PrimeGlobal member firm Simmons Gainsford discusses the new tax-treaty between the United Kingdom and Gibraltar.
Whilst Gibraltar has offered a competitive low tax rate, political independence and good sector links with the Government via The Gibraltar Finance Centre Council, for a number of years transactions between a Gibraltar company and a UK company in an international group, has historically been problematic from a tax perspective due to the lack of a double tax treaty between the two jurisdictions.
The recently adopted Gibraltar-UK Double Tax Treaty (“the Agreement”) is in line with the OECD’s Model Tax Convention and marks the latest in a series of developments demonstrating Gibraltar’s commitment to international standards of tax transparency and cooperation.
The purpose of the Agreement is to eliminate double taxation with respect to taxes on income and capital and prevent tax evasion and avoidance.
The Purpose of Double Tax Treaties
It is the case that a particular source of income or capital gain may be taxable in one or more jurisdictions by virtue of the nature of that income or gain and the tax residence of the tax payer.
This means that the same income or capital gain may be taxable in several jurisdictions which would not be advantageous to the tax payer.
In order to avoid and or mitigate this anomaly, a Double Tax Treaty is agreed between two jurisdictions to identify particular sources of income or types of capital gain and clarify and determine where that income or gain should be taxed, i.e. which jurisdiction will have the primary right to tax .
A tax payer seeking relief under a particular Double Tax Treaty will have to demonstrate to the fiscal authorities their connection to a particular jurisdiction by virtue of having ‘substance’ in that jurisdiction.
On 24 March 2020 the Gibraltar-UK double tax treaty came into force.
What This Means
Now that the treaty is in place it means that a UK company:
- Can pay interest and royalties to a Gibraltar company without having to withhold UK tax of 20%.
- May fall outside the UK transfer pricing requirements for transactions with a Gibraltar group company if the group is an SME (Small & Medium Sized Enterprise) for these purposes.
This is explored further below.
UK Withholding Taxes on Interest & Royalties Payable to a Gibraltar Company
The treaty will apply from 1 May 2020 for withholding tax purposes.
Prior to the treaty coming into force, UK withholding tax of 20% would be required to be paid to HM Revenue & Customs quarterly, together with a CT61 tax return being completed and submitted on interest and royalties.
The newly enforced treaty reduces the withholding tax rates to 0% where the qualifying conditions are met.
The 0% rate may be automatically applied on royalties paid provided certain conditions are met, including the principal purpose test.
The 0% rate on interest will be subject to applying and receiving either treaty relief or having a double tax treaty passport in advance of making the interest payment.
Historically, connected party transactions between a Gibraltar company and a UK company typically in a group, would be caught under the UK transfer pricing provisions regardless of the size of the group.
Under the new treaty, certain SMEs will no longer be caught under the UK transfer pricing provisions when transacting with a connected party in Gibraltar.
Gibraltar Branch Exemption
A UK resident trading company operating a Gibraltar branches will now be able to exclude any profits arising to that branch from UK taxation by way of an election. Gibraltar tax will still be charged in the usual manner.
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