Gibraltar High Net Worth Individuals Residency Changes…
Only two things in life are certain, death and taxes…How often have we heard this saying before? Well in Gibraltar since 1992 the High Net Worth (“Category 2”) Individual has not had to worry about taxes. For over 20 years individuals have been relocating to Gibraltar to enjoy the Mediterranean climate, cuisine and way of life.
The Category 2 rules allow individuals who meet certain criteria (including the purchase or rental of a suitable property and a minimum net worth of £2 million) to cap the tax on their worldwide income at an amount of less than £30,000 per annum.
One of the common and more restrictive features of the Rules to date has been that Gibraltar employment and trade has been specifically discouraged. Whilst the Finance Centre Director is able to waive this restriction where he feels that doing so would be of benefit to the economic development of Gibraltar, this has been, and remains, very much the exception.
Over the years, much like Gibraltar itself, the profile of the Category 2 individual has changed. When it was first introduced the typical Category 2 individual was a wealthy individual who had chosen to relocate to Gibraltar to enjoy the Mediterranean lifestyle as well as the tax free returns from their pension or investment portfolio. When in 2005 taxation on investment income was abolished for all Gibraltar residents followed shortly after by the exemption from taxation of pension income, the Category 2 status was no longer necessary for many of these individuals.
However, Gibraltar continued to attract a younger Category 2 individual, one who was not relocating to Gibraltar to retire here but was alternatively a much more entrepreneurial individual with active business interests. The Gibraltar Government recognising this trend issued guidance to the industry clarifying what activities Category 2 individuals could in principle carry out locally. The guidance was welcomed by the industry as it provided a number of clear examples of what a category 2 individual could do. Unfortunately though there were still restrictions with what could be done physically from Gibraltar.
In the autumn of last year the Gibraltar Government created a working group of industry professionals to review the Category 2 status and advise on how this product could be expanded and improved. The group is engaging with professionals experienced internationally in this area (including current Category 2 individuals) and is considering all aspects of the status from its process and application through to its functionality and practical application.
The recommendations, some of which have already been published in the Income Tax Amendment Bill 2015, will allow Category 2 individuals who have the necessary approval from the Finance Centre Director, to carry out or exercise any trade, business, profession or employment in Gibraltar. The intention is that the jurisdiction will benefit from the additional inward investment and from having these entrepreneurs using their business skills and expertise locally. The income from such activities will be taxed locally to the extent that the income is accrued and derived in Gibraltar. The challenge for the working group continues to be achieving the right balance in terms of the effective tax rate that these individuals should be subject to, in order for Gibraltar to retain its attractiveness as a low taxed jurisdiction.
An additional benefit of this new “opening of the doors” approach is the additional substance that it provides to the individual’s residency position. Substance is high on the global tax agenda and the weight that having an individual’s economic interests physically located in the jurisdiction gives to their residency position should not be underestimated. Many high net worth individuals, travel and have business interests in other jurisdictions therefore potentially there is a risk that another country may claim that the Category 2 individual is resident in their country. The more established the individual is in Gibraltar the better their defence against a claim for residency from another country will be.
Individuals affected by the change may be able to structure or plan their affairs to minimise the tax impact from the change. With its low corporate tax rate of 10% and its system of no taxation on capital gains, no wealth tax and no inheritance tax Gibraltar really is starting to feel like paradise in the sun.
So, only one thing in life is certain…….