Taxation in Gibraltar
The following is a general commentary on taxation of Gibraltar funds in Gibraltar. Those considering establishing a fund in Gibraltar should seek full tax advice on the matter.
Gibraltar is unique in that it offers a fund domicile with a competitive tax system which has been approved by both the European Council of Economic and Finance Ministers (ECOFIN) and is compliant with the EU Code of Conduct of business taxation.
Income tax in Gibraltar is levied on a territorial basis, under the “accrued and derived in Gibraltar” principle. In most cases Gibraltar does not levy tax on investment or passive income wherever derived. Gibraltar does not typically tax dividends, bank or bond interest, income from debentures or capital gains. Gibraltar funds typically undertake investment activities which fall outside the Gibraltar tax regime on general principles, either because the income consists of exempt investment income, income from a trade conducted outside Gibraltar, income which accrues and derives outside Gibraltar, or capital gains on the disposal of assets. Therefore no special tax exemption is required in the case of most Gibraltar funds.
A Gibraltar fund may, however, obtain a confirmation from the Gibraltar Commissioner of Income Tax that the fund is not subject to corporate tax on its investment income. Private equity and real estate funds that wish to avail themselves of the Parent Subsidiary Directive (“PSD”), the Interest and Royalties Directive (“IRD”) will typically not request an exemption, instead preferring to be taxed under Gibraltar’s 10% corporate tax rate and thereby demonstrate that they are taxable and able to benefit from these directives. Ultimately, these investment funds are unlikely to be liable for corporate tax as Gibraltar levies tax on a territorial basis on income accruing in Gibraltar, whereas the fund’s investments will ordinarily be located outside the jurisdiction.
Gibraltar is a well-regulated onshore finance centre located within the European Union. Similarly to a number of other international finance centres, Gibraltar does not have bilateral double tax treaties in place with other countries. At this time the Government of Gibraltar is investigating the feasibility of implementing double tax treaties with certain countries. Notwithstanding this, Gibraltar funds can make use of the PSD and IRD from many jurisdictions, including Luxembourg, which is particularly popular. PSD provides for no withholding taxes on dividends payable by a subsidiary in an EU member state to a Gibraltar parent company. IRD provides that there should be no withholding taxes on interest or royalties paid from a group company to a Gibraltar company. This is particularly advantageous in private equity fund structures investing on a pan European basis.
Although within the European Union, Gibraltar is outside the common customs area and the VAT area. In the private equity arena in particular, where an investment adviser is based within an EU member state, the adviser need not charge VAT on its services, and neither is there any reverse charge in place in Gibraltar where the service is received by a Gibraltar domiciled fund. This compares favourably to other EU fund jurisdictions.
Gibraltar is not an island, and many people working in the financial services industry in Gibraltar live in Spain and commute daily across the Spain-Gibraltar border. Gibraltar has a burgeoning investment management community. Although not a tax benefit as such, it is worth noting that an investment manager with a Gibraltar issued MiFID license can passport its services throughout Europe. Where this can be achieved without creating a permanent establishment in the countries where the services are offered, foreign taxes will often be avoided.
Taxation of Fund Managers
A Gibraltar based investment manager providing licensable investment or fund management services is taxable in Gibraltar at the rate of 10%, as such activity is deemed to accrue in, and derive from, Gibraltar. The Income Tax Act makes it clear that activities which give rise to the profits of the business shall be deemed to take place in Gibraltar in the case of a business whose underlying activity that results in the income requires a licence and regulation under Gibraltar law.
Typical deductions from trading income, such as rents, salaries and office expenses are allowable in arriving at taxable profits, in accordance with Gibraltar Generally Accepted Accounting Principles (GAAP). The profits of any branch or permanent establishment of the investment manager are not subject to tax in Gibraltar, to the extent that those activities are undertaken outside Gibraltar.
The overall effective tax rate for investment and fund managers may be further mitigated where the owner or manager receiving a salary can obtain a special tax status in Gibraltar, such as High Executive Possessing Special Skills (“HEPSS”). The HEPSS scheme caps an individual’s personal employment and dividend income tax liability to under £30,000 per annum, provided the individual is an expatriate who possesses specialized skills, is earning over £100,000 per annum and owns or rents an approved residence in Gibraltar.
A self-managed fund, managed by its directors from Gibraltar, would not ordinarily become liable to income tax on trading income otherwise accruing and deriving from outside Gibraltar as a result of licensing under the Experienced Investor Fund regime or any other regime for the licensing of funds.
Where required, tax transparency is available in Gibraltar under certain structures. A Gibraltar limited partnership is confirmed by HM Revenue & Customs as tax transparent for UK tax purposes. There are similar rulings in place for certain other European countries. In addition, a Gibraltar private limited company is not considered a corporation for US tax purposes, and such an entity can therefore “check the box” for US tax transparency.
There are typically no withholding taxes in Gibraltar and Gibraltar does not typically levy income taxes on non-resident directors of Gibraltar companies who are occasionally present in Gibraltar for less than 30 days per annum.
Gibraltar’s Income Tax Act 2010 introduced tax self-assessment for companies and individuals. Companies that have income assessable for tax in Gibraltar are required to make returns of their income and, where there is taxable income, calculate their own tax liability for the relevant accounting period. Two payments on account are required for each calendar year – one on 28 February and one on 30 September. Each payment will equal to 50% of the tax payable for the last relevant accounting period. A balancing payment or refund is then due no later than six months after the accounting period year-end. Companies are required to submit their tax returns within six months following the accounting period end.
Taxation of Investors
There are no withholding taxes in Gibraltar on dividends, capital gains or interest income. An exception to this is in connection to certain interest payments to UK resident individuals under the EU Savings Directive 2003/48/EC, where the payee elects for the withholding option. Consequently, non-Gibraltar resident shareholders in a corporate vehicle will generally not suffer any taxes in Gibraltar. Other interests, such as limited partners or unit holders, similarly will not suffer any Gibraltar taxes on income from a fund which does not accrue and derive income from Gibraltar. The introduction of FATCA may however require the imposition of a withholding tax where information on U.S. investors is not forthcoming.
Gibraltar resident shareholders will not suffer tax on income from a fund which does not accrue and derive income from Gibraltar. In addition, where a fund is marketed to the general public, such as a retail UCITS, there are no taxes payable in Gibraltar on income arising from the fund.