Investors Offshore Special Reports: Gibraltar

Gibraltar is a small peninsula located on the southern coast of Spain. It covers a total area of 6.5sq km and its coastline stretches for 12km only; there is a 1.2 km borderline with Spain. The Strait of Gibraltar links the Mediterranean Sea and the North Atlantic Ocean. Gibraltar enjoys a mild Mediterranean climate. Its highest point is the rock of Gibraltar which reaches 426m and is surrounded by narrow coastal lowland. The supply of fresh water is limited and there is no agriculture.

In July, 2008, the population was estimated at around 28,000. The official language is English although Spanish, Italian, Portuguese and Russian are also spoken. The ethnic groups settled in Gibraltar include Italian, English, Maltese, Portuguese and Spanish.

The history of the Rock of Gibraltar is rich and varied due to its strategic location. Once dominated by Rome, the cape fell to the Goths who ruled for a further 3 centuries. The Berber Tarik-ibn-Zeyad took Gibraltar in 711, giving the Rock its name (a corruption of Jebel Tarik, Tarik's Rock). Gibraltar remained under moorish occupation for six centuries. Spain finally reclaimed Gibraltar in the late 15th century, and kept it until the War of the Spanish Succession (1702-1713), when the Treaty of Utrecht ceded the Rock to Great Britain "for ever." Spain's last attempt to take it back by force was in 1779.

During the nineteenth century, Gibraltar developed into an impregnable fortress and a prosperous society developed within its walls. It remained a key British military and naval outpost until very recently and British culture has heavily influenced most aspects of Gibraltarian life. In modern times Spain has pursued its claim to Gibraltar in every possible way short of force of arms; but the population will have none of it, and no resolution of the problem is in sight.

Gibraltar is predominantly Roman Catholic (74%) with Protestant, Muslim and Jewish minorities.

In 1830 Gibraltar became the Crown Colony of Gibraltar with legislative powers vested in a Governor; a Charter of Justice created an independent Judiciary. Gibraltar is now a dependent territory of the UK with internal self-government based on a Constitution of 1969. The UK remains responsible for defence, foreign affairs and internal security.

Gibraltar has its own House of Assembly, comprising fifteen elected members and two nominated members; the last elections were in 2007. The two main parties are the Gibraltar Socialist Labour Party (led by Joe Bossano) and the Gibraltar Social Democrats (led by Peter Caruana). The latter is currently in power.

The Chief Minister who is appointed by the Governor heads the Council of Ministers who are responsible for matters such as trade, economic development, education, public services, and housing. There is an advisory Gibraltar Council.

Gibraltar is politically stable and as a British colony since 1704 its legal systems are based on English models, although of course EU law applies in most areas. There are three levels of court, and a Court of Appeal.

In December 2006, Gibraltarians accepted a new constitution for the jurisdiction, which aimed to give it more autonomy from the United Kingdom over its own internal affairs. In a referendum, 60.24% of those who turned out voted 'yes' to the new constitution, while 37.75% voted to reject it. 60.4% of Gibraltar's 20,061 registered voters turned out to vote.

The constitution, agreed in April of that year by then UK Foreign Secretary Jack Straw and Peter Caruana, and between Gibraltar's two main political parties later in the year, saw the UK retaining international responsibility for Gibraltar. However, the new constitution ceded certain powers previously in the possession of the British government to Gibraltar, and allowed the jurisdiction to have its own independent judiciary.

Spain and the UK have disputed the status of Gibraltar for nearly 300 years but in April, 2000, both Governments agreed to put the issue of sovereignty to one side and work co-operatively on administrative tasks. In effect Spain agreed to accept Gibraltar's status within the EU - an issue on which Spain had contended for many years.

It was also agreed that communications between Spain and Gibraltar would be handled by a 'postbox' mechanism whereby a unit of the FCO in London relayed messages in both directions.

Despite that agreement, however, the Spanish Foreign Ministry subsequently called for joint sovereignty of Gibraltar with a view to the Rock coming under full Spanish sovereignty after a period of time.

The Gibraltar Government was - not unexpectedly - unhappy about the situation; it would have liked to see the Spanish Government ease restrictions in three main areas: frontier queues - the Spanish border controls can cause delays; European Parliament voting rights; and the provision of more telephone numbers.

By mid-2003 it was clear that the age-old stalemate between Britain and Spain had been re-established, and British Foreign Office minister at the time, Denis MacShane suggested that there was unlikely to be a resolution to the Gibraltar question for at least thirty years. "I don't think the people of Gibraltar will approve any steps on sovereignty until there has been a long period of calm and good relations with Spain," said Mr McShane. "I have respect for the Spanish position, but quite simply, I do not see any positive outcome on the issue for some time."

In 2004, after fierce resistance from Spain, Gibraltar was incorporated into a UK European parliamentary constituency, and its citizens voted accordingly in the 2004 MEP elections.

The Spanish government persisted, however, and in July, 2005, a hearing began began in the European Court of Justice. The Spanish argued that the British legislation broke the founding treaty of the then European Community because it allowed non-European commonwealth citizens to vote in EU elections. Spain also believed that the United Kingdom acted illegally by incorporating Gibraltar into the south western UK electoral constituency for the purposes of European elections.

Jack Straw and his Spanish counterpart at the time, Miguel Angel Moratinos made another attempt to resolve the sovereignty issue in November, 2004, when they met in Madrid, where it was agreed that progress should be made towards giving Gibraltar an independent voice in future sovereignty negotiations. As a result of the discussion, Straw and Moratinos agreed to discuss the setting up of a new forum for dialogue which will have an open agenda and within which Gibraltar could have its voice heard under a "two countries, three voices," format.

In September 2006, agreement over a number of outstanding issues relating to Gibraltar was reached between the UK's Minister for Europe, Geoff Hoon, Spanish Foreign Minister Migel Angel Moratinos and Gibraltar's Chief Minister, Peter Caruana.

Areas covered by the agreements included the expanded use of Gibraltar Airport, the full inclusion of Gibraltar in EU air liberalisation measures, recognition by Spain of Gibraltar's '350' international dialling code and unblocking by Spain of Gibraltar mobile telephone roaming in Spain.

However, relations appeared to be deteriorating again in March 2008, when a report published in the Spanish media suggested that the Spanish government was considering asking the Organisation of Economic Cooperation and Development (OECD) to place Gibraltar on its 'blacklist' of uncooperative tax havens.

In a two-page article published by the Spanish El Pais newspaper, the Spanish government effectively accused Gibraltar of helping to facilitate money laundering and tax evasion through its apparent reticence when dealing with Spanish requests for assistance in fraud and fiscal investigations.

Gibraltar's Chief Minister, Peter Caruana dismissed the Spanish allegations, telling the UK's Daily Telegraph newspaper that: "If the Spanish government is saying that the Gibraltarian authorities are not cooperating with Spain in the way we cooperate with other countries, then that is simply untrue."

Things seemed to be getting better in 2009, when The Minister for Foreign Affairs and Co-operation of the Kingdom of Spain, Miguel Angel Moratinos, the Secretary of State for Foreign and Commonwealth Affairs of the United Kingdom of Great Britain and Northern Ireland, David Miliband, and the Chief Minister of Gibraltar, Mr Peter Caruana, held the third Ministerial Meeting of the Forum of Dialogue in Gibraltar on July 21, 2009, under the terms of the Joint Communiqué of December 16, 2004.

As foreshadowed in London in July last year, participants further confirmed their commitment to the creation of a constructive atmosphere of mutual confidence and cooperation for the benefit and prosperity of Gibraltar and the whole region, noting in particular that cooperation and mutual trust should become the norm between Gibraltar and Spain.

The Gibraltar government released a communiqué and a statement, welcoming progress in the discussions under a cordial and constructive atmosphere. It announced that progress has been made in six areas first outlined during the 2008 London meeting, namely the environment; financial services and taxation; judicial, customs and police cooperation; education; maritime communications and safety; and visa-related issues.

With regards to cooperation within financial services and taxation, Spain and Gibraltar highlighted their desire to establish normal lines and methods of cooperation including the exchange of information on tax matters to aid in the investigation of tax crimes. The countries also agreed to establish liaison and exchanges between regulatory authorities, and increase cooperation on taxation and anti money laundering issues and policies.

“We have agreed that there should be full co-operation in the common objective to fight crime whether local or international, and address the particular challenge of organised crime,” notes the communiqué, adding: “The detailed framework that we have approved today therefore lists a series of areas in which we will seek agreements to ensure that this occurs, including exchange of information, joint operations, simplified and clear channels of communication and agreed procedures.”

“We are committed to reaching agreements in these areas as soon as possible, preferably by the end of this year, and in any event by next year’s ministerial round. We have reaffirmed that, as was the case with the Cordoba Statements, any agreements in these areas would have no implications whatsoever regarding sovereignty and jurisdiction,” the communiqué concluded.

Gibraltar has had a troubled relationship with the EU, which regards it as a metropolitan part of the UK and really would like to see its low-tax, 'offshore', regime abolished. There is always an undercurrent of suspicion here that the Spanish are somehow influencing the debate.

In response to the general European push for tax transparency and a level playing field, in July 2002 Gibraltar's Chief Minister, Peter Caruana announced a new corporate taxation policy setting a zero rate of corporation tax for all companies but introducing new taxes on company personnel and property occupation which would be capped at 15% of profits.

In addition, and subject to EU clearance, two sectors of the economy only were to pay a new tax on profit. The sectors were financial services providers and utility companies.

Since the taxes were to be capped at 15%, local companies which used to pay 20% or 35% profits tax would have been better off, while 'offshore' companies would be worse off only if they employed staff or occupy premises locally. Many companies, particularly those used to hold Spanish property interests, do neither.

In March, 2003, the EU's Council of Finance Ministers confirmed that the reforms did not constitute harmful tax measures, but in April, 2004, the Commission argued that the new rules would give companies domiciled in Gibraltar an unfair advantage over their counterparts in the UK, under a principle known as 'regional selectivity'. The Commission also took issue with the fact that since the taxes were based on payroll and the occupation of business premises, offshore companies registered in Gibraltar would be unlikely to incur any tax liability. The EC therefore rejected the reforms, effectively suggesting that for taxation purposes, Gibraltar should be considered part of the United Kingdom.

Later that month, it was announced that Gibraltar had been given until 2010 (2007 for new companies) to phase out its exempt company tax regime after the European Commission ruled that the scheme violated EU state aid rules.

In response, further major changes to Gibraltar's corporate tax regime were announced in Chief Minister Peter Caruana's June 2007 Budget speech. Mr Caruana explained that: "By mid-2010 the Government will have introduced an across the board flat, low corporate tax rate. This will most probably be set at 10%, but in any event not higher than 12%. This will be similar to arrangements that already exist in Ireland, Cyprus, Malta and other EU Countries."

Meanwhile Gibraltar had taken the Commission to the European Court of Justice, and in December 2008, the European Court of First Instance ruled in favour of Gibraltar, stating that the European Commission was wrong to argue that the tax reforms proposed in 2002/03 were in breach of state aid rules, and effectively giving the jurisdiction licence to set its own tax rules.

The Court dismissed the EU Commission’s case, and stated that although the UK is representative of Gibraltar, Gibraltar does, however, have fiscal autonomy from the UK, and therefore can introduce its own individual tax system (the aforementioned 10-12% corporation tax).

In a statement to the press at the time, Peter Caruana, Gibraltar's Chief Minister, said he was "overjoyed" by the outcome.

"The Court has found in Gibraltar’s favour and has accepted our arguments on each and every issue, relating both to regional selectivity and material selectivity, and has ordered the commission to pay the Gibraltar government’s legal costs.”

“This needs to be clearly understood. Had Gibraltar lost the Regional Selectivity case, we would have had to adopt the UK’s company tax system and company tax rates. That would result in the bulk, if not all, of the finance centre and gambling companies leaving Gibraltar. That would have meant the loss of thousands of jobs throughout our economy, and a very large fall in government revenue. This in turn would have rendered unsustainable our current level of public services and public sector employment.”

“This is a huge and vital victory for Gibraltar. A threat to our economic, social, and thus political well-being, has, once again, been successfully seen off. I believe that the economy of Gibraltar now has the opportunity to forge ahead to the next level of growth and development, to fulfil its great potential and thus to guarantee that we shall bequeath economic and social prosperity and stability to our children, grand children and future generations.“

So is Gibraltar an appropriate location for your assets? If you are a globetrotting career expat or have a substantial liquid net worth which you would like to protect from harm, the answer may well be yes. Gibraltar is well known for its financial sector, and the particular expertise on the Rock is in the formation and management of offshore holding, investment, and trading companies, both for expats and corporations. There are a number of reasons why the country is especially suitable for the groups previously mentioned, and here we take a look at just a few of them:

For more detailed information about the types of asset protection and business vehicles available in Gibraltar, please visit the Lowtax Jurisdictions Guide.

There is something of a competition between a number of offshore jurisdictions to offer the most advanced e-commerce environment to businesses seeking an offshore base for part or all of their operations. Gibraltar would claim to be one of the preferred jurisdictions in this competition. Gibraltar's advantages are her position in the EU, both geographically and structurally, an established base of professionals, good telecommunications and excellent port facilities. If only the problems with Spain could be finally resolved, Gibraltar could function as a tax-efficient e-commerce gateway to Spain and the rest of the EU beyond for physical goods as well as digital ones. As things are, Gibraltar has to give preference to digital products, including financial services, in which the competition is strongest.

By locating websites in Gibraltar to carry out functions previously based in high-tax jurisdictions such as sales and marketing, treasury management, supply of financial services, and most of all, the supply of digital goods such as music, video, training, software etc, businesses can take advantage of low rates of taxation for increasingly substantial parts of their operation.

A case in point is the betting and gambling sector: In 2000 and 2001 Gibraltar attracted many of the book-makers who fled the UK's high-tax regime in order to set up telephone betting service centres offshore. In May, 2004, Gibraltar showed that its e-commerce prowess wasn't limited to betting, when leading London-based independent trading firm Mac Futures significantly expanded its presence in the jurisdiction of Gibraltar with the opening of a new 100-desk trading facility by Chief Minister Peter Caruana.

In May, 2005, PartyGaming Plc, the Gibraltar-based e-gaming firm which owns the largest multi-player poker room on the internet, announced a healthy financial performance prior to its flotation on the London Stock Exchange. PartyGaming saw unaudited revenues of $602 million in 2004, deriving a profit before share option expenses of $391 million.

Gibraltar is a perennially popular location for international consultants, and independent contractors, and its burgeoning offshore sector accounts for the greatest percentage of expatriate workers, for reasons which we will examine later. However, it is also a popular destination for active retirees, (who are attracted not just by the lifestyle on offer, but by the attractive tax regime).

In this section of the focus on Gibraltar, we will be looking at the requirements for entry and residence, working, living, and buying property on the Rock, and the taxation liabilities for both resident and non-resident expatriates. So without further ado…

Nationals of EU member states have the right to enter, live and work in Gibraltar. Initially a six-month visa is given, and then a 5-year renewable residence permit, provided that they have found suitable employment or have started a business. Work permits cannot be denied to EU citizens.

Other nationals have to apply for residency under the Immigration Control Ordinance and permission is issued by the Governor. Government guidelines indicate that an applicant for residency must be ready and able to purchase a property of sufficient size to accommodate himself and his family, must be in good health, and must have adequate financial resources. The Government looks more favourably on those applicants who purchase luxury property in Gibraltar.

The holder of a residence permit need not live in Gibraltar and is not automatically entitled to social security or citizenship. However, the resident's children may attend local schools and are entitled to the same benefits as other local residents.

If a non-EU national wishes to stay in Gibraltar other than through the property 'doorway', he must usually try to find employment, for which he will receive a work permit only if there are no Gibraltarians able and willing to perform it. Such individuals will be given residence permits for shorter or longer periods depending on the nature of the work for which they have a permit. The government can deny a non-EU national the possibility of buying residential property.

Non-Gibraltarians need work permits, issued under the Control of Employment Ordinance. A work permit cannot be refused to an EU national.

In the June 2007 budget, passport Issue and renewal fees were abolished for persons aged 65 and over.

Unless Qualifying Individual status is applied for (see below), an individual may be liable for taxation on his worldwide income if he resides in Gibraltar for more than 183 days a year.

As from 2008, every taxpayer is able to choose for each tax year between two systems to pay tax, and to choose the one that results in the lower tax payment, either of which can be paid through the PAYE system. The first system is the pre-existing Allowance Based System; the alternative system is a new Gross Income Based system, in which the taxpayer receives no allowances, but pays tax on gross income at the following rates: 20% on the first GBP25,000; 30% on the next GBP75,000; 40% above GBP100,000.

Under the Allowance Based System, the first GBP7,500 of income is free of tax; rates of 10% and 20% apply to the next two tranches of taxable income; a standard rate of 30% applies to income between GBP4,000 and GBP16,000, and a higher rate of 38% applies above that level.

For more detailed information on taxation liability in Cyprus, please visit the Lowtax Jurisdictions Guide.

This regime sets limits on the tax that has to be paid by particular types of individuals. Qualifying (Category Two) Individuals are High Net Worth Individuals; Qualifying (Category 3) and (Category 4) Individuals are expatriate employees of Exempt or Qualifying companies.

Qualifying (Category Two) Individuals must have available for their exclusive use approved residential accommodation in Gibraltar. The Government would also be looking to ensure that the individual has sufficient means to maintain himself and his family. They will therefore be looking for evidence of wealth although it is not necessary for the individual to declare his worldwide wealth or earnings. The Government would also be looking to ensure that the individual has private medical insurance to cover both him and his family whilst residing in Gibraltar. Income over GBP60,000 is not taxed; therefore the maximum tax payable by an HNWI is GBP27,000. There is no capital gains tax in Gibraltar, and an HNWI is also exempt from Estate Duty. The minimum amount of tax payable by an HNWI is GBP18,000.

Qualifying (Category 3 and 4) Individuals (until 2007) were expatriate individuals who possess specialist skills not available in Gibraltar. The company applied on the individual's behalf to the Financial Centre Directory and obtained a certificate which set the tax payable by the individual at GBP15,000, irrespective of their taxable income. Given current rates of tax and allowances in Gibraltar, this meant that all income earned in excess of GBP27,000 (approx) would be tax free.

Category 3 Status was abolished in 2007, and a new category called ‘High Executive Possessing Specialist Skills’ (HEPSS) was established for existing Category Three holders who earn more than GBP100,000 per annum and for new applicants who possess skills not available in Gibraltar and, in the Government’s opinion, are of particular economic value to Gibraltar, who will occupy a high executive or senior management position, and who will earn more than GBP100,000 per annum of income in Gibraltar. Tax would be payable only on the first GBP100,000 per annum of income under the dual choice tax system. New applicants may not have been resident in Gibraltar for any part of the period of three years immediately preceding the application.

Category 4 Status was abolished for new entrants with effect from 1 July 2007. Existing holders could retain the status until the end of their current certificate or 30 June 2009, whichever is the longer. However, minimum tax payable was to increase with effect from 1 July 2007 from GBP5,000 per annum to GBP7,500 per annum.

Existing and prospective residents of Gibraltar should bear in mind that the territory conforms to OECD information exchange guidelines.

In October, 2009, Gibraltar was placed on the OECD’s white list of territories that have substantially implemented the internationally agreed standard, having signed 13 tax information exchange agreements (TIEAs), the latest being with Finland, Greenland and Faroe Islands on October 20.

Territories that were placed on the OECD "gray list" when it was formed on April 2 are required to conclude 12 TIEAs in order to be deemed fully compliant with the internationally agreed standard on transparency and information exchange.

In a statement, the Gibraltar government said that the territory is "well-placed" not only having concluded the required number of agreements, but also that the territory concluded agreements with important countries within the OECD. The government noted that at its most recent meeting, the G20 gave notice that it was not just a matter of signing 12 agreements, but also of who they were signed with, urging territories not to enter into agreements solely with less economically relevant countries in order to quickly fulfill the quota.

“For Gibraltar this is not a ‘numbers game'. We are committed to the underlying principles of the commitments that we gave. Therefore, in addition to these 13 signed agreements, we have already negotiated and initialed several more, which will be signed when the other countries complete their internal constitutional procedures for doing so. Our offer to sign a TIEA with whatever country wants to sign one with us remains open,” the government stated.

The government will shortly be publishing a bill to enact any agreements that are not yet in force. This bill is expected to be law by end-2009. The government plans to post the text of the agreements on its website as they become operative.

So in the final analysis, is Gibraltar a good location for your assets, yourself, your family, your boat, or (e) all of the above? Depends what you are looking for. Gibraltar is not one of the cheapest offshore jurisdictions available, but nor is it one of the most expensive in which to locate an offshore structure, or spend your retirement. There is an efficient and well-maintained infrastructure in place, and the standard of living is high for the most part.

The government usually encourages independent contractors, offshore employees, and those who wish to retire to Gibraltar. Although it has shied away slightly from the 'offshore' image it once had, and has been forced to implement some changes to its legislation in order to satisfy the EU, it is still generally regarded as a safe and secure location in which to do business or reside.

For up-to-date news about the offshore and taxation regime, visit the Gibraltar section of Tax-news.com

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