Gibraltar’s long-awaited new corporation tax system has been in the pipeline for many years due to a challenge to its legitimacy by the European Commission (EC), an argument centred on Gibraltar's fiscal autonomy from the UK. The European Court of First Instance ruled in favour of Gibraltar on December 28, 2008, accepting the jurisdiction's arguments on each and every issue, relating both to regional selectivity and material selectivity, thus reaffirming its fiscal autonomy and allowing it to continue with its reforms.

As part of the negotiations with Brussels in respect of its tax system, Gibraltar was forced to phase out elements of its existing offshore regime. Gibraltar dissolved its ‘qualifying’ company scheme in January 2005, in a move which cost the government an estimated GIP1.5m in annual tax revenues. These companies paid corporate tax at a rate agreed by the company and the government,set anywhere between 0% and 35% (but generally between 5% and 10%). As a transitional measure, the 80 or so qualifying companies registered in Gibraltar were switched to the ‘Exempt’ Company Regime (which paid annual fees and no percentage based corporation tax). However, later that month, it was announced that Gibraltar had been given until 2010 (2007 for new companies) to phase out its exempt company tax regime after the European Commission ruled that the scheme violated EU state aid rules.

In order to maintain government revenues and the jurisdiction's position as a thriving finance jurisdiction, the Chief Minister announced, on Gibraltar Day 2008, that the necessary legislation would be put into place for the new tax system by July 1, 2009, in order to implement the new regime for the 2010/11 fiscal year, starting July 1, 2010.

Outlining the new measures, in an address to parliament, Caruana stated:

“Mr. Speaker, as the House knows, the Exempt Status Tax Regime must end by December 31, 2010. It is essential for Gibraltar’s socio-economic prosperity that our corporate tax rate should be as competitive as is compatible with government’s revenue needs. Without this there would be large scale loss of economic activity and job losses.”

“Existing corporate taxpayers will be huge windfall beneficiaries of the need to eliminate tax exempt status, and its replacement with a low rate for all companies. The new rate will be 10%. Energy and utility providers will pay a 10% surcharge and will thus suffer a rate of 20%. These will include electricity, fuel, telephone service and water providers,” he explained.

Caruana reassured that the government would allow existing Exempt Status Companies to keep their tax benefits until 'the last possible minute': "Most Exempt Status companies currently hold exemption certificates that are valid, subject to repeal of the legislation, for 25 years. The Government therefore feels honour bound not to remove the tax benefit provided by the exemption certificate until the last possible moment. That will therefore occur at midnight on December 31, 2010, by means of a repeal of the Companies (Taxation and Concessions) Act.”

Caruana continued by outlining the salient features of the new regime, which will include:

• A corporate income tax rate of 10%;
• The effective date will be January 1, 2011; This means that the tax rate in respect of the first half of the tax year 2010/11 will be whatever is then the corporate tax rate, and in respect of the second half of the tax year will be 10%. Companies that are presently tax exempt will thus pay tax in respect of the tax year 2010/11 at the rate of 10% in respect of half a year. Companies that are not tax exempt will pay at the then corporate tax rate in respect of half a year, and at 10% in respect of half a year.
• The preceding year basis of assessment will be abolished in favour of an actual basis. Commencement provisions will be abolished. There will be transitional rules;
• The basis of taxation will not change and will thus continue to be on an accrued and derived basis, effectively what is known as a source based system; and,
• Wide-ranging and far-reaching anti–avoidance provisions.

Caruana has reduced the current basic corporate tax rate to 22% from 27%, as announced late-2008, with immediate effect. In order to smooth the transition and encourage business start-ups in the jurisdiction, the Chief Minister has introduced a scheme to allow a reduced rate for recently-established, and prospective startups, pending the implementation of the flat 10% rate in 2011. Caruana explained:

“I am introducing with effect from July 1, 2009, a start up rate of 10%, which will apply to any business established in Gibraltar after the July 1, 2009. Tax will be assessed on an actual year basis. As an anti-avoidance provision, it will not apply in respect of any commercial activity being carried out before today and which is reorganised by the taxpayer in the name of a different entity for the purpose of benefiting from this scheme."

"In order to assist them in their early developmental needs, this scheme will also be available, on certain conditions, to businesses that have been recently established."

The conditions of this new regime are as follows:

• The business must have commenced after July 1, 2007;
• The company must agree to be taxed on a preceding year basis, and not on an actual year basis in the context of commencement provisions;
• The first tax year for which the company will be liable is 2008/9, and tax will be payable in respect of this period at the rate of 27%;
• In 09/10 the tax rate will be 10%.

Taxation on personal incomes has also been decreased.

As of July 1, 2009, the government introduced a dual tax system under which taxpayers may choose the basis on which they will be taxed. Taxpayers will be now able to opt for either a Gross Income Based (GIB) system, under which income tax rates will be reduced, but no allowances given, or retain the traditional Allowance Based System.

The GIB system, effective July 1, works as follows:

• For persons whose gross income does not exceed GIP16,000 (USD26,000) per annum, a new band of GIP10,000 will be added on which tax will be paid at 10%.
• For persons with incomes between GIP16,000 and GIP25,000, new bands will be added as follows on which tax will be paid at 0%:
• Income of GIP16,000 to GIP17,000, on the first GIP5000 - 0%
• Income of GIP17,000 to GIP18,000, on the first GIP4000 - 0%
• Income of GIP18,000 to GIP19000, on the first GIP3000 - 0%
• Income of GIP19,000 to GIP20,000,on the first GIP2000 - 0%
• Income of GIP20,000 to GIP25,000,on the first GIP1000 - 0%

According to government statistics, these new bands will benefit 3,600 taxpayers by between GIP40 and GIP640 per annum. For example a single person earning GIP16,000 per annum will pay GIP640 less tax, a 22% reduction in tax.

There are also alterations to the upper income tax bands under the GIB system as follows:

• The 30% band, on income exceeding GIP25,000, but less than GIP100,000, has also been reduced by 1% to 29%. This is expected to benefit 4,000 taxpayers by up to GIP750 per annum.
• The top band rate, levied on income exceeding GIP100,000, will be subject to a reduced rate of 35%, from 38%.

The attractiveness of the existing Allowances Based System has also been improved - the government has announced that all personal allowances will be increased by 2.8% with immediate effect.

Although the reforms will reduce the income tax burden on most taxpayers, High Net Worth Individuals (HNWIs) and Category Two Individuals, will see marginal increases in their tax burden. The budget increased the minimum amount of tax they must now pay from GIP18,000 to GIP20,000, while the maximum amount of their income on which they pay tax has also increased from GIP60,000 to GIP70,000. Both changes were effective from July 1, 2009.

The budget has also increased the maximum weekly social insurance contribution by 4% in respect of both employers’ and employees’ contributions with immediate effect. This is expected to amount to an increase of GIP1.15 per week for employers and GIP0.91 a week for employees. Licensing fees for gaming machines were doubled to GIP1,000 and duties on petrol and cigarette products were marginally increased.