will be limited to goods and not extend to services, thus preserving the incentive for the continuing provision of financial services from the Rock.
UK/Gibraltar market access
Prior to Brexit, financial services firms in Gibraltar, the UK and all other EU countries enjoyed passporting rights allowing them to sell their services to each other's jurisdictions without additional regulatory clearance. The departure of the UK (and thereby Gibraltar) from the EU brought this to an end (both between the UK/Gibraltar and the rest of the EU states and between the UK and Gibraltar themselves in as much as arising automatically under EU law).
The UK-EU Trade and Cooperation Agreement reached on 24 December 2020 did not (and was not intended to) address questions of market access for financial services firms between the UK and the EU. As a result, this presently relies on the satisfaction of individual country requirements or equivalence determinations, generally only issued in circumstances where there is considered to be sufficient alignment. Given that the EU has thus far only granted equivalence on a time-limited basis in two areas it considers important to it (derivatives clearing and the settling of Irish securities) and that EU equivalence determinations can be withdrawn with 30 days’ notice, pending a more substantial and substantive equivalence agreement being reached between the UK and the EU, there is obviously far greater complexity, cost and uncertainty with the current proposition.
From Gibraltar’s perspective, however (especially noting that the majority of Gibraltar passporting activity pre-Brexit has been UK-centric), mutual access for a wide range of specified UK and Gibraltar financial services firms is already afforded under previously concluded arrangements, and the establishment of a new Gibraltar legal and institutional framework will align relevant Gibraltar law and practice with that of the UK in order to allow for this. Such access currently exists under transitional arrangements (which are renewable by HM Treasury for successive periods of 12 months), which have recently been extended until 31 December 2021.
It is no surprise, therefore, that we have already seen a number of financial services firms relocate their UK-facing EU operations (which previously had automatic passporting rights pre-Brexit) to Gibraltar, in order to avail themselves of the current exclusive market access with the UK that Gibraltar enjoys. It also remains to be seen whether the form of Schengen-style arrangements relating to Gibraltar (as these materialise) will also serve to allow for greater fluidity and market access between Gibraltar and the wider EU on financial services matters as well.
Gibraltar limited partnerships
Limited partnerships is another area of recent, continuing development in Gibraltar, where the Limited Partnership’s Bill seeks to modernise existing limited partnership legislation. The most notable changes are to allow for limited partnerships to make a one-time election whether or not to have legal personality, with provisions affording limited partners a statutory basis on which to play a more active role in the affairs of the limited partnership (in certain permissible ways), as well as giving them the ability to vote on permissible actions pro rata to their interests in the limited partnership, in each case without vitiating their limited liability. The Gibraltar Funds sector has been key in driving these changes, which shall also see the partnership interests of limited partnerships become capable of being represented by shares, bonds, notes, loans or other debt securities or instruments.
The changes to the statutory framework also include the Protected Cell Limited Partnerships Bill, under which funds shall be capable of being structured as a special form of limited partnership with one or more segregated cells, allowing for the creation of distinct sub-funds and arrangements within the same limited partnership, but with the benefit of statutory protection over the segregation of the assets and liabilities of each cell.
There are also potential tax implications and opportunities from the changes, and the legislators are alive to international tests for opacity/transparency as well as recent aggressive stances being taken by the EU and similar bodies through blacklisting mechanisms.
Evolution is by definition a continuing process, but recent trends and developments in Gibraltar demonstrate that the jurisdiction is focused on and prepared to benefit from the potential opportunities presented by the ongoing significant current and future changes to the wider tax, legal and regulatory landscapes.