Adrian Pilcher outlines the much anticipated changes that Gibraltar’s new Income Tax Act will bring and considers the impact such changes will have on the territory as a financial services centre
Gibraltar’s much anticipated new Income Tax Act has now reached its final pre-legislative stages and is due to be enacted shortly. It comes into force on 1 January 2011. The pre-legislative stage has included a consultation process allowing members of the legal, accounting and financial services sectors to provide input and feedback.
The New Act does not just change the law in Gibraltar; it has wider political ramifications. For reasons highlighted below, it is the view of some practitioners that the New Act serves to shift Gibraltar’s global position as an international finance centre. Firstly, however, let us focus on the legal impact of the New Act on taxation law in Gibraltar.
The existing Income Tax Act is, in the words of the Gibraltar Government in the New Act’s pre-legislative briefing paper, “many decades old therefore of a different age and world to that which exists today”. The Government has decided to keep the old legislation and the majority of its taxation principles, “but to overhaul it, by a series of far reaching amendments to make it fit for the modern age”. The New Act therefore not only changes tax law in Gibraltar, it also modernises it by, amongst other things, codifying what used to be complicated common law principles and rules.
For example, Gibraltar has a territorial basis of taxation whereby income tax is charged on income accruing in or derived from Gibraltar. This basis of taxation derives from common law, but is retained within the New Act, providing statutory clarity and certainty with the accrued and derived test being defined, subject to certain exceptions, by reference to the location of the activities which give rise to the profits. Specifically, section 11 of the New Act preserves the principle that all income accrued in, or derived from, Gibraltar is taxable (although the principle is, in some instances, softened for infrequent visitors to Gibraltar, whose presence is only incidental).
The New Act preserves the taxation of profits or gains of a company from any trade, business, profession or vocation and the taxation of rents, but only if the profits, gains or rents are accrued and derived in Gibraltar. It is also charged on certain income accruing in, derived from or received in, any place other than Gibraltar by any person ordinarily resident in Gibraltar.
The New Act defines an individual as ordinarily resident in Gibraltar if:
For these purposes, any presence in Gibraltar in any 24 hour period commencing at midnight shall be counted as a day, irrespective of whether accommodation in Gibraltar is used or not.
A Gibraltar resident (other than a qualifying category two individual[i] ) pays taxes on his worldwide income after the deduction of all the expenses which have been wholly, necessarily and exclusively expended in the production of that income.
A dual taxation system exists whereby taxpayers are able to choose to pay tax between one of two systems, whichever results in the lower tax payment.
A company will be considered resident in Gibraltar if the management and control of its business is exercised from Gibraltar. This remains unchanged by the New Act.
The location of central management and control will be established under legal principles laid down in the United Kingdom, which focuses on the place of the highest form of control and direction over a company’s affairs, as opposed to decisions on the day-to-day running of the business.
Tax year and basis of assessment
Tax is currently charged for the year of assessment (running from 1 July, in one calendar year, to 30 June in the next) on the basis of the income of the preceding year, except for income from employment which is charged on the basis of the income for that year.
The preceding year basis of assessment will be abolished by the New Act in favour of an actual basis as from 1 January 2011.
Payment of tax
The New Act introduces significant changes to the collection of taxes in Gibraltar. The New Act’s pre-legislative briefing paper states that:
“The commissioner will have such powers [as] will be consistent with the sea change in the attitude to secrecy in such matters throughout the civilised world and will demonstrate Gibraltar’s commitment to be at the forefront of the modern breed of finance centres”.
Sections 6 to 8 of the New Act, for example, allow the commissioner to issue notices to obtain documents from a taxpayer himself or from a third party who may have particulars or evidence in documentary form relevant to a taxpayer.
The commissioner may force the production of documents or particulars which he believes have information relevant to the liability or quantum of liability of a taxpayer. The commissioner may also seek documents or particulars to satisfy any international exchange of information obligations.
The power extends to the obtaining of information in relation to a taxpayer or class of taxpayers whose individual identity may not be known but the commissioner believes may be evading tax.
The definition of documents and particulars is deliberately wide but does not include items covered by legal privilege.
Where the commissioner becomes aware that serious tax fraud has been or will be committed and that the penalties for destruction, etc, of documents will not deter a taxpayer from removing evidence, the commissioner now has the power to approach the Supreme Court to obtain a warrant to enter and search premises.
Amongst other things, this serves to provide the framework within and alongside which the recently signed Tax Information Exchange Agreements (TIEAs) will operate, as Gibraltar, in accordance with its OECD commitment, has to date signed a total of 18 TIEAs, with the following countries:
Of the 18 TIEAs, the following have entered into force:
Taxation of Gibraltar trusts
The New Act provides that trusts settled for non-resident beneficiaries are not liable to tax in Gibraltar other than on their Gibraltar taxable source income, even where the settlor or trustees are Gibraltar residents and the trust is administered from Gibraltar.
Historically, the income received by a trust created by or on behalf of a non-resident person or an individual who had been issued a certificate under rule 6 of the Qualifying (Category 2) Individuals Rules 2004 was exempt from tax where the income accrued or was derived outside Gibraltar or, in the case of income received by a trust, would not be liable to tax under the Income Tax Act if it had been received directly by the beneficiary. The trust also had to expressly exclude residents of Gibraltar from any present or future benefit.
Under the New Act trusts will be classified as resident or non-resident with the spouse and issue of Category 2 Individuals deemed non-resident for these purposes. Non-resident trusts will be taxable on their Gibraltar source income only. It should be borne in mind that qualifying investment income is not taxable and it is therefore possible for non-resident trusts to hold deposits and investments with a bank in Gibraltar without the trust incurring any liability to income tax and allows Category 2 individuals to reside in Gibraltar without incurring income tax liability in relation to assets held by a trust.
The New Act excludes from the definition of trusts, for the purposes of taxation only, bare trusts whether they arise by declaration, constructively or resultantly.
The standard rate of tax on companies up to the 31 December 2010 is 22 per cent with a small company rate of 20 per cent[ii].
The new rate, effective from 1 January 2011, for companies, is 10 per cent of their taxable income; however energy and utility providers including telecommunications, electricity, water, sewage and petroleum will pay tax at the higher rate of 20 per cent of their taxable income.
A start-up rate of 10 per cent applies to any business established in Gibraltar after 1 July 2009. Tax will be assessed on an actual year basis. As an anti-avoidance provision, it will not apply in respect of any commercial activity being carried out before 25 June 2009 and which is re-organised by the taxpayer in the name of a different entity for the purpose of benefiting from the scheme. As from 1 January 2011 all companies, other than utility providers, will be subject to a rate of 10 per cent of their taxable income.
This coincides with the ending of the Gibraltar tax exempt company regime (whereby a tax exempt company paid no tax in return for an annual tax exempt fee of £450), in accordance with the agreement to that effect, with the European Commission.
In the New Act’s pre-legislative briefing paper, the Gibraltar Government stated that "all historical concepts distinguishing between onshore and offshore are eliminated, thus definitively ending the last remaining vestiges of tax haven in Gibraltar and concluding the Government’s 15 year programme to reposition Gibraltar’s finance centre, in every respect, into the mainstream of EU financial services."
[i]The qualifying (Category 2) Individuals Rules 2004 provide low tax limits for high net worth individuals wishing to reside in Gibraltar. Such individuals will only pay tax at the normal tax rates applicable to residents, in accordance with the Income Tax (Rates of Tax) Rules, on the first £60,000 of assessable income with a minimum tax payable per annum of £22,000. Any income in excess of £80,000 is not subject to income tax. Only income received in or remitted to Gibraltar is taxable and such individuals may be directors of a Gibraltar tax-exempt company. The income of a tax-exempt company is not treated as remitted to the individual.
[ii] applicable where the profits of an accounting period are less than £35,000 per annum and a marginal rate is charged on profits of between £35,000 and £43,333. A small company is one whose trading activity in any year has a minimum of 80 per cent of total trading receipts derived from sources other than dividends, interest or discounts, rents, royalties, premiums and any other profits arising from property.
Adrian Pilcher, Senior Associate, Isolas, Gibraltar