On 4th March 2021 an international agreement to improve tax co-operation between authorities in Spain and Gibraltar came into force. The Agreement, entered in to between Spain and the UK, was published in Spain’s official State Bulletin on 13th March 2021. This is the UK’s first international agreement with Spain regarding Gibraltar since the 1783 Treaty of Paris. The Agreement creates a set of rules to define tax residency, prevent double taxation and introduce transparency between Spain and Gibraltar on tax matters.
On 26th February the Agreement was added to the schedules of the Gibraltar Income Tax Act 2010. Nevertheless, some of the provisions of the Agreement do not take effect until the start of the tax year following entry into force. Gibraltar’s tax year runs from the 1st of July to the 30th of June and Spain’s tax year runs from the 1st of January to the 31st of December.
The Agreement is a seminal event in the evolution of Gibraltar as a premier tax-compliant international finance centre. This is the first time that Gibraltar is accepted by Spain as a separate tax system and in particular that Spain accepts Gibraltar’s territorial tax system, after years of denouncing it. Following the Agreement, Spain withdrew a legal action claim in the EU Courts of Justice against Gibraltar’s territorial tax system.
After a history of confrontation, the Agreement cultivates a new culture of cooperation between Spain and Gibraltar. The Agreement serves to normalise Gibraltar’s relationship with Spain, as evidenced by Spain’s removal of Gibraltar from its list of tax havens.
The Agreement also increases administrative cooperation. It reinforces cooperation through a liaison body and a joint coordination committee. However, the Agreement does not imply any change with respect to the Spanish or British position regarding sovereignty and jurisdiction in relation to Gibraltar.
The landmark Agreement focuses on four areas:
- Residency rules for individuals
- Residency rules for entities
- Double taxation relief
- Exchange of information and administrative assistance between the tax authorities
The game changer for Gibraltar
The Agreement is unique as it deviates from international and OECD models. It is a bespoke arrangement accommodating both Spain’s resident-based tax system and Gibraltar’s source based tax system.
The Agreement is a significant collaboration between Gibraltar and Spain and it paves the ground for Gibraltar to enter tax treaties with other countries. The Agreement was swiftly followed by a Double Tax Treaty between Gibraltar and the UK, under the OECD model.
With signing of the Agreement, Spain removed its veto over Gibraltar joining the OECD’s Base Erosion and Profits Shifting (BEPS) programme. The Agreement therefore reinforces Gibraltar’s commitment to transparency, exchange of information and tax compliance.
The Agreement is a recognition of the Gibraltar Status Act and is the first international legal recognition of Gibraltarians' rights whereby the Gibraltarian is identified as a distinct nationality by Spain.
Residency rules for individuals
Under the Agreement, natural persons shall be deemed tax resident in Spain when any of the following circumstances exist:
i.They spend over 183 overnight stays in Spain during a calendar year. Sporadic absences in either Spain or Gibraltar shall be added to the time where these individuals spend the majority of their overnight stays;
ii.Where a spouse (from who they are not legally separated) or the natural person with whom a similar relationship has been established, and/or any dependent ascendants or descendants, resides or reside habitually in Spain;
iii.The only permanent home at their disposal is in Spain;
iv.Two thirds of their net assets held directly, or indirectly, are located in Spain.
If the criteria above are not fulfilled, natural persons may still be considered tax resident in Spain, unless they can demonstrate that they have a permanent home for their exclusive use in Gibraltar and remain in Gibraltar for over 183 days per year.
Following the Agreement, Spanish nationals who move residency to Gibraltar are considered tax residents of Spain indefinitely. Non-Spanish nationals and Gibraltarians will be treated as Spanish tax residents for 4 years following a relocation to Gibraltar.
Individuals deemed to be tax resident in Spain will typically incur tax on worldwide income and gains (subject to DTT relief and treaty exemption), as well as gift tax, inheritance tax and wealth tax. They will also be required to file returns and report on certain assets held outside Spain, in accordance with Spanish laws.
Residency rules for entities
Under the Agreement, legal persons, entities and other legal structures or arrangements are tax resident in Spain when any of the following exists:
i.Majority of the assets, whether held directly or indirectly, are located in Spain;
ii.Majority of the income accrued in a calendar year derive from sources in Spain;
iii.Majority of the natural persons in effective management are tax resident in Spain; or
iv.Majority of the ownership, control or profit-sharing rights are under direct or indirect control of Spanish tax residents or entities related to tax residents in Spain.
In connection with criteria iii. and iv., the Agreement includes a series of tests that if met, enable the entity to rely on a Grandfathering safeguard provision to retain its tax residency in Gibraltar. This safeguard is available where the entity satisfies all the following 5 conditions:
i.Has a fixed place of business in Gibraltar with adequate employees and operating expenditure with regard to the core income generating activities;
ii.Is subject to and pays Gibraltar corporation tax on profits at the prevailing rate (currently 10 or 20%);
iii.Has operated in Gibraltar without interruption or change since inception or 1st January 2011;
iv.Has from inception through 2018 accrued and derived at least 75% of income in Gibraltar; and
v.Has Spanish sourced income in 2018 of less than: 5% of turnover over €6m; 10% of turnover between €3m and €6m; or 15% of turnover less than €3m.
Legal persons, entities and other legal structures incorporated before 16th November 2018 that trigger the Spanish residency rules are eligible to apply for the Grandfathering Safeguard Provision. Completed forms should be filed at the Gibraltar Income Tax Office by 7th May 2021. The form can be found here.
The form requires evidence that the Gibraltar residency requirements are met. This includes: evidencing a fixed place of business in Gibraltar; payment of corporation tax; operation in Gibraltar between the date of incorporation and 31st December 2018; more than 75% of income for the period preceding 31st December derived from sources in Gibraltar; and that the Spanish income criteria are met. The form also requires information on legal and beneficial ownership and the effective management.
Gibraltar companies owning a majority of Spanish assets, either directly or indirectly, will be deemed to be a Spanish tax resident and will have the same obligations as a Spanish company. In addition, Gibraltar companies will be deemed tax resident in Spain where the majority of their income is generated in Spain or the majority of owners or natural persons in charge of effective management are tax residents in Spain.
Double taxation relief
The Agreement is designed to eliminate double taxation between Gibraltar and Spain, however it does not change the Gibraltar taxing rights of income accrued or derived in Gibraltar, nor the Spanish taxing rights over individuals who reside in Spain but work in Gibraltar.
The Treaty provides elimination of double taxation in accordance with domestic law. Where entities or trusts that become tax resident in Spain pay tax in Gibraltar, there are circumstances in which Spain will give unilateral tax relief to the amount of tax paid in Gibraltar, however such companies or trusts are taxable throughout that period in Spain under Spanish law on income and assets worldwide, including Gibraltar.
Information exchange and administrative assistance
The Agreement provides for enhanced administrative cooperation and information exchange for the purpose of tax enforcement and collection. A Joint Cooperation Committee is established to supervise and coordinate the cooperation activities.
The Agreement commits Gibraltar to the exchange of information, in particular over workers in Gibraltar who reside in Spain within 80km of Gibraltar. As part of the Agreement, Gibraltar will provide:
i.Information on vessels, aircraft and motor vehicles newly registered in Spain related to tax residents in Gibraltar;
ii.Direct and free access to the Gibraltar Registrar of Companies & Land Registry; and
iii.Direct access to Gibraltar’s beneficial ownership register (a public register), or on request to the Commissioner of Income Tax on companies, partnerships or foundations.
The Agreement comprises the following administrative cooperation arrangements:
i.Exchange of information, whether automatic, spontaneous or on request, including simultaneous or join tax examinations;
ii.Assistance with collection, including measures of conservancy; and
iii.Serving or transfer of documents.