The 2005 year agreement between the Gibraltar Government and the European Union announced the end of the tax exempt regime on 31 December 2010. The story of this agreement has started in December 2004, when after long negotiations between Gibraltar, Britain and the European Commission a respective decision was made concerning the tax-exempt status of 8,464 Gibraltar registered companies. Official publication of this agreement has been delayed until February 2005, and the reasons for this have not been publicly explained by the Commission. The purpose of this agreement was to decide much uncertain questions hanging over Gibraltar's Financial Centre.
The formally announced agreement provides for any existing tax exempt companies to benefit from their status until December 31, 2007. The agreement allows for some new business to participate in the regime. New applications for exempt status can be made until June 30, 2006, and they will receive approvement only in the cases of “real economic benefit to Gibraltar”. Practically, that means that applications would not be successful.
Gibraltar Tax Arrangements
Under the agreement negotiated with the Commission the existing exempt companies can keep their exempt status until December 2010. One of the undoubted advantages of the agreement is “absolute legal certainty” that is delivered by it to exempt companies, and enabling the financial sector of the economy of Gibraltar to continue growing while the European Courts will have ruling on regional selectivity. By the time this ruling will be handed down, there will be the 2010 year deadline for exempt companies, and the alternative arrangements will be in that place.
In particular, until December 31 of 2010, Gibraltar Government plans to implement new tax structures which will replace those called in question by European Union. According to these taxation changes, low tax will take place of no tax regime. This arrangement provides additional time to Gibraltar’s Finance Centre to implement those changes which were set since July 2001, when the EU Commission first challenged the legality of the Gibraltar exempt status regime under EU State Aid Rules.
The Agreement between the Gibraltar Government and the EC
Later, the Gibraltar Government successfully challenged the decision of the EU Commission in the European Court, thus allowing exempt companies to continue and eliminating the risk of recoverability. In response, the Commission initiated the process to attack the tax-exempt regime under a different procedure - the existing State Aid Rules. This process was challenged by Gibraltar and Britain, and in November 2002 the Commission adopted an appropriate measures decision requiring an end to new exempt companies within 3 months and withdrawal of exempt status for existing exempt companies by December 2005.
The Gibraltar Government rejected this and offered an alternative in February 2003, which have been under negotiation until December 2004 – the time when the final version of the agreement was reached, and later approved by the Commission.
If Gibraltar had failed to reach an agreement with European Commission, Gibraltar would have to terminate its specific regime for the exempt companies without any possibility to replace it with a competitive alternative. This would bring real and reputational damage to the Finance Centre and other businesses.
Finally, it should be noticed that in July 2001 the EU Commission opened stated aid investigations against 15 tax measures in Europe, and the Gibraltar tax exempt company was one of them. The rest 14 have already been shut down. The exempt company is the last of the 15 investigations and the only one of them in respect of which new entrants were allowed by the Commission. This may serve as a prove of the unique circumstances of Gibraltar tax exempt status.
EC Exempt Status Agreement Details
There are following provisions in the negotiated agreement:
- The total number of exempt companies will be 8,464.
- Existing exempt companies will be able to continue to benefit from their tax exempt status until 31 December 2010.
- Existing exempt companies that change ownership and/or activity after June 30, 2006 will lose their tax-exempt status from December 31, 2007.
- New exempt companies can be formed until June 30, 2006 on the basis that the number of new exempt companies that can be formed this year shall not exceed 60% of the number of exempt companies leaving the regime this year – or in any event 823. And from January to June 2005, the number of new exempt companies that can be formed shall not exceed 50% of the number of exempt companies leaving that regime during that period, or in any event the number of exempt companies admitted in 2005.
- New exempt companies will be able to continue to benefit from their tax-exempt status until December 31, 2007.
- Regular reports shall be submitted to the EC Commission certifying compliance with the above.
Exempt Company Alternatives
After the change of legislation concerning Gibraltar exempt companies, we recommend you to consider the possibility of registering non-resident company in Gibraltar as an alternative to tax exempt company. Please read important information on the status and advantages of Gibraltar non-resident companies.