Making the most of the attractive tax regime in Gibraltar

We are seeing more and more countries increasing taxes due to the economic climate we all find ourselves in. Due to these increases there has been a marked increase in wealthy individuals moving to fiscally attractive jurisdictions. Gibraltar is one of the jurisdictions beginning to see an increase in individuals relocating here to take advantage of a capping of their tax under a special tax residency regime known as Category 2 residency rules. Background Gibraltar is located on the southern tip of Spain. It is a densely populated territory with just under 30,000 in approximately 2.6 square miles (just under 7 square kilometres). The official language is English, but Spanish is also widely spoken. The currency is the Gibraltar pound. Gibraltar is a modern international financial centre with its own government and the ability to raise its own taxes. Gibraltar Income Tax The Gibraltar tax year runs commences from the 1st July to the following 30th June. Liability to income tax is generally based upon the income of any person "accruing in, derived from, or received in, Gibraltar". There is no capital gains tax, sales tax or inheritance tax in Gibraltar. As in most jurisdictions, tax residency in Gibraltar is primarily based on physical presence in a tax year. The Gibraltar Income Tax Act states that an individual is deemed to be "ordinarily resident" in Gibraltar if they are present in any year of assessment for either: • 183 days; or • 300 days over a three year consecutive period. An individual who is "ordinarily resident" in Gibraltar is liable to tax on a worldwide basis. However it is also possible to be resident in Gibraltar if you have special residency status such as Category 2 residency. Qualifying (Category 2) residency status Category 2 residency was created specifically for high net worth Individuals coming to Gibraltar. It has historically been popular with UK advisers whose clients wished to exit the UK with assets with unrealised capital gains or clients with a very high level of international income. Category 2 residents pay income tax calculated using normal income tax rates and bands on the first £80,000 of taxable income only. This effectively caps the maximum tax payable to just under £30,000 per annum (with a minimum payable of £22,000). These figures are pro-rated monthly in the year of arrival or departure. The key conditions of obtaining Category 2 status are as follows: • The Category 2 individual must be of substantial and sound financial standing and have a minimum net worth of £2 million. • The Category 2 resident must either own or rent approved residential accommodation in Gibraltar. The accommodation must be approved by the Gibraltar Finance Centre and be used exclusively by the Category 2 individual and his direct family. • The Category 2 individual cannot have been resident in Gibraltar during the five years immediately proceeding the year of assessment. Previous residency (as defined in the Category 2 rules) includes 183 days in any tax year during the previous 5 years or an average of 90 days in any three of the previous 5 years. • The individual must have private medical cover in Gibraltar. • The Category 2 individual is not allowed to engage in a trade, business or employment in Gibraltar. Exceptions to this rule include where duties are incidental to a business outside of Gibraltar or the Category 2 resident is a director of a Gibraltar Exempt Company or a director of a Company which does not transact any trade or business in Gibraltar. The Gibraltar Finance Centre has issued guidelines in the form of a circular confirming the list of permissible activities that a Category 2 individual may in principle carry out. In addition to this, it is also possible to apply for a ruling to determine whether proposed activities would contravene the Category 2 rules. Category 2 status is granted on an indefinite basis, but the Category 2 residency certificate needs to be sent to the Gibraltar Finance Centre for endorsement every three years. There is no minimum stay in Gibraltar for a Category 2 resident individual, therefore as long as the individual fulfils all of the Category 2 conditions he will retain his Gibraltar residency without the need to spend any time in Gibraltar. International points Gibraltar has not signed any double tax treaties. Therefore it is very important that the individual exiting the country of origin does so correctly. In addition, the Category individual must also make sure that due to the lack of a minimum day count that they do not inadvertently become resident elsewhere.