The ‘Rock’

Tuesday, 01 December 2009
An explanation of trusts, taxation and residency in Gibraltar.

Gibraltar, ‘the Rock’, is a peninsula of approximately seven square kilometres at the southernmost tip of Spain. It is approximately five kilometres long and 1.2 kilometres wide.

The official language is English, but most of the 30,000 inhabitants are bilingual in English and Spanish. The official currency is the Gibraltar pound, although the sterling pound circulates freely at par with the Gibraltar pound. Euros are also widely accepted in Gibraltar.

Gibraltar enjoys regular daily airline flights with the UK. An agreement on the joint use of the Gibraltar Airport has been accorded with Spain, which allows weekly return flights to Madrid, and which will lead to an increase of destinations from Gibraltar. Gibraltar is also within easy reach of the increasingly utilised international airport of Malaga, which is a one-hour drive away.

Gibraltar trusts

The legal system of Gibraltar is based on the common law and statute law of England and therefore embodies the advantages and security of English company and trust law. Trust legislation in Gibraltar is generally based on the trust law of the United Kingdom; thus Gibraltar recognises and gives full effect to the concept of the trust. The Trustee Act of Gibraltar is the main governing Act; it is based on the Trustee Act 1893 of the United Kingdom, with amendments being made from time to time.

Although not required to do so under any EU Directive, Gibraltar has, since 1989, regulated company managers and professional trustees, giving a further layer of comfort to those establishing companies and trusts in Gibraltar.

The standard of supervision implemented by the Financial Services Commission in Gibraltar matches UK standards. The Commission includes supervisors of various licensed activities including insurance, investment services and banking. Intermediaries such as insurance brokers and advisors are licensed, as well as company managers and professional trustees.

Taxation in Gibraltar

Gibraltar’s Income Tax Act governs the taxation of individuals and companies. In broad terms it provides for the taxation of income accruing in, derived from, or received in Gibraltar. It taxes gains or profits from any trade, profession or employment including benefits in kind as well as dividends, interest, pensions, annuities, rents and royalties. Income from qualifying investments (mainly interest from bank and building society deposits and income from quoted investments) is tax free.

There are, however, substantial exemptions for non-residents in the case of a non-resident settling a trust in Gibraltar, or establishing a non-resident company. Additionally, there are specific rules for high-net-worth individuals wishing to take up residence in Gibraltar – residency in Gibraltar is attractive for high-net-worth individuals because there is no capital gains tax, nor is there estate duty or inheritance tax (see below for further information relating to Category 2 Individuals).

Investment income (which includes bank deposits, dividends from quoted shares and the gains by way of income or otherwise arising out of collective investment schemes) is not subject to individual or corporate taxation in Gibraltar. This applies irrespective of whether the investment made is outside or within Gibraltar or whether it is remitted to Gibraltar or not.

Withholding taxes on dividend payments issued by a Gibraltar company have been abolished; the main distinction being that dividends received by a Gibraltar resident remain subject to income tax on receipt, whilst a non-resident shareholder of such Gibraltar company incurs no liability.

A non-Gibraltar situs loan will not give rise to withholding obligations.

Gibraltar has no tax on lifetime gifts. It has no capital gains, wealth, gift or inheritance taxes. Estate duties were abolished in Gibraltar on 1 April 1997. Any inter vivos gift will therefore be free of all taxation other than stamp duty on immovable property situated in Gibraltar.

No stamp duty is payable in respect of gifts to charities registered under Gibraltar’s Charities Act.

There are no taxes on lifetime gifts, and indeed such gifts will not be treated in the hands of the recipient as income.

Taxation of Gibraltar trusts

Gibraltar has not followed the United Kingdom as far as the taxation of trusts is concerned. Gibraltar’s Income Tax Act provides that trusts established for non-residents of Gibraltar do not pay any tax in Gibraltar even where the trustees are Gibraltar residents and the trust is fully managed from Gibraltar.

The income received by a trust created by or on behalf of a non-resident person (or an individual who has been issued a certificate under rule 6 of the Qualifying (Category 2) Individuals Rules 2004 – see further below) is exempted from tax where the income accrues or is derived outside Gibraltar or, in the case of income received by a trust, would not be liable to tax under the Income Tax Act if it had been received directly by the beneficiary. This enables trust assets such as bank deposits to be held by a bank in Gibraltar without the trust incurring any liability to income tax in Gibraltar, and allows high-net-worth individuals to reside in Gibraltar without incurring income tax liability in relation to assets held by a trust.

Many trust structures will be pure holding structures without activity (just income from interest). In Gibraltar, neither dividends from quoted investments (including mutual funds) nor interest received from licensed banks/building societies are taxed.

For the trust to be tax exempt, however, the terms of the trust must expressly exclude residents of Gibraltar as persons who either are, or may become, beneficiaries under any discretionary power of the trustees under the terms of the trust.

The effect of Gibraltar’s Stamp Duties Act 2005 is that no stamp duty is payable on the transfer of any assets held by such a trust, except in the case of immovable property situate in Gibraltar. In addition there are no gift or wealth taxes payable in Gibraltar – nor are there any turnover, capital gains or inheritance taxes payable.

In view of the limited circumstances in which a liability to Gibraltar tax may arise, it is possible to accumulate income and realise capital gains without a tax liability arising.

Asset protection trusts

An amendment made in 1990 to Gibraltar’s Bankruptcy Act enables asset protection trusts to be established in Gibraltar. The Bankruptcy Act is based on the Bankruptcy Act 1914 of the United Kingdom, which renders void any trusts fraudulently intended to avoid obligations in the future. The amendment to the Bankruptcy Act means that certain dispositions are not voidable at the instance of, or upon an application by, any creditor of the settlor provided certain conditions are complied with.

The settlement of assets will not be voidable by any creditor of the settlor provided that:

  1. the settlor is an individual;
  2. the settlor is not insolvent at the date of the settlement; and
  3. the settlor does not become insolvent in consequence of the settlement before the settlement is registered.

Gibraltar introduced asset protection trust legislation within the provisions of the bankruptcy law, rather than within fraudulent conveyancing laws, so that, for a creditor to commence an action in Gibraltar, he must commence an action under the bankruptcy law – and the standard of intent to defraud that must be met is much narrower and more difficult for a creditor to satisfy. In order to commence an action under the bankruptcy law it must be demonstrated that the settlor is resident or domiciled in Gibraltar or that an ‘act of bankruptcy’ has been committed in Gibraltar.

EU membership

Gibraltar enjoys a special status within the European Union. Under article 299(4) of the EC Treaty, it is within the Union by virtue of being a European territory for whose external relations the United Kingdom is responsible; however, article 28 of the UK Accession Treaty 1972 specifically excludes Gibraltar from the Common Customs Tariff, the Common Agricultural Policy and the harmonisation of turnover taxes, in particular value added tax.

Gibraltar is treated as part of a member state – the United Kingdom – and must comply with all EU Directives relating to financial services.

Gibraltar can take advantage of the single European passport for banking, insurance and investment services that allows Gibraltar-licensed banks, insurance companies and investment services providers to operate in other EU Member States, enabling them to sell their financial products throughout the European Union and the European Economic Area.

Category 2 individuals

The Qualifying (Category 2) Individuals Rules 2004 provide low tax limits for high-net-worth individuals wishing to reside in Gibraltar.

Such individuals will only pay tax at the normal tax rates applicable to residents, in accordance with the Income Tax (Rates of Tax) Rules, on the first GBP60,000 of assessable income with a minimum tax payable per annum of GBP18,000. In the first year of assessment the minimum tax payable is GBP1,500 for each complete month or part thereof. The Gibraltar tax year runs from 1 July to 30 June. Any income in excess of GBP60,000 is not subject to income tax. A maximum annual income tax of just over GBP23,000 is payable in any one year.

Only income received in, or remitted to, Gibraltar is taxable, and such individuals may be directors of a Gibraltar tax-exempt company. The income of the tax-exempt company is not treated as remitted to the individual.

Income received from a trust that qualifies for exemption (namely, a trust which is established for a non-resident) shall not be regarded as accruing in, deriving from, or received in Gibraltar, which would make it otherwise taxable.

An application for the status of high-net-worth individual is made to the Gibraltar Finance Centre Director. In order for an individual to qualify, he will be required to have available for his exclusive use approved residential accommodation in Gibraltar for the whole of the year of assessment and not to have been resident in Gibraltar during the previous five years.

In addition, in support of his application an applicant must submit a curriculum vitae, detailing his qualifications and work experience, and two references, one of which must be from a banker confirming that the individual has available to them a minimum of GBP2,000,000 in bank deposits or securities. A copy of the applicant’s passport must be included together with evidence of the ownership or rental of property. There are particular property developments within Gibraltar that have been identified as being suitable for these purposes. A non-refundable application fee of GBP1,000 is payable on submitting an application.

Author block
Adrian Pilcher

Adrian Pilcher TEP is an Associate at Isolas in Gibraltar.

The content displayed here is subject to our disclaimer. Read more