When you start looking for European company formation options that will provide tax or operational benefits you narrow the list pretty quickly generally to:
- Ireland (though not often)
- Isle of Man
There are lots more but I can’t think of any reason you’d want to use any of the others when you’ve got those to choose from and frankly there are definite preferences among those depending on what you’re doing. We’ll cover each in detail in coming posts but for today we’re going to focus on Gibraltar. As it stands today as of this writing we LOVE Gibraltar. But when I first started studying offshore jurisdictions I didn’t quite understand why I would love it in spite of it being mentioned to me by several people.
On the surface Gibraltar isn’t that spectacular:
- While supposedly inexpensive by European standards Gibraltar company formation or incorporation typically costs around 850 GBP in the retail market not counting other required documents
- There’s a 10% tax rate and no tax treaties
- Company formation takes a minimum 2 weeks often dragging on much longer
- Director/ownership details are public
- There’s no domestic corporate banking to speak of
- Over a certain level audited financials are required
Reading the list it doesn’t sound that compelling to me and unless there are special circumstances I’d say if you’re going to form a resident Gibraltar company you’re probably better off looking elsewhere (alternatives discussed in other posts). It used to be that Gibraltar being an EU member but not a member of the VAT regime was helpful but updates to the VAT regime have mostly eliminated these benefits.
Favorable Tax Treatment
However, Gibraltar is one of only 3, really only 2, jurisdictions within the EEA (European Economic Area) with a particular nuance in their corporate residency laws. Tax residency in Gibraltar is based ONLY on management and control, which means you can have a non-resident Gibraltar company. What does that mean?
A non-resident company isn’t liable for any local income taxes except on domestic source income (no income in Gibraltar = 0% corporate tax rate). So we’ve just gone from Gibraltar being a 10% tax jurisdiction, which is OK, but not exceptional, to a fantastic 0% tax regime.
Non-resident Gibraltar companies also benefit from not having the same requirements when it comes to the likes of audited financial statements that resident companies have.
By default a Gibraltar company is not non-resident so to ensure it is you need to file according with the local financial authority and meet the appropriate criteria. These include:
- No funds remitted to Gibraltar
- No business in Gibraltar or from Gibraltar sources (not a big deal since it’s a tiny market of around 80 000 people)
- Management and control (generally speaking directorship of the company) outside of Gibraltar
This does raise some questions such as:
- If no funds can be remitted to Gibraltar (there’s a sort of remittance basis in their tax system) where should the company bank?
- If management and control isn’t in Gibraltar where should it be?
Banking & Reputation
Corporate banking in Gibraltar is virtually non-existent anyway, while Gibraltar is fairly well known for some of their banking it is private banking not corporate banking and certainly not for small businesses. The good news is this means other jurisdictions, particularly other European jurisdictions are fairly familiar with Gibraltar companies banking abroad and relative to a lot of other offshore jurisdictions gaining banking for a Gibraltar company can be relatively easy.
Unfortunately, even though this is the case the available jurisdictions that accept non-resident companies with strong banking are few and diminishing so it’s becoming more and more attractive to be able to bank locally in spite of an asset protection argument against doing so but that’s for another post. The common places to look would be Malta, Andorra, eastern European jurisdictions or Caribbean jurisdictions. There are a few gems in there but a lot that aren’t particularly attractive.
Gibraltar actually has a pretty strong reputation as it is what might be called a mid-shore jurisdiction competing within the global incorporation landscape on reputation as much as on tax and other features. This is very helpful in some parts of the world but in Asia it is a very unknown as a result hands on experience has shown in spite of a much better reputation it can be more difficult to open a bank account for a Gibraltar company in say Singapore than for say a Marshall Islands company as illogical as that might seem. Opening accounts in jurisdictions such as Singapore and Hong Kong is certainly possible but typically more of a hassle than doing so with some of the more well-known tax havens or by contrast more of a hassle than opening an account in a European jurisdiction where Gibraltar companies are more common.
Incorporating in Gibraltar
When actually forming a company in Gibraltar be prepared for a fairly rigorous process, this is not like opening a company in say Delaware or Anguilla where essentially just providing the name of the company and owners is good enough. In order to safeguard their reputation that Gibraltar agents will require details about the nature of the business comparable to what’s required to open a bank account and may decline applications based on certain types of business, which might negatively impact the reputation of the jurisdiction. If you’re aware of this in advance and have prepared the process can be relatively smooth but expect some hassles as compared with more traditional offshore jurisdictions. The end result if you’re not prepared is incorporations can drag on months rather than the optimal two week formation time if you are organized and prepared.
When forming the company be sure to clarify you are forming a non-resident company (unless for some reason you want the company to be resident locally). Forming a local company certainly isn’t the end of the world, while they will be subject to a 10% tax and audited financial statement requirements when the sales volume exceeds a certain threshold there is a quasi-territorial tax system in place that means depending on how operations of the business are structured the net effective tax rate might be quite low.
All companies in Gibraltar are “limited”.
Management and Control
For a Gibraltar company to qualify as non-resident it must have foreign management and control. What’s the problem with this? It might not be a problem, it might mean the company can have essentially stateless tax residency much like how Apple Inc. has applied with a couple of their Irish subsidiaries in their tax strategy. However, for a lot of the world’s jurisdictions, which determine corporate residency on the basis of management and control it could create issues. For example, I’d never recommend a Canadian company or individual form a Gibraltar company unless management and control were exercised somewhere else since Gibraltar doesn’t qualify for Canada’s favorable tax regimes and it also taxes based on management and control, meaning the non-resident Gibraltar company would end up fully taxable in Canada.
In other words whether to incorporate in Gibraltar becomes based on a variety of other facts and circumstances aside from the merits of the jurisdiction itself.
Bottom line if you’re going to form a company in Gibraltar and not have it be resident there be sure the foreign management and control won’t make the company taxable somewhere else, perhaps somewhere more onerous.
Asset Protection & Confidentiality
Confidentiality rules in Gibraltar are mediocre at best. While there are definite limitations on information sharing, which might come about as a result of tax information exchange agreements, FATCA, EU Savings Directive, and multi-lateral exchange agreements, Gibraltar does definitely participate in exchange sharing initiatives and is rated as largely compliant by the OECD. Further as previously discussed ownership and director details are public making confidentiality directly through a Gibraltar company difficult.
Getting around this later challenge is achieved through the use of nominees or corporate directors/shareholders, which are permitted as of this writing.
Overall Gibraltar is one of the best European jurisdictions to form an offshore company depending on your individual circumstances. There are very favorable tax regimes available, the reputation is good, and you gain access to the European advantages as discussed in other posts. We like Gibraltar and use it fairly frequently to form companies.
If you’re interested in any guidance as to which formation agents to use or how to go through the company formation process please contact us and we’ll be happy to provide direction.