On 4 March 2021 the ‘International Agreement on Taxation and the protection of financial interests between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland regarding Gibraltar’ (“the Agreement”) came into full force and effect in Gibraltar and Spain.
The Agreement was incorporated in Gibraltar’s Income Tax Act 2010 and similarly made law in Spain as published by the Official State Bulletin. However, there are various provisions that will not take effect until the start of the following tax year, that is 1 July 2021 in Gibraltar and 1 January 2022 in Spain.
The Agreement is expected to improve the tax co-operation between both jurisdictions. It provides rules for resolving conflicts over residency and will enable greater administrative co-operation, through exchange of information and addressing disputes by means of a Joint Committee.
A summary of the salient points of the Agreement is set out below.
Tax residency – natural persons
Tax residency of natural persons will be determined in accordance with their domestic law. The rules of the Agreement will be applied only in cases where tax residency conflicts arise – i.e., where the individual is seemingly a tax resident in Gibraltar and Spain.
Individuals shall be tax resident only in Spain when any of the following provisions are met:
i. Individual spends over 183 overnight stays of a calendar year in Spain;
ii. Their spouse (or similar relationship), or any dependant ascendants or descendants reside habitually in Spain,
iii. Only permanent home at their disposal is in Spain; or
iv. Two thirds of their net assets, determined pursuant to Spanish tax legislation, are located in Spain.
When the above provisions are not conclusive, individuals shall be considered tax residents only in Spain unless they are able to provide reliable evidence that they have a permanent home for their exclusive use in Gibraltar and remain in Gibraltar over 183 days.
For the avoidance of doubt, if employment income is earned by an individual in/from Gibraltar it is subject to Pay As You Earn (PAYE). However, an individual resident in Spain would be liable to the differential tax in Spain on that same income.
Special rules for determining residency shall be applied in all cases where an individual changes residency from Spain to Gibraltar:
i. Spanish nationals who move their residency to Gibraltar after the signing of the Agreement (that is the 4 March 2019, the Agreement was ratified this year) shall in all cases only be considered tax residents of Spain;
ii. Non-Spanish nationals, who have spent over one complete tax year in Spain, shall retain their tax residency in Spain in the tax period in which the change was made and during the four subsequent tax years; and
iii. Registered Gibraltarians who have spent over four years in Spain will retain their tax residency in Spain for the tax period in which the change was made and during the four subsequent years.
The special tax residency schemes available in Gibraltar for High-Net-Worth Individuals, Category 2 Individuals, High Executive Possessing Specialist Skills or any other equivalent scheme shall not in itself constitute proof of tax residency in Gibraltar.
Tax residency – legal persons
Legal persons, entities and other legal structures or arrangements established and managed in Gibraltar shall be considered to have residency only in Spain when any of the following circumstances exist:
i. Majority of the assets, whether directly or indirectly owned, are located in Spain;
ii. Majority of income accrued in a calendar year derives from sources in Spain;
iii. Majority of the individuals in charge of effective management are tax resident in Spain; and
iv. Majority of the interests in the capital or equity, voting or profit-sharing rights are under the direct or indirect control of either natural persons who are tax residents in Spain or legal persons who are tax residents in Spain.
(iii) and (iv) above, do not apply to any legal person that is incorporated in Gibraltar before 16 November 2018 and that as at 31 December 2018 met all of the following conditions:
- Has a fixed place of business through which the business is wholly or partially carried on in Gibraltar;
- Is effectively subject to and pays corporation tax in Gibraltar
- For the period between incorporation to 31 December 2018, operated in Gibraltar and has done so without interruption of trade since 1 January 2011;
- Has more than 75% of its income in respect of financial year immediately preceding 31 December 2018, accruing and deriving from sources in Gibraltar;
- Has less than the following incomes in respect of the financial year immediately preceding 31 December 2018 from sources in Spain:
i. 5% for a legal person whose annual turnover exceeds 6 million euros;
ii. 10% for a legal person whose annual turnover exceeds 3 million euros but does not exceed 6 million euros;
iii. 15% for legal persons whose annual turnover does not exceed 3 million euros.
Elimination of double taxation
The competent authorities shall eliminate, where necessary, double taxation pursuant to the provisions of their domestic law.
Administrative co-operation in tax matters
Enhanced administrative co-operation is expected between all parties with a view to exchanging information, enforcement and collection of taxes. Provisions have been put in place in the instance that EU legislation ceases to apply in Gibraltar.
Information provided to the Spanish tax authorities will be the following:
- Annual information on workers registered in Gibraltar as residents in Spain (to be exchanged within 4 months after the end of the calendar year and is applicable for taxable periods commencing on or after 1 January 2014);
- Bi-annual information on vessels, aircraft and motor vehicles registered in Gibraltar relating to tax residents in Spain (to be exchanged every six months on 31 March and 30 September and is applicable for taxable periods commencing on or after 1 January 2014).
- Direct and free access to the records of the Registrar of Companies in Gibraltar including the Gibraltar Land Registry;
- Direct access to beneficial ownership information as is public; and
- Direct access to information as is public on settlors, trustees, beneficiaries and assets of all types of trusts established or managed in Gibraltar.
On the 6 April 2021, the Gibraltar Income Tax Office made available the ES1 Form for legal persons that trigger the residency rules under Article 2(2)(a)(iii) or (iv) (see tax residency – legal persons (i) to (iv) above) and want to claim exemption from being considered tax resident in Spain. Only legal persons that were incorporated in Gibraltar prior to 16 November 2018 and satisfied the five conditions as at 31 December 2018 are eligible to apply this safeguard.
Completed ES1 Forms should be filed with the Income Tax Office by 30 April 2021.
Whilst the Income Tax Office clarified that the submission of the ES1 Form is not mandatory, failure to provide the information identified in the Form may result in tax being imposed in Spain.
Please e-mail your contact person in BDO Gibraltar or [email protected] with any queries or clarifications.