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GIBRALTAR

Planning the Tax Structure

Gibraltar has an 'onshore' tax structure quite similar to that of the UK so far as income and corporation tax is concerned, although there are no capital taxes. However, as long as a company does not do business locally (ie have transactions with local residents) it can use the exempt private company form which can be resident or non-resident, pays no tax on its income (other than the yearly registration fee of G£225 if resident or G£200 if non-resident), and applies no withholding tax to payments it makes.

NB: 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 will be capped at 15% of profits. The existing corporate forms which allowed zero taxation, the Exempt and Qualifying companies, will be abolished, although there is no news yet about the possible grandfathering of existing companies. Local companies which currently pay 20% or 35% profits tax will be better off, while 'offshore' companies will be worse off only if they employ staff or occupy premises locally. Many companies, particularly those used to hold Spanish property interests, do neither.

The changes will have to be argued out at the European Court of Justice. The issue will take years to resolve, and meanwhile Brussels officials seem to have agreed that the existing situation (confusing as it is) may be allowed to continue, at least as regards Exempt companies. New Exempt companies may be formed until 2006, and the exempt regime will continue until 2010.

Gibraltar dissolved its qualifying companies tax regime in January, 2005, as negotiations continued in Brussels. In a move that will cost the Gibraltar government an estimated £1.5 million in annual tax revenues, the remaining qualifying companies, of which there are about 80, will switch to the ‘exempt’ companies regime. “Each qualifying company has been dealt with on an individual basis and alternative arrangements made,” said the government.

No stamp duty is payable on any document or transaction relating to an exempt company's shares; however an exempt company does pay, like all companies, 50p capital duty per G£100 of its authorised share capital on incorporation. This is the most commonly used corporate form in Gibraltar, and would be the normal choice for an e-commerce operation which is carrying out transactions around the world with its customers from servers based in Gibraltar. An exempt company must obtain a certificate of tax exemption, which is valid for 25 years, from the Financial and Development Secretary.

Branches of overseas incorporated companies, which have to be registered with the Registrar of Companies, and pay an annual registration fee of G£300, can also be exempt and benefit from the same tax exemptions as an exempt company. Branches also must obtain a certificate of tax exemption from the Financial and Development Secretary.

Gibraltar, as a part of the EU, applies the Parent/Subsidiary Directive, so that a Gibraltar company with a 25% EU parent (or subsidiary) benefits from a preferential tax regime as regards dividends. The use of a Gibraltar 1992 Company together with the operation of the Parent/Subsidiary Directive allows dividends from an EU subsidiary to be remitted with minimal taxation in Gibraltar to a non-EU parent (NB such schemes may become ineffective as a result of the EU's 'harmful tax practices' initiative under the Code of Conduct Committee).

There is a quasi-double tax treaty with the UK, but otherwise Gibraltar has no tax treaties, meaning that dividends or other types of income paid from Gibraltar to high-tax countries are going to be taxed in the hands of the recipient, depending on the local regime, even though they may have suffered tax in Gibraltar (not a problem for exempt companies, of course). Many high-tax countries have 'Controlled Foreign Corporation' legislation, meaning that undistributed profits in a Gibraltar (low-tax) subsidiary will be deemed to be taxable income in the high-tax residence country of a controlling owner (individual or company). The exact arrangements vary widely.

It follows that the owner of a business in a high-tax country who wants to transfer part or all of the business to a low-tax area such as Gibraltar must follow one of the following routes or some more-or-less complicated variation or combination of them (it must be understood that the right solution will depend completely on the circumstances of age, residence, country etc - these are just illustrative possibilities):

  • Set up a new business in Gibraltar with ownership which falls outside the CFC rules, eg don't hold more than 40% from a high-tax country, and put remainder of shares in trust for children or in the hands of an offshore relative;
  • Create a joint venture with other onshore companies or owners whereby ownership is sufficiently distributed to escape CFC rules;
  • Owner (individual or company) move offshore (not necessarily Gibraltar), move business to Gibraltar and outsource high-tax area distribution (if physical);
  • Transfer existing business into trust or other offshore ownership for inheritance tax purposes; set up new offshore business to handle expanded range of products or markets.

NB: Any transfer of all or part of a business away from a high-tax area is likely to trigger a disposal for capital gains, gift or transfer tax purposes - great care is needed to avoid this happening. Companies may be in a better situation than individuals to mitigate the effects of tax on a transfer; equally, companies with international subsidiaries may be able to make use of 'mixer' holding companies, and thus may not be so much affected by the CFC rules.

In fact there are numerous possibilities for arriving at an effective structure; it is normally possible to improve the tax performance of a business substantially by moving part or all of it offshore - but expert professional guidance is essential, and the suggestions above are no more than indications of the sort of thing that may be effective in some circumstances.

What to Locate in Gibraltar

To date, e-commerce companies have tended to focus on marketing and selling as the most likely business functions to locate offshore, but there is no reason why procurement, administration, payroll and other corporate functions should not be based offshore.

Since physical distribution can be outsourced, and in some countries doesn't even amount to a taxable presence, the use of offshore is by no means limited to digitally-downloadable products. Still, there is no doubt that the greatest cost and tax savings are available to those companies whose products can be delivered electronically, as in the following list:

Retail businesses dealing in intangibles or intellectual property, such as software or music
Electronic publishing enterprises
Online reservations
Telecommunications services
Language translation services
Education and Internet-based training
Online gift certificates

Online brokerages and other financial services, including insurance
Legal services
Software and other technical support
Research and online information services
Internet Service Providers (ISPs)
Metamediaries and access portals
Corporate services

Data warehouse centres for processing and storing data
Database management services
Certification and verification services for business and consumer documents
Hubs for secure transactions and communications
Supply chain management centres
Communications and billing hubs for fibre optic and satellite systems
Network monitoring facilities and services

In the case of Gibraltar, its physical proximity to EU markets, and its excellent port facilities mean that it can also be used as a trans-shipment or physical distribution centre for many types of product. Gibraltar's attractions in this respect would be considerably enhanced if the problems with Spain were to be resolved. Bottlenecks at the border and Spanish obstructionism create unnecessary difficulties at present.

Indeed, so far Gibraltar has proven attractive mainly to betting and gaming companies and to financial trading operations.

In May 1999, Victor Chandler sent shock waves through the betting industry by becoming the first big-name bookie to open an offshore service for UK clients, replacing 9% UK taxes with a 3% service charge.

It did not take long for others to join the offshore revolution and Chandler's arch-rivals Ladbroke and Coral soon established substantial operations in the territory.

Offshore Options for E-Businesspeople

The object of setting up an e-commerce business, or part of one, in an offshore jurisdiction, is evidently to make money, and if the tax structure is correct, profits will accumulate in a local bank from which they can be freely invested according to an individual's preferences, either by being ploughed back into expansion of the business, or into income- or capital-generating investments.

There are as many different offshore investment situations as there are offshore investors, and anyone considering making offshore investments must absolutely take appropriate professional advice. But it can be useful to have a first idea of what kind of investment, and which offshore jurisdictions, might be suitable before approaching professionals.

For this reason, lowtax.net has opened a companion web-site called www.investorsoffshore.com, which explores the world of offshore investment from the perspective of an individual with say more than $100,000 to invest. The site has sections on the history of alternative investment and descriptions of the main types of investment, along with hints on how and where to invest.

Recognising that investment strategies are heavily dependent on a person's country of residence, life-style and future plans, InvestorsOffshore DIY Guide allows an individual to specify the broad outlines of his or her offshore investment profile, and receive in return some suggestions as to the most suitable investment route to be further explored with professional guidance.