- The UK, Gibraltar and Spain negotiated and ultimately arrived at an in-principle agreement for an International Agreement on Taxation and the Protection of Financial Interests that was finalised in November 2018. This Treaty was signed on 4 March 2019 by the UK as the state responsible for Gibraltar’s external relations under the Gibraltar Constitution.
- The application of the Treaty does not prejudice the position on sovereignty, jurisdiction or control of Gibraltar.
- The Treaty’s purpose is to improve and enhance administrative co-operation in tax matters, to assist in resolving tax residency disputes and to avoid incidences of double taxation between Gibraltar and Spain.
- The Government’s strategy is influenced by the general direction of travel of international tax standards regarding transparency and cooperation. Adherence to these standards prevent double non-taxation and encourage cooperation and exchange of information.
- It also demonstrates Gibraltar’s commitment to maintain measures equivalent with EU law on matters related to tax transparency and good governance following the exit from the EU.
- This is in line with Gibraltar’s international tax compliance strategy and to the approach taken regarding other initiatives and measures from the OECD and G20 summit.
- As part of this overall strategy, the Government acknowledges the important outcomes that can be achieved from the active participation in international forums. It therefore remains fully committed to this.
- In today’s modern tax landscape, membership in international bodies, such as the OECD’s Global Forum on Transparency and Exchange of Information and the Base Erosion Profit Shifting Inclusive Framework (BEPS for short) are more critical than ever.
- Participation in such initiatives ensures that the necessary standards of transparency and good governance are achieved and maintained through continuous monitoring and assessment of members.
- Gibraltar has formed part of the Global Forum since its inception and has been a member of the Inclusive Framework since 5 July 2019. This was a significant achievement for Gibraltar and a major step in the right direction towards cementing our international tax reputation.
- It was also a necessary step since any jurisdiction not participating in such measures faces dire and devastating consequences. Most common of these is the classification of the jurisdiction as a non-cooperative jurisdiction and its inclusion in a blacklist. The adverse effect this has on a jurisdiction’s reputation is to exhaust all its internal resources in remedying this misclassification with little opportunity to both generate inward investment and foster good international business relations.
- This is something Gibraltar is very keen to avoid. Gibraltar has over the years strived for the very opposite. We want to nurture our international business links, we want to attract international trade and we want to reach out and expand out treaty network with prospective partners.
- This is more important than ever in a post Brexit world as we seek to forge new relationships with Non EU countries, who like it or not will be influenced by whatever adverse statements Spain makes to the OECD, EU or wider afield.
- Wider transparency initiatives have also been driven internationally. For example when the UK under the then Prime Minister David Cameron strongly urged its dependent and overseas territories to develop a public register of beneficial ownership; Many jurisdictions resisted these suggestions but Gibraltar committed to them unreservedly. Since then it has become a reality in Gibraltar whereas many other UK dependent and overseas territories have not done anything about this.
- It is important to demonstrate forward-thinking, initiative and bold decision-making in safeguarding jurisdictional reputation. The decision to publicise our beneficial register when our peers were not doing so was one such example. This has in fact paid off significantly.
- Under their Sanctions and Anti-Money Laundering Act, that received royal assent in late 2020, the UK’s Secretary of State is empowered to mandate the imposition of publicly available beneficial ownership register in those British Overseas Territories that have not already done so. This is, thankfully, something we do not need to worry about.
- In order to ensure Gibraltar’s future success, it is critical that the Government, in collaboration with key stakeholders within the finance industry, are able to promote a tax system that is compliant with both OECD standards and internationally recognised rules and principles on State Aid.
- Most importantly, the Government is eager to see Gibraltar removed from any international blacklist. This would have positive and far-reaching benefits.
- Although we remain focussed on what we want to achieve and where we are heading, we must also remember where we have come from.
- Let us remember what our businesses and economy suffered under the incessant regime of constant fiscal and legal attacks from Spain. Their challenge to our tax system on grounds of regional selectivity which has lasted the better part of 25 years, not to mention their continued attempts to jeopardise and collapse our economy. Let us also remember their relentless campaign against our inclusion in the OECD’s global tax project; only to then criticise us for not joining, for labelling our home as a tax haven and for undermining the work and continued efforts of all hard-working Gibraltarians in securing a bright future for Gibraltar.
- These are just some of the bad memories. I, personally, do not care to remember or relive any of these anymore. Nor do I wish my children and future generations to have to relive such events. This Treaty does away with that.
The need for a Treaty
- Our departure from the EU prompted a change in Spain’s historic and relentless approach towards Gibraltar. Despite having maintained this approach for the better part of 30 years, Spain demonstrated a willingness to engage constructively in addressing cross-border tax issues.
- The conclusion of the Treaty marks an important and positive move towards establishing these closer relations and is an inevitable and welcome first step. It is commonplace between neighbouring states with a high volume of cross-border traffic, flows and common interests.
- The Treaty enables both sides to cooperate with each other similarly to the way each does with their other treaty partners around the world. This spirit of co-operation and understanding is necessary given the close economic and social ties between Gibraltar and Spain.
- It is nevertheless important to understand the outcome in the context of the journey made. Spain had serious misconceptions about both Gibraltar’s tax system and its commitment to tax transparency. In addition, it was necessary to unravel many years of prejudice driven primarily by the continuous propagation of myths regarding a lack of adequate standards in relation to international tax compliance and good governance, not to mention the classification of Gibraltar as a tax haven by Spain.
- Spain considers the Gibraltar tax act to be one that facilitates the evasion of taxes in Spain. This is the reason Spain has not only blacklisted Gibraltar, but also embarked on an aggressive policy of seeking to get other countries and international organisations to similarly blacklist or sanction Gibraltar. Whilst this policy has only had limited impact, it has nonetheless created a degree of uncertainty internationally regarding the tax system in Gibraltar and blocked Gibraltar’s progress. The intensity and extent of this uncertainty has ‘ebbed and flowed’ with the level of scrutiny and review that the tax act in Gibraltar has, over many years, been subjected to in the form of a European Union State Aid investigation, comprising numerous court cases and high-level technical reviews.
- In negotiating this Treaty Gibraltar has sought to carefully navigate and manage these expectations providing an opportunity to understand Spain’s concerns and the misconceptions they had about the tax system in Gibraltar. It has allowed these issues to be addressed in the most effective manner possible without eroding its taxing rights.
- It has also permitted Spain to analyse and evaluate its position regarding Gibraltar being conscious of its own domestic tax legislation and reconsider its aggressive stance and destabilisation of our tax system.
- This is an unprecedented change in attitude. Spain no longer wishes to act the “world police” as they see it. It is no longer concerned with the wider picture and is focussing on matters closer to home. It is keen to build a better relationship with Gibraltar, one which benefits us both. Is that not the objective of what most neighbouring countries strive to achieve?
Spain’s aims in negotiating the Treaty
- Spain’s paramount concern was the perceived loss of tax revenue from Spain to Gibraltar. Gibraltar is the lower tax jurisdiction. It has tax rates that are substantially lower than those in Spain and does not impose taxes on capital, wealth or savings income. Complex cross-border structures can therefore be used to exploit advantages and opportunities of double non-taxation. This is compounded further given the relative ease in moving from one jurisdiction to the other.
- This is the mischief that Spain aims to prevent in the Treaty. Spain no longer pursues any wider agenda regarding Gibraltar’s taxation system. It focuses on their immediate and close concerns and the best way in which to address them.
Gibraltar’s aims in negotiating the Treaty
- Gibraltar had no concerns on the loss of tax revenue to Spain.
- The primary concern for Gibraltar was to slay the myths and address the irritants consistently and continually used by Spain to attack its international reputation as a credible financial institution and its record on complying with international obligations in relation to tax matters.
- The result of concluding a tax treaty with the jurisdiction most opposed to Gibraltar’s inclusion in international tax transparency initiatives cannot be underplayed. The international symbolism of negotiating and signing the Treaty cannot be underplayed. It has enabled Gibraltar to finally remove the objection by Spain and become a member of the OECD’s Inclusive Framework. This became a reality on 5 July 2019 and as a member Gibraltar now enjoys participation in a global strategy to tackle tax avoidance and improve the coherence of tax rules to ensure a more transparent environment.
- The position maintained by Gibraltar continues to be clear. Gibraltar will combat aggressive tax planning and will not allow itself to be used to exploit opportunities of not paying tax anywhere - the right person must pay the right tax in the right place.
Tax rules in Gibraltar
- The tax system in Gibraltar is broadly territorial in scope and application. This means it taxes income where this arises (i.e. where the activity takes place) and not much else. In simple terms, residence is not a factor driving taxation in Gibraltar.
- From a taxing perspective the impact of residency in Gibraltar is negligible. The tax residency test for individuals in Gibraltar is based on a minimum presence requirement. This is similar to many other states. These rules require an individual to be present in Gibraltar for either at least 183 days in a tax year or have been present in Gibraltar for more than 300 days in three consecutive tax years. A day of presence is counted if an individual is in Gibraltar for any part of a 24-hour period. This is why the simple act of crossing the border with Spain into Gibraltar can so easily make an individual tax resident in Gibraltar. This test applies in isolation and there are no additional tests based on personal and/or economic relations.
- Gibraltar determines tax residency for entities on the basis of management and control. Unlike many other states, Gibraltar has no additional residency tests considering the place where the company is established (i.e. place of incorporation and/or registered office) and/or where it situates its effective base or centre of operations.
- Despite this, taxation for entities is similarly not driven by residency. It is the territorial principle that broadly applies in determining what tax is paid in Gibraltar.
Tax rules in Spain
- The position in Spain is very different. Spain taxes its residents on their worldwide income, wealth and capital gains. Residence is therefore a vital factor driving taxation.
- Spain’s individual residency tests are based on a day-count or an analysis of social and/or economic relations. An individual is considered resident in Spain if either they have stayed longer than 183 days in Spain over the calendar year, their main base or centre of activities or economic activities, directly or indirectly, is in Spain or their dependent not legally separated spouse and/or underage children are usually resident in Spain.
- There are additional considerations particularly on how the day count in Spain is determined. Occasional absences from Spain are included except when the individual proves tax residence in another country. If the absence from Spain is in a country or territory classified by Spain as a tax haven, the individual may be required to prove their stay in that place for over 183 days within the calendar year.
- The rules for determining residency for entities in Spain are also very different to Gibraltar. Companies that are resident in Spain are subject to tax on their worldwide income.
- A company is resident in Spain when it has been incorporated in accordance with Spanish law, has its registered office is in Spain or has its ‘effective’ head office in Spain (i.e. business activities are managed and controlled in or from Spain).
- Similarly, there are additional considerations for companies established in countries or territories classified by Spain as tax havens. Such companies are deemed tax resident in Spain if the company’s main assets consist, directly or indirectly, of property located or rights fulfilled or exercised in Spain or when the company’s core business activity is carried on in or from Spain.
- These presumptions are rebuttable if the company proves that it is effectively administered and managed in the country or territory in which it is established and that it was incorporated and operates there for valid economic and business reasons.
Interaction of rules and perceived advantage given to Spain
- Spain has a residency-based tax system requiring them to establish residence in order to tax. The tax system in Gibraltar is predominantly source-based, simply taxing the income where this arises (i.e. the location of the activity).
- These noticeable differences have underpinned the framework on which the Treaty is based and are most evident in the allocation of taxing rights to the party with the emphasis on residency-based taxation and therefore the greater need to determine residency. The Treaty does not change that.
- If income is earned in Gibraltar, then it is subject to tax here. An individual resident in Spain would be liable to further tax in Spain on that same income. This is so because Spain will have a domestic tax interest based on that individual’s residency in Spain. The ease and fluidity of moving across the border and the corresponding tax rules allow an individual to actually be tax resident in both Gibraltar and Spain; sometimes even more than once in the same day.
- This is why the default position in the Treaty seeks to establish tax residence only in Spain. It is not purposefully designed to favour or give an advantage to Spain. It merely reflects what the reality on the ground is and the rules contained in any treaty always need to address this.
- This is of little to no consequence to Gibraltar since our territorial tax system ensures income is, and continues to be, captured irrespective of residency.
- The Treaty represents a binding agreement with Spain underpinned on our territorial basis of taxation. It therefore reinforces our current basis of taxation and identifies Spain’s public recognition and acceptance of it; a meaningful achievement when considering that they have so vehemently opposed both Gibraltar having a system that was differentiated from the UK system as well as the concept of territoriality that underpins our tax system..
- Were Gibraltar to change to residency based taxation, the principal articles of the Treaty would need to be renegotiated to remove the emphasis on residency given to Spain since the mismatch between our tax systems would no longer exist.
Differing legal basis
- The legal systems of both Gibraltar and Spain are distinct; Gibraltar is a common law jurisdiction whilst Spain is a civil law jurisdiction.
- The most visible difference in the Treaty relates to the purposive approach commonly associated with civil law jurisdictions, particularly in relation to legal arrangements such as trusts and foundations.
- Under civil jurisdictions these arrangements are not recognised. They are ‘looked-through’ to determine the true purpose, effect, control and ownership behind them. This position is contrary to that under common law, where the protection afforded by the legal arrangement is maintained.
- This is why there is a mismatch between the exchange of information between Gibraltar and Spain. It is not a concession on Gibraltar’s part. It simply reflects the reality that the legal concept of a trust does not exist in Spanish law and it is not recognised by either the Spanish tax authorities or the Spanish courts. Therefore, one cannot exchange what one does not have.
Human rights and asymmetry
- There is a common misconception that the Treaty includes special rules for determining tax residency that are asymmetric and to the advantage of Spain.
- These rules do not change an individual’s ability to change residence. They only impact on the tax treatment following such a change. The rules concerned have the following effect.
- They limit the freedom of Spanish nationals from ever changing their tax residence to Gibraltar as from 4 March 2019.
- Non -Spanish nationals and registered Gibraltarians also retain Spanish tax residency for 4 years immediately after their change in residency from Spain to Gibraltar. This will only apply however if Spanish nationals spend at least one complete tax year in Spain prior to the change in residence and four years in the case of registered Gibraltarians.
- The purpose and aim of these rules is to curb what Spain perceives to be one of the major causes of tax loss as a direct result of changes in residency from Spain to Gibraltar.
- The time required to be spent in Spain before the condition applies allows genuine reasons for a change in residency arising from personal circumstances to be considered whilst also preventing those purely driven by a tax motive seeking to evade the payment of tax..
- These time limits represent a departure from their current tax rules. Presently, changes in residence from Spain to a place classified by them as a tax haven carries with it the retention of Spanish tax residency for 4 years. Although this ‘stickiness’ applies under the Treaty, the conditions under which they apply allow for a narrower application.
- Although this is not a conventional way to address the risk of tax loss it is not uncommon. There are a number of countries and territories that apply similar rules retaining residency.
- Examples include France, United States, Italy and the Nordic countries of Sweden, Finland and Norway.
- French nationals taking their residence to Monaco are taxed in France on personal income tax, wealth tax and other taxes in the same way as residents of France.
- US federal tax is applied to US citizens irrespective of where they reside.
- Under Italian anti-abuse rules, an Italian citizen who changes his residence to a foreign country that is considered as a tax haven through a decree of the Italian Ministry of Finance, are deemed tax resident in Italy. [Tax residence in Italy is retained unless otherwise provided by the individual, even if the individual is no longer registered in the Records of the Italian Resident Population (on 24 February 2014, through an official Ministerial publication, the Republic of San Marino was removed from the list of countries considered by Italy to be tax havens following recognition of efforts in tax transparency).]
- Swedish citizens as well as foreign nationals that have been resident in Sweden for at least 10 years are deemed tax resident in Sweden, until they prove that all important ties with Sweden have been broken. For the first five years the burden of proof is on the taxpayer and then it is reversed and the tax authorities must prove that ties still exist with Sweden.
- Finnish nationals are considered resident in Finland for 3 full calendar years after having left the country, unless they prove they have had no essential connection with Finland.
- A Norwegian tax resident moving from Norway, is continued to be considered tax resident in Norway until the first year they can prove they have not stayed in Norway for a predefined period in the tax year and has not had a dwelling there at their disposal.
- Essentially, whatever Spain does with regard to its nationals or former residents is up to them and the tax treaty does not change that. If Spain wishes to continue to tax those Spanish nationals and former residents that transfer their residence to Gibraltar, this could be achieved anyway by unilaterally amending their domestic tax law.
Model basis for Treaty
- One of the main questions asked is why the Treaty is not entirely based on the OECD Model Tax Convention on Income and on Capital.
- Political sensitivities with Spain limited the use of the OECD Model as a starting point. Nevertheless, the Treaty retains many similarities with an OECD Model including mechanisms for determining single residence for individuals (including a series of tie-breakers and a mutual agreement procedure), various forms of exchange of information and mutual assistance, provisions ensuring the appropriate confidentiality & data safeguards for the exchange of information, the mechanisms for entry into force and the reference and use of many OECD-related terminology.
- The compatibility requirement between tax systems inherent in conventional tax treaty models was also a limiting factor. The definition of the term “resident of a contracting state” within the OECD Model predominantly refers to a residency-based system of taxation and not a source-based one.
- As previously mentioned, there is a fundamental difference between the tax systems in Gibraltar and Spain. The system in Gibraltar is predominantly territorial in scope and applies on income but not on savings and/or capital. Spain’s tax system is residency-based and extends to income, wealth and capital.
- Although the OECD model can be used as a basis for treaties between countries or territories with differing tax systems, specific changes were required to compensate for these differences in the context of the Treaty.
- Gibraltar gains a number of benefits and advantages as a result of having negotiated the Treaty.
- Firstly, the existence of the Treaty makes it totally unsustainable for Spain to continue to accuse Gibraltar of being a tax haven. The agreed level of co-operation and transparency agreed in the Treaty would be at odds with this.
- The impact of Spain’s Parliamentary decree classifying Gibraltar as a tax haven and including it in its blacklist cannot be underplayed. This has had wide-ranging consequences for Gibraltar. It is for this reason that the Treaty is a really positive news. The Treaty will commence the delisting process in the Spanish Parliament and the eventual removal of Gibraltar from their blacklist. This will have a positive impact on our international reputation and a likely favourably reaction from countries that currently also blacklist Gibraltar as a direct result of this classification by Spain.
- It will open up gateways with countries not previously willing to establish business with Gibraltar as a direct result of Spain’s inclusion of Gibraltar in their blacklist.
- It has also facilitated Gibraltar’s admission to the OECD’s Inclusive Framework initiative and to the OECD BEPS Project. This is a global strategy developed to combat tax planning by multinationals shifting profits from higher-tax jurisdictions to lower-tax jurisdictions.
- Previously, Spain actively campaigned to prevent Gibraltar’s inclusion in such forums whilst also publicly condemning Gibraltar as a non-cooperative jurisdiction for not participating in the very same initiatives promoting tax transparency and combatting tax evasion.
- As absurd as this sounds, it is true. Gladly, this is no longer the case. Following the successful conclusion of the Treaty, Gibraltar gained membership of the Inclusive Framework on 5 July 2019. It now participates on an equal footing with all other Inclusive Framework members in this very important area of international tax.
- It is the Government’s view that staying out of these international initiatives is not sustainable over the longer term. Countries that do not meet these global rules and standards attract attention that is less than favourable, impacting on fluidity of trade with international partners.
- Actively pursuing and participating in these forums and keeping abreast of emerging standards and global requirements in the field of international tax continue to enhance Gibraltar’s reputation and assist in establishing it as a robust and reputable international finance centre for the future. This is of utmost importance as we face the challenges that lie ahead following our exit from the European Union and as we rebuild our economy after the damaging impact of the COVID-19 pandemic.
- Another important gain for Gibraltar is the recognition by Spain of a separate and distinct tax system in Gibraltar including our territorial basis of taxation. In doing so, they accept our autonomy and sovereignty in tax matters. This is perhaps most evident in the designation of liaison bodies for the purposes of ensuring the operation of the Treaty. This will lead invariably lead to a more direct and fluid communication.
- Although this has been a long and hard fought battle, it has been worth it. Gibraltar has come a long way from where we first started; a place where Spain’s strategy of challenging and discrediting our tax system at every possible opportunity and in every conceivable forum was a common occurrence.
- For individuals, it brings legal certainty to the eligibility and application of double taxation relief and assists in determining and establishing single tax residency in either Gibraltar or Spain. The rules tighten the criteria to be met requiring a closer examination and therefore a fairer determination of tax residence in Spain.
- Presently, under Spanish tax residency rules, the tax authorities determine the stay in Spain by including occasional or sporadic absences from Spain, unless residency can be proved in another place. There is a very limited legal framework for the actual application or verification of this sporadic absence rule. The manner in which this is applied is based on the facts in relation to the duration and/or the extent of the absence.
- The Treaty defines this more closely. It ensures a fair allocation of the time spent in Spain by identifying absences away from both Gibraltar and Spain and allocating this to the place where most of the remaining time is spent.
- This Gibraltar-Spain centric approach is a safeguard against both the application by Spain of their sporadic absence rule or any other legal measure unilaterally taken domestically that seeks to establish residency for tax purposes in Spain.
- Much criticism has been levied against the residency rules for entities and arrangements that are contained within the Treaty, which ‘pulls’ the tax residence of entities or arrangements to Spain on the basis of a majority of effective management or control being in Spain.
- The Government also negotiated a safeguard to prevent the application of these rules that would unjustly tax an entity or arrangement in Spain because of the personal circumstances of their controlling persons. This safeguard is available to entities and arrangements established in Gibraltar with physical presence and a trading activity here. This allows residency to remain in Gibraltar.
- Finally, the Treaty also recognises Spain’s acceptance of the legal status of the Gibraltarian. This supports our efforts internationally in gaining official recognition for Gibraltarians. The importance of this is significant and the noticeable change in Spain’s position on this is remarkable given their historic and intransigent stance previously..
Article 2.1 (Individuals)
- The Treaty first applies domestic law.
- If, after the application of the respective domestic law in Gibraltar and Spain, an individual is found to be tax resident in both places, a set of tie-breakers then determines the single place of residency.
- This is a sequential process. The tie-breakers will only be applied if the domestic law has failed to determine single residency.
- Three out of the four tie-breaker tests are based on current Spanish legislation. They are designed to provide a greater analysis and focus of the triggers that determine when an individual would be resident only in Spain.
- This is achieved through key principal differences including the treatment of temporary or sporadic absences in the Spanish territory, the scope and extent of the centre of vital interests to encompass dependent ascendants and descendants (not just dependent children) and an increase to the defined threshold determining your centre of economic interest from a simple majority currently in Spanish law to a maximum of two thirds of net assets. Finally presence in Spain is not defined in days presence but rather by reference to overnight stays.
- Therefore, if any of the tie-breakers are met, an individual would be resident only in Spain. If none of the tests are conclusively met, there is a presumption that the individual is tax resident in Spain unless they spend over 183 days in Gibraltar and have a permanent home in Gibraltar. If these latter conditions are met, the individual is tax resident only in Gibraltar.
- No unfair advantage is being given to Spain. As intended, the Treaty does not deliver changes to the domestic law. It merely clarifies the application in an international context to ensure a proper allocation of the right to tax.
- Taxing rights are granted to the party with the greater emphasis on residency-based taxation and therefore the greater need to establish residency in order to tax. Spain has this need given its residency-based tax system requiring its authorities to establish residency in order to apply taxes. The system in Gibraltar is mainly source-based and taxes where the income arises (i.e. location of the activity). Gibraltar does not need to prove residency in order to preserve its taxing rights.
- This is the reason why there is less focus on proving residency in Gibraltar and a greater focus and emphasis the other way round.
- It is important to highlight that Spain has always had, and will continue to have, full autonomy to unilaterally amend their domestic laws however they see fit. They are free to introduce whatever measures domestically in order to curtail what they perceive to be a risk to their exchequer through the shifting of income and profits to lower tax countries.
- This Treaty has afforded them the opportunity to protect their position against these perceived risks in the context of Gibraltar, but has also allowed Gibraltar an opportunity to allay many concerns and misconceptions underpinning these as well as engage in a process under which this understanding prevents the unilateral imposition of domestic measures in Spain.
Article 2.2 (Entities)
- The Treaty also provides residency rules for entities and legal and other arrangements, including any of the following:
- the direct or indirect holding of the majority of assets in Spain; or
- the majority of the accrued income deriving from Spanish sources; or
- the majority of the persons in charge of effective management being tax resident in Spain; or
- the majority of the direct or indirect ownership by tax residents in Spain.
- Current Spanish legislation applies the rules on effective management and control on the principle of the “effective” head office being in Spain and as the location where its business activities are managed and controlled.
- These residency rules have no impact on Gibraltar’s domestic law. Residence for entities for tax purposes in Gibraltar is determined by where their management and control resides (i.e. the place where the Board holds their meetings and the place where strategic decisions and objectives are carried out).
- Our domestic law is mainly territorial in scope and application, taxing income where the income-generating activity takes place. Residency is not a factor driving the taxation of entities in Gibraltar.
- For this reason, the taxing rights in relation to income within the territorial scope is preserved.
- A common question is why then did Gibraltar accept these rules. The answer is simple. As is the case with individuals, these rules enable the allocation of taxing rights to the place with the emphasis on residency-based taxation and the greater need to determine residency in order to apply taxes.
- This is why the default application of these rules seeks to establish residence only in Spain. It is not purposefully designed to give an advantage to Spain, but merely to reflect what the reality truly is. As mentioned above, it has no impact on either the taxing rights or domestic law in Gibraltar.
- The Government has accepted these rules to demonstrate our commitment to full transparency, good tax governance and willingness to combat harmful tax practices in accordance with global trends and best practice recommendations.
- The rules provide simplicity and certainty in addressing Spain’s primary concerns regarding entities; the mismatch of a residency-based system of taxation and a territorial system of taxation with the potential for opportunities to exploit the non-payment of tax in either jurisdiction.
- It is also important to highlight that these rules have not however been agreed to without consideration of Gibraltar-based businesses.
- Gibraltar has ensured that its long-established and genuinely structured businesses can avail themselves of a safeguard under which residence is retained only in Gibraltar. This does not expose them to taxation in Spain if their controlling persons are in fact found resident in Spain.
- This safeguard only applies to the entities and arrangements and not to their controlling persons.
- It is available to all entities or legal or other arrangements that were incorporated or established in Gibraltar before 16 November 2018 (the date on which these rules were agreed in-principle) and would be tax resident in Spain under the Treaty by virtue of the rules regarding effective management or ultimate control.
- This approach also allows prospective new entrants into the region’s market to prospectively plan their tax affairs in a transparent manner.
- Eligibility to the safeguard and therefore shielding from these rules is only given when the entity or arrangement demonstrates that it operates in Gibraltar for valid and economic business reasons and has both a physical and trading presence in Gibraltar.
- The Treaty provides certainty when, where and how an entity or arrangement will be tax resident. New market entrants are given the opportunity of setting up their business here with full visibility on cross-border taxation issues. The message must be clear. Gibraltar does not want your business if that business is to abuse the Spanish system, avoid paying what is owed where it is owed and tarnishing our good reputation.
Double Taxation Relief
- Presently, although Spanish legislation currently allows credit on foreign sourced income this is not always applied consistently.
- The Treaty therefore presents a coherent legal mechanism for relief under which tax is only paid in the place where it is due and no individual or entity suffers double taxation.
Exchange of information
- The Treaty provides for a comprehensive framework of exchange of information, cooperation and assistance in tax matters. None of the envisaged exchanges are not already within the scope of Gibraltar’s international partners and the relevant legal basis and exchange instruments already entered into.
- In addition to further cementing our reputation as a reputable and cooperative jurisdiction for the purposes of information exchange and assistance, the arrangements are reciprocal. This will ensure, that although not within the scope of taxation locally, information on foreign-held assets will no doubt prove a source of valuable intelligence to our own tax authorities.
- There are a lot of concerns that provisions in the Treaty replicate rules for deemed tax havens in current Spanish legislation. This is true and it cannot be denied. The reality is that at the time the Treaty was negotiated, and still today before it has come into force, Gibraltar remains in the Spanish blacklist by Parliamentary decree.
- The Treaty contains special rules for individuals. Spanish nationals that change their residence to a jurisdiction classified by Spain as a tax haven retain residency in Spain for the year in which the change is made and the four subsequent years.
- We have seen and cited examples of this in other jurisdictions and not only in relation to territories involving other jurisdictions deemed to be tax havens but also in jurisdictions with an aggressive regime that seek to tax on nationality irrespective of residence.
- The Treaty’s rules for entities and arrangements regarding the direct or indirect holding of the majority of assets in Spain and the majority of the accrued income deriving from Spanish sources mirrors the position in Spanish legislation. Under both, tax residency is retained in Spain if the entity under consideration is one that is classified as a tax haven by Spain.
- However, in the same way that the rules are recognised, it is also important to acknowledge that where each and every instance that this is observed in the Treaty, there is also a mechanism to refute it. This is in-line with Spanish legislation and the position taken by their authorities when imposing rules in relation to jurisdictions classified by them as tax havens.
- But how is this done? How would you refute these rules? The answer is simple; by clearly demonstrating that there is a taxation nexus to Gibraltar through a physical and/or trading presence and business activity in and from Gibraltar.
- Modern terminology such as base erosion, profit shifting and double non-taxation are commonplace in the modern tax landscape. This is nothing new; it is something that jurisdictions have always sought. The preservation of their tax revenues and the fight against tax crime has always been an ongoing battle but this modern landscape now provides the mechanisms and attitudes to engage constructively through international agreements in order to harmonise exchange of tax information and transparency and coordinate efforts.
- This process has enabled Gibraltar to obtain a unilateral declaration by Spain under which the Parliament undertakes to delist Gibraltar once the Treaty is operational.
- Gibraltar has listened, evaluated and assisted Spain with its concerns. Although we do not share all of their concerns to the same extent and legitimacy, we agree that the Treaty should hedge against any possible tax delinquents seeking to exploit our cross-border scenario in double non-taxation schemes once Gibraltar is delisted.
- This is a balanced trade-off which will no doubt bring economic success and prosperity to Gibraltar in the long-term, much needed as we rebuild our economy after the impact of Brexit and the COVID-19 pandemic, immediately halt Spain’s attack on our economy and ensure that Gibraltar’s tax system is not abused in a manner that causes unnecessary irritation to Spain; something not conducive to our wish to collaborate for better future relations with our neighbour.
- The Treaty articles may need to be amended once Gibraltar is removed from the Spanish blacklist given the mischief that Spain intends to continue to avoid but this may be negotiated as the relationship develops.
- Also important, least us not forget, is the manner in which this Treaty fits into the wider picture as part of a delivered package for the future success and benefit of Gibraltar.
- At a time when we are negotiating our future relationship with the EU and contemplating the removal of the land border with Spain, this Treaty creates a fiscal boundary reinforcing our basis of taxation and our recognition as an independent and autonomous territory.
- In essence we may be heading for a future under which although our land border with Spain may, for the first time in our history, be loosened as we seek to enjoy access to the Schengen area, our fiscal border is stronger than ever clearly demarcating our sovereignty in tax matters more clearly than ever before.
- Deal with the asymmetric political position. Opposition in Spain see it as massive concession by the Spanish Government. Opposition in Gibraltar see it as a massive concession of the Gibraltar Government. Both cannot be right.