Investors Offshore Special Reports: Gibraltar

by the Investors Offshore editorial team, December, 2011, 02 December, 2011

Gibraltar is a small peninsula located on the southern coast of Spain. It covers a total area of 6.5 sq km and its coastline stretches for 12 km 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, 2011, the population was estimated at around 29,000. 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; elections are due to be held on December 8, 2011. 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 retained power following the previous elections in 2007.

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.

Gibraltar-Spanish Relations

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 MacShane. "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 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, 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.

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 Moratinos, then UK Foreign Secretary David Miliband, and Caruana, held the third Ministerial Meeting of the Forum of Dialogue in Gibraltar on July 21, 2009, under the terms of the Joint Communiqu? of December 16, 2004.

As foreshadowed in London in July 2008, 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 communiqu? 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 communiqu?, 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 communiqu? concluded.

Since then the relationship has seemed calm. However, the sovereignty dispute reared its head again in July 2011 when the British government confirmed that London will challenge the European Commission over a ruling in favour of Spain in order to uphold the UK's position over the waters around Gibraltar. Spanish territorial claims are said to have been given legal credibility under the guise of environmental protection.

The most recent events relate to the February 2009 adoption by the European Commission of a proposal by the Spanish government to designate, under the Habitats Directive, a Site of Community Importance (SCI), named Estrecho Oriental.

The Spanish SCI overlaps almost the entire area of British Gibraltar Territorial Waters and entirely overlaps an existing adopted UK SCI, which is managed by the government of Gibraltar.

The UK and Gibraltar, have sought to reverse the adoption of the Spanish site, first through diplomatic action with the European Commission and Spanish government, and then through legal action.

The original legal case was launched by the UK in the European General Court (EGC) on December 22, 2009. This challenged the European Commission?s listing of this site as a Spanish Site of Community Importance.

Commenting on the proceeding, UK Foreign Secretary William Hague said: "The UK government is clear that only the UK can submit sites covering BGTW. Spain cannot enforce the management or monitoring of the specific area in question. There is therefore a risk that, given its lack of access to this site, Spain will make decisions without accurate scientific information which could have detrimental environmental or economic impact on Gibraltar and BGTW."

Hague added: "The government has a clear responsibility to uphold the UK?s position over the waters around Gibraltar. I want to reassure the people of Gibraltar that we will defend their interests on this matter."

Since 2009 there have, however, been signs of a rapprochement between Gibraltar and Spain, and in May, 2010, Peter Caruana underlined the territory?s willingness to enter into a Tax Information Exchange Agreement (TIEA) with Spain as soon as possible.

The announcement followed the conclusion of year-long negotiations on a trilateral agreement with Madrid, mediated by the UK. While it is thought that small textual alterations are still required to the TIEA, Caruana stated that "the text has been agreed, and as far as we are concerned it could be signed tomorrow. We don?t want to be seen as a threat to Spain?s public treasury."

The negotiations have, however, dragged on into 2011, and in May Caruana reported that talks with Spain on the tax agreement were "very advanced".

Speaking on the TV3 television network broadcast in Spain, Caruana said that the TIEA "is one of the packages we are negotiating currently; the talks are going well; and the texts are very advanced?.

Gibraltar has already concluded a total of 20 TIEAs, classifying it as a territory that has substantially implemented the internationally agreed standard in transparency and information exchange.

While the Spanish authorities have said that the agreement will facilitate efforts towards reducing tax evasion, the TIEA is not expected to deter companies from registering in Gibraltar. Indeed, Gibraltar?s new 10% corporate tax regime, which came into force at the end of 2010 (see below), compares very favourably with Spain's 30% corporate tax rate.

Gibraltar And The European Union

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 Chief Minister 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 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, Caruana 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."

This wasn't the end of the ongoing legal saga over Gibraltar's tax regime however, and in November 2011, the European Commission appeared to take great satisfaction from a decision by the European Court of Justice dismissing a previous General Court ruling, which had annulled a 2004 Commission decision finding that a proposed Gibraltar corporate tax reform amounted to incompatible aid in favour of offshore companies (so-called 'material selectivity').

"This landmark ruling confirms that fiscal regimes engineered to give certain companies, in this case former offshore companies, an advantage, constitutes state aid to the beneficiaries which artificially and harmfully distorts competition in Europe's single market," the Commission stated following the ruling on November 15.

While the ruling may have served to reinforce the EU's argument that offshore tax regimes reduce transparency, distort competition and are generally a bad thing, it was largely irrelevant in the case of Gibraltar because the material selectivity issue had been dealt with by the abandonment of the payroll tax scheme in favour of a 10% across-the-board corporate tax, which is now firmly in place.

Furthermore, according to the Gibraltar government, the ECJ's decision also effectively backed up previous European court rulings that the jurisdiction is fiscally autonomous from the UK and therefore allowed to set its own tax rates.

"The Government is advised and believes that this ruling is quite sufficient and satisfactory for Gibraltar?s purpose as it leaves intact our taxation powers," the government stated after the ruling. "Accordingly, the position on regional selectivity remains as it stood before to-day?s ruling, namely, 
the favourable ruling of the General Court (against which the Commission did not appeal) and the Advocate General?s favourable opinion in this appeal hearing."

"The attempt by Spain (only) to use this appeal hearing to obtain a ruling from the Court that Gibraltar does not have the right to have its own tax system and rates has thus failed," the statement added.

On this ruling, Chief Minister, Peter Caruana commented: ?The General Court?s favourable ruling of December 2008, and the opinion of the Advocate General to the ECJ of April 2011 are the only judicial pronouncements on the question of regional selectivity and Gibraltar, and both robustly confirmed in our favour that the principle of regional selectivity does not apply to disentitle us from having a different and more favourable tax regime than the UK, of which we are not a region. This is the crucial issue for Gibraltar.?

Gibraltar As An E-Commerce Hub

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.

The Gibraltar Government elected early in 2000 was quick to make its intentions clear as regards e-commerce, announcing that: ?The Government of Gibraltar believes there are significant opportunities for e-commerce businesses operating from the Rock. The Internet allows access to customers located in every corner of the globe and we should be well placed to serve this international clientele.?

The Electronic Commerce Ordinance was passed on March 5, 2001 by the Gibraltar parliament, the House of Assembly, and was viewed as an important step in Gibraltar's development as an e-commerce hub to rival its nearest competitors, such as Guernsey, Malta and the Isle of Man.

The legislation facilitated the use of electronic means for transmitting and storing information and afforded legal recognition to transactions undertaken electronically. It also provided a framework for the accreditation of electronic signatures, and determines the activities and liability of service providers.

In addition to a sound legislative base, 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.

The gradually worsening tax climate in the UK and increasing international competition drove many betting and gaming operators away between 2006 and 2011, with quite a few of them migrating to Gibraltar. In August, 2009, Ladbrokes announced that it would follow suit with William Hill and relocate to Gibraltar by the end of the year, in order to maintain international competitiveness.

Previously, Ladbrokes? sportsbook operations were based in London and incurred 15% Gross Profits Tax and 17.5% VAT on input costs (since increased to 20%), as well as corporation tax. British-based bookmakers must also pay a Horserace Betting Levy of 10% of profits on British horseracing.

Christopher Bell, Chief Executive Officer of Ladbrokes, commented: "Our award winning sportsbook is the biggest in the UK market but faces aggressive competition from offshore operators who hold a very significant cost advantage by operating from low tax jurisdictions. Operating from the UK has become unsustainable and we will relocate by the year end."

In 2011, Betfair announced that it was to cease operations under a British gaming licence with effect from March 9 and would join rivals Ladbrokes and William Hill in Gibraltar, where its licence will henceforth be located. In a conference call held on March 8, chief executive David Yu said that the move would have a positive impact on the business, largely effected by gross profits tax savings.

Gibraltar is also now host to the world?s largest listed online gaming business when, in 2011, industry giants PartyGaming and bwin received shareholder approval to create a Societas Europaea (European joint stock company) incorporated in the jurisdiction.

It remains to be seen, however, how proposed changes to the UK's remote gambling tax and licensing regime will affect e-gaming firms and the remote operations of traditional bookies.

Under the proposals, announced on July 14, 2011, the UK Gambling Act would be amended so that remote gambling is regulated on a point of consumption basis, and all operators, whether from the UK or abroad, will be required to hold a Gambling Commission licence to enable them to transact with British consumers. Importantly, the tax regime for remote gambling is also being reviewed, with the intention of taxing operators on the basis of customer location.

Changes to the licensing regime are also being looked at. Currently any gambling operator who wants to offer their services in Britain must be licensed or regulated in either an European Economic Area (EEA) state or one of the states approved by the government on the ?White List? (which includes Gibraltar, under the EU umberella). However, the government says that the current system for regulating remote gambling "doesn?t work".

"Overseas operators get an unfair advantage over UK-based companies, and British consumers who gamble online may have little or no protection depending on where the operator they deal with happens to be based," said Minister for Tourism and Heritage John Penrose. "So our new proposals are an important step to help address concerns about problem gambling and to plug a regulatory gap, ensuring a much more consistent and higher level of protection for those people in the UK who gamble online."

UK bookmakers have for years been advocating a change to the UK regime, arguing that the current setup disadvantages domestic operators over their offshore counterparts.


The banking sector is well established in Gibraltar in both the offshore and local market, although there has been a steady fall in the number of banks located in the jurisdiction, from 26 banks in Gibraltar in 1996, to 18 banks in early 2011.

Most of the banks established in Gibraltar are branches of major UK, European or US banks. Much of the banking activity in Gibraltar is directed to asset management for high-net-worth individuals, not least because Gibraltar has tried hard to attract such people with special tax regimes.

Financial services in Gibraltar are regulated by the Financial Services Commission. The Commission introduced important changes to the way it supervises locally incorporated banks and non-EEA branches in 2002.

Within this time the FSC had been rolling out a risk based approach to supervision, where the supervisory team evaluates an institution in terms of the risks posed to an institution in the way it does business or the type of business it is in. This new approach to supervision aims to focus supervisory resources on the areas deemed to be high risk for an institution in order to ensure that the right controls and procedures are in place to mitigate the risks or where corrective action is required by an institution.

The Banking Ordinance 1992 (as amended) repealed the previous distinction between 'A' onshore and 'B' offshore licences, and introduced a single banking licence. Thus Gibraltar licensed banks can in theory take advantage of 'passporting' opportunities and branch out across the EU and EEA without the need for further authorisation (except for notification).

A deposit protection policy has been brought into effect by the Gibraltar Deposit Guarantee Board in line with EU directives in this area, and in October 2008, as the global financial crisis escalated, the FSC sought to draw the attention of savers to the scheme.

The FSC argued that whilst the Rock is well placed to withstand most of the banking crisis striking Europe and the United States, savers should nevertheless be made aware of these deposit protection arrangements.

"With the present financial situation being so prominent in world news events, it is normal for depositors to show a level of concern about the security of their deposits," the FSC said in a statement at the time.

The deposit protection scheme was extended from December 31, 2010, so that any claimant with a qualifying deposit will be entitled to the lesser amount of 100% of the total of all qualifying deposits with the failed bank (including all branches); or EUR100,000 (or the sterling equivalent). Previously to this, the scheme covered 90% of a bank's total liability to a depositor, subject to a maximum payment to any one individual of GBP18,000 (or EUR20,000, if greater).

Like other European 'offshore' jurisdictions, Gibraltar has had to come to terms with the EU's Savings Tax Directive, and has opted for a withholding tax on bank interest payments to nationals of EU Member States. In this way, Gibraltar has preserved banking secrecy.

The jurisdiction had come under fire from the Channel Islands, as its legal status in relation to the UK and European Union meant that the Directive did not apply to it in quite the same way.

However, under an agreement between the two governments, Gibraltar and the UK exchange information about the returns on savings under the Directive, or, in Gibraltar's case only, if the savers so choose, impose a withholding tax on returns on savings of UK residents with accounts there.

The rate was set at 15% from April 1 2006 to June 30 2008, following which it rose to 20% for the next three years, and to 35% from July, 2011.

Gibraltar is thought to be one of the safer jurisdictions as far as money laundering risks are concerned. As part of the European Union, Gibraltar is required to implement all relevant EU directives, including those relating to anti-money laundering.

Gibraltar was also one of the first jurisdictions to introduce and implement money laundering legislation that covered all crimes.

Investment Fund Management

There is a lively investment management sector in Gibraltar, with around 17 licensed portfolio management firms. Many of the banks in Gibraltar also offer investment management services, and there are also independent stockbrokers.

At the end of March 2011, funds under management in Gibraltar totalled GB9.2bn, of which GBP7bn was with banks, and the remainder with investment firms.

The Financial Services Commission is responsible for the regulation of investment business in Gibraltar.

Investment funds in Gibraltar are usually formed under a trust deed either as unit trusts or mutual funds, or under the Companies Ordinance as private or public companies. A public investment company (PIC) must have a minimum paid-up capital of GIP50,000 and if it is not listed on a recognised exchange its head office must be in Gibraltar.

In July, 2003, the UK gave its approval for passporting rights designed to allow local investment firms in Gibraltar to offer services to individuals in other EU member states. This was the third passporting 'badge' that the jurisdiction had received following banking and insurance passports and meant that firms regulated by a recognised competent authority such as the FSA did not have to seek regulatory approval from regulators in other member states.

However, the passport did not permit investment firms from the Rock to offer services in the UK as this was subject to the completion of a separate agreement between Gibraltar and Britain concluded in December 2005, which enabled investment services firms established in Gibraltar to passport (that is to market and sell) their products and services into the UK market.

In 2005, Gibraltar introduced Experienced Investor Funds under the Financial Services (Experienced Investor Funds) Regulations, 2005. These are funds designed for professional, high net worth or experienced investors. This legislation also provides for the licensing of Non-UCITS Retail Funds and UCITS Funds.

Experienced Investor Funds are lightly-regulated funds designed for professional, high net worth or experienced investors. Investors in these funds must have a net worth in excess of EUR1m or invest a minimum of EUR100,000. They can normally be set up in a matter of days and must only notify the Financial Services commission within 14 days of establishment in order to trade.

Non-UCITS Retail Funds are licensed by the FSC and are subject to more regulation and certain restrictions on the type of investment activity they may undertake. A number of documents must be submitted to the FSC, such as the fund's prospectus, before authorisation is given, and fund directors and managers are subject to higher levels of scrutiny than an EIF.

UCITS funds are generally aimed at retail investors and are allowed to 'passport' their services in the EU the European directives on Undertakings in Collective Investment in Transferable Securities. However, UCITS funds must comply with the Financial Services Ordinance (Collective Investment Schemes) Regulations, 1991, which limits how much a fund may invest in any one issuer to 10%.

At the end of 2010, there were 164 EIFs registered in Gibraltar, with total assets of GBP1.65bn. In addition, there were 31 recognised funds established outside Gibraltar, of which 19 were UCITS-recognised funds and 12 were recognised foreign schemes.

Trust Management

Trust management has been a traditional business for Gibraltar, for more than fifty years. Originally most trust business emanated from rich UK individuals and was tax-related, but asset protection trusts have become important in recent years, with a much more diverse clientele.

Successive tightenings of UK anti-avoidance legislation have reduced the possibilities for UK citizens, but trust work continues to be significant; many Collective Investment Funds are of course based on Trusts.

Gibraltar has a well-developed legal and financial infrastructure for trust management. With a large established base of trusts, and a growing reliance on corporate work, the volume of trust litigation is becoming significant.

Trustees, if they are not already members of the accounting or legal professions, must be licensed by the FSC, which applies a number of criteria to determining whether a person or a company is 'fit and proper' to have a license.

The FSC's Fiduciary Services Division is responsible for the supervision of approximately 70 groups, all of which are subject to risk assessments.

The basic law of trusts is contained in the Gibraltar Trustee Ordinance, which is virtually a copy of English trust legislation. Gibraltarian legislation affecting trusts also includes the Perpetuities and Accumulations Ordinance 1986, the Trustee Investments Ordinance, the Bankruptcy Ordinance and the Trusts (Recognition) Ordinance which implemented the Hague Convention. Appeal is to the Privy Council.

There are no provisions for the exclusion of foreign inheritance laws or for the non-recognition of foreign judgements.

As in the UK, the essential requirements of a trust in Gibraltar are that it is created orally or in writing and that a settlor conveys legal title to real property (land) or personal property (property other than land) into the name of one or more trustees to be administered in accordance with the wishes of the settlor for the benefit of one or more beneficiaries.

Trust documents are in English, and there are no requirements for registration except that Asset Protection Trusts must be registered with the Registrar of Dispositions. There is no stamp duty. The normal perpetuity period of a Gibraltar trust is 100 years. There are no restrictions on the accumulation of income during the perpetuity period.

Corporate Tax

From January 1, 2011, Gibraltar has set a flat 10% tax rate on resident and non-resident companies under the new Income Tax Act. However, utility companies and companies enjoying a dominant market position pay a higher rate of 20%. These include electricity, fuel, telephone service and water providers.

Interest is not chargeable to tax under the Income Tax Act 2010, unless it is in the course of licensed money lending activities or deposit taking activities as defined in the Financial Services (Banking) Act.

Dividends paid by a company which is ordinarily resident in Gibraltar are liable to tax in Gibraltar when paid to a shareholder who is an individual ordinarily resident in Gibraltar. A tax credit at the rate of tax paid by the company on the profits out of which the dividend is being paid is available to be credited against any tax that may be charged on that income.

The Income Tax Act 2010 introduces the concept of self assessment and companies are now required to make returns of their assessable income and calculate their own tax liability for any tax year.

A company which has assessable income chargeable to tax under the Act for an accounting period must make a full and complete return of its income and its liability to tax no later than six months after the end of the company?s accounting period. Additionally, every company that declares a dividend in favour of a person ordinarily resident in Gibraltar or another company incorporated in Gibraltar must submit a dividend return within one month of the dividend declaration.

If a company has a turnover of less than GBP500,000 in an accounting period which is not less than 12 months it is not required to submit audited accounts. However all unaudited accounts must be accompanied by an independent accountant?s report to the effect that the accounts have been drawn up in accordance with the Act. All other companies must submit audited accounts within six months from the end of the company?s accounting period.

A company must make a payment on account of its future liabilities on or before 28 February and 31 August in each calendar year. Each payment on account is in two equal installments of 50% of the tax payable for the last accounting period. If a company believes that the payments on account for an accounting period will exceed the liability for that accounting period, the company can apply to the Commissioner to have the payments on account reduced.

Personal Taxation

For taxation purposes, an individual is either resident or non-resident, and nationality is not a factor in determining tax status. An individual is 'ordinarily resident' if he or she is present in Gibraltar for a period of at least 183 days in aggregate in any one tax year, or is present in Gibraltar in excess of 300 hundred days in three consecutive years. Non-resident means any person other than a person ordinarily resident.

Several key changes to Gibraltar's personal tax regime were introduced by Chief Minister Caruana in his June 2007 Budget:

Acknowledging Gibraltar's relatively high headline rates of income tax, Caruana announced a dual income tax system and changes to the high-net-worth individual (HNWI) scheme (see below) designed to make the tax system more attractive to expat workers employed in the jurisdiction's finance industry.

"Our tax system has very high ?headline? rates of taxation, but these are reduced to lower ?effective? rates by a generous system of tax allowances, the main ones of which are mortgage interest relief, life insurance premium relief, child allowances etc. This is all very well, but taxpayers who cannot benefit from these allowances because they are single, have no mortgage, no children or no life insurance are left to pay the very high ?headline? rates" Caruana told parliament in his budget speech.

"This is harsh on affected local residents, as well as being a disincentive for location in Gibraltar for companies that need to recruit specialist skills from abroad," he observed.

To remedy this, Caruana announced that from 1 July 2007, every taxpayer would be 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 existing Allowance Based System, under which the tax is charged following the deduction of personal and other allowances from gross income at the current tax rates: the first GIP4,000 of taxable income at 17%; the next GIP12,000 of taxable income at 30%; and the remainder of taxable income at 40%.

Several allowances and deductions are given under Gibraltar tax law, including a GIP2,812 personal allowance, a GIP2,632 spouse allowance, dependent relative allowances up to GIP190, a home purchase allowance of GIP11,500, child allowances up to GBP1,105, a disabled individual allowance of GBP2,274, a single parent allowance of GBP2,632, a nursery school allowance of GIP1,023 and a medical insurance allowance of GIP1,120.

There are also deductions for life insurance contributions and mortgage interest payments, and there is a special deduction for senior citizens.

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:

Individuals with gross assessable income not exceeding GIP25,000:

Individuals with gross assessable income exceeding GIP25,000:

There is no capital gains tax in Gibraltar and estate duty was abolished with effect from April 1, 1997.

High-Net-Worth Schemes

Given the importance of the offshore sector to Gibraltar's economy, but with its very limited local labour pool, the government has traditionally offered tax schemes to attract highly-qualified expat workers and high-net-worth individuals to fill senior management roles or invest in the jurisdiction. The government currently offers two such schemes, outlined below:

Qualifying (Category Two) Individuals are liable to income tax on the first GIP80,000 of assessable income only. However, the minimum amount of tax payable by an HNWI in any one year of assessment under this scheme is GIP22,000. Applicants 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. Additionally, an applicant must not have been resident in Gibraltar in the previous five years.

A new category called ?High Executive Possessing Specialist Skills? (HEPSS) was established for existing Category Three (since abolished) holders who earn more than GBP120,000 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 GBP120,000 per annum of income in Gibraltar. Under the HAPSS scheme, tax is payable only on the first GIP120,000 of assessable income under the Gross Income Based System. HEPSS applicants must also satisfy residential accommodation and residency conditions.

Qualifying Categories 3 and 4 were open to expatriate individuals of Exempt of Qualifying Companies and set the tax payable by the individual at GBP15,000, irrespective of their taxable income, but were abolished in 2007.

Obtaining Permission To Live And Work In Gibraltar

Nationals of EU member states have the right to enter, live and work in Gibraltar. Persons who are not entitled to work in Gibraltar (e.g. non-European Economic Area nationals) will require the prospective employer to request the issue of a work permit before commencement of employment.

Various conditions will need to be met by the employer before approval may be granted for the issue of a work permit. A work permit is issued for a period not exceeding 12 months.

Employers who breach work permit rules by not obtaining a valid permit for an employee who needs one face a fixed fine of GIP1,500.

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

Like so many other offshore financial centres, Gibraltar has had to work hard to shake off the shady 'tax haven' image of offshore so popular with onshore governments, the mainstream press and influential multilateral bodies like the OECD. However, ongoing tensions with Spain, and its somewhat confusing status as a British offshore territory within the European Union have given it some unique problems of its own. The fact that the territory seems to have shaken off all that Spain and the European Union could throw at it in the ongoing row over taxation looks to be standing Gibraltar in good stead, however, and the offshore sector does not seem to have suffered lasting damage as a result. Indeed, Gibraltar has carved out its own niche as a major e-gaming and e-gambling company domicile, and other sectors such as banking, investment management and fiduciary services continue to thrive.



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