On 24th March 2020 H.M. Government of Gibraltar announced that, pursuant to the relevant notifications having been exchanged, the Double Tax Agreement which was signed by H.M. Government of Gibraltar and H.M Government of the United Kingdom in October 2019 (the "DTA") is now in force.
What is a Double Tax Agreement?
Double taxation agreements (also known as double taxation treaties or conventions) (DTAs) are primarily aimed at reducing juridical double taxation. A double taxation agreement is an agreement made between (usually) two jurisdictions, which allocate taxing rights on various items of income and gains between them. DTAs typically alleviate double taxation in one of the jurisdictions or by requiring the country in which the person subject to tax is resident to grant relief for source state taxation through a credit or exemption mechanism.
The DTA
The main purpose of the DTA is to eliminate double taxation between residents in Gibraltar and/or the United Kingdom in respect to taxes of income and gains. The DTA further strengthens the economic relationship of both territories ahead of the effects of Brexit, and although based on the Organisation for Economic Co-operation and Development ("OECD") model, some key differences arise, which will be highlighted within this article, together with working examples.
What taxes will be covered? (Article 2)
The existing taxes covered by the DTA are:
- Gibraltar – income tax and corporation tax; and
- United Kingdom – income tax, corporation tax and capital gains tax.
Resident of a territory (Article 4)
Individuals
Article 4 applies to individuals who are resident in both Gibraltar and the United Kingdom. However, how can an individual be resident in both Gibraltar and the United Kingdom?
Gibraltar
Under Gibraltar law an individual will be considered resident when, irrespective of whether such individual is domiciled in Gibraltar, in any tax year of assessment (which runs from 1 July to 30 June):
- he is present in Gibraltar for a period of, or periods together amounting to, at least 183 days; or
- he is present in Gibraltar in any year of assessment which is one of three consecutive years in which the total of the days on which the individual is present in Gibraltar exceeds 300.
United Kingdom
Under English law an individual will be considered resident if they satisfy any of the Statutory Residency Tests (SRT), as set out below:
- The Automatic Overseas Test
- The Automatic UK Test
- The Sufficient Ties Test
For example, under the Automatic UK Test, an individual will be UK resident if they (1) spent more than 183 days in the UK; or (2) have a home in the UK which is available to him for at least one period of 91 consecutive days and in which he is present on at least 30 days in the tax year.
If residence cannot be determined by either the Automatic Oversees Test or the Automatic UK Test, then the 'ties' which an individual has with the UK will need to be considered. There are five different ties: (1) family; (2) work; (3) accommodation; (4) 90 days; and (5) country.
Example
Paul Garcia, a UK national, is currently working in Gibraltar for a Gibraltar insurance company. Paul's wife and three children have remained in the UK and Paul flies to the UK every weekend to visit his family.
Paul is Gibraltar resident by virtue of being in Gibraltar for more than 183 days, but could also be deemed to be UK resident by virtue of satisfying any of the SRTs. For the purpose of this example we shall assume that Paul is also UK resident, and therefore resident in both Gibraltar and the UK.
Paul will be considered resident under the DTA in the territory (Gibraltar or the UK) where:
- he has a permanent home available to him. If he has a permanent home available to him in both Gibraltar and the United Kingdom, he shall be deemed to be a resident only in the territory with which his personal and economic relations are closer (centre of vital interests);
- if the territory in which he has his centre of vital interests cannot be determined, of if he does not have a permanent home available to him in either territory, he shall be deemed to be resident only in the territory in which he has an habitual abode;
- if he has a habitual abode in both territories or in neither of them, the competent authorities of the territories shall settle the question by mutual agreement.
Companies
Article 4 applies to persons other than individuals (which for the purposes of this example shall mean companies) which are resident in both Gibraltar and the United Kingdom. However, how can a company be resident in both Gibraltar and the United Kingdom?
Gibraltar
Under Gibraltar law a company will be considered resident in Gibraltar when:
- it is managed and controlled in Gibraltar; or
- it is managed and controlled outside Gibraltar by persons who are resident of Gibraltar.
United Kingdom
Under English law a company will be considered resident in the UK if:
- it is incorporated in the UK; or
- its central management and control is carried out in the UK.
Example
Paul Garcia is the sole director and shareholder of a UK incorporated company, Garcia Limited (the "UKCo"). Paul manages and controls the UKCo exclusively from Gibraltar. The UKCo will be resident in the UK by virtue of being incorporated in the UK, but could also be deemed to be resident in Gibraltar if the UKCo is managed and controlled from Gibraltar. For the purpose of this example we shall assume that the UKCo is also Gibraltar resident, and therefore resident in both Gibraltar and the UK.
The UKCo's tax residency shall be determined under the DTA by the competent authorities of Gibraltar and the United Kingdom (the Income Tax Office and HMRC respectively), where they shall endeavour to determine by mutual agreement the territory (Gibraltar or the UK) where the UKCo will be deemed resident, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors.
Permanent establishment (Article 5)
The term "permanent establishment" includes especially:
- a place of management;
- a branch;
- an office;
- a factory;
- a workshop; and
- a mine, oil or gas well, a quarry or any other place of extraction of natural resources.
Also, where a person (other than an agent of an independent status) is acting on behalf of an enterprise, that enterprise shall be deemed to have a permanent establishment in that territory in respect of any activities which that person undertakes for the enterprise (subject to certain exemptions).
Example
Paul Garcia is also the sole director and shareholder of a Gibraltar company, Paul Limited ("GibCo"). GibCo is managed and controlled from Gibraltar and is tax resident in Gibraltar. GibCo does some business in the UK so Paul has decided to set up an office in the UK in respect of the UK Business. It is likely that GibCo has created a permanent establishment in the UK. The significance of this shall be highlighted below (within Business profits (Article 7)).
Business Profits (Article 7)
Profits of an enterprise (which includes a company) of a territory shall only be taxable in that territory unless the enterprise carries on business in the other territory through a permanent establishment. If the enterprise carries on business through a permanent establishment, the profits that are attributable to the permanent establishment may be taxed in that other territory.
Example
As set out above, GibCo is managed and controlled from Gibraltar and is tax resident in Gibraltar. Under Gibraltar law, the profits of GibCo would be taxed in Gibraltar. However, on the basis that GibCo has created a permanent establishment (as set out above), the profits attributable to the permanent establishment may also be taxed in the UK. If GibCo would not have created a permanent establishment then, possibly, the profits derived from the UK would not be taxable in the UK and would only be taxable in Gibraltar.
Dividends (Article 10)
Where dividends are paid by a company resident in either Gibraltar or the UK and these dividends are payable towards the beneficial owner resident in the other territory, such dividends will be exempt from withholding tax, unless the following conditions are satisfied, in which case tax is capped at 15%:
- the beneficial owner of the dividends is a pension scheme established in the other territory;
- the dividends are paid out of income or gains derived (directly or indirectly) from immovable property;
- Dividends are paid by an investment vehicle which distributes its income from immovable property (annually).
Example
Paul Smith's wife, Angela Smith, is a UK resident and is the shareholder of a Gibraltar trading company ("GibCo2"). GibCo2 declares and pays a dividend to Angela.
Currently there is no requirement to deduct withholding tax from dividends under existing Gibraltar law, meaning that dividends would currently be paid gross, regardless of the DTA. However, should Gibraltar impose a withholding tax on dividends in the future the DTA would be advantageous as, under the DTA, no withholding tax would be payable in Gibraltar in respect of dividends paid to Angela, as a UK resident.
Income from employment (Article 14)
Income from salaries, wages and other similar remuneration derived by a resident within a territory in respect of employment shall be taxable only in that territory, unless, the employment is exercised in the other territory. However, employment exercised in the other territory shall be taxable only in the first-mentioned territory if:
- The recipient is present in the other territory for a period not exceeding 183 days in any 12 months commencing or ending in the fiscal year concerned;
- Remuneration is paid by, or on behalf, of an employer not resident of the other territory; or
- Remuneration is not borne by a permanent establishment which the employer has in the other territory.
Example
Paul Smith is employed by a UK company and exercises his employment in the UK. However, Paul is required to exercise some employment in Gibraltar. Prior to the DTA, Paul would have been liable to tax in Gibraltar in respect of the employment exercised in Gibraltar and would then need to set off his Gibraltar tax paid against his UK tax liability in respect of the same income. However, under the DTA Paul would no longer be liable to tax in Gibraltar in respect of the employment exercised in Gibraltar, provided that the criteria set out above is satisfied.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
