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Open for Business: The Gibraltar family office

Wealthy families are increasingly resorting to “family offices” to manage their activities. Isaac Levy and Stephen Noguera comment on the phenomenon.

Recent years have seen the world of private client legal work become more complex due to the ever increasing need for transparency and accountability, coupled with having to operate within, and comply with, stricter regulatory and taxation frameworks. Likewise, the management of trust and corporate structures is becoming increasingly onerous and demanding. Investments in general are also becoming more sophisticated, and individuals are consequently faced with having to place greater reliance on the expertise of specialists to manage their wealth.

It is against this background that family offices – private operations routinely dedicated to the strategic management of financial investments, trusts, legal affairs and philanthropic enterprises for wealthy families – have proliferated. Gibraltar has been no exception to these developments, and the jurisdiction offers a number of important advantages which make it an attractive location in which to base a family office.

The generational difficulties that wealth can present is just one of the more ephemeral and long-standing challenges to be tackled. Social awareness, the hunger to develop, innovate and persevere, are all traits which the older generation want to instil in the next. The effects of wealth on a younger generation that have been born into it can run counter to these values, resulting in a reluctance on the part of certain families, celebrities included, to have their accumulated wealth automatically included in the family inheritance pool. Intergenerational dynamics are thus key, and the family office is often used to ensure a smooth transfer of wealth and values across generations.

Although there is no one-size-fits-all family office structure that can be implemented across the board, the core features which are prevalent across many setups will often include enterprise/investment, governance and compliance, risk and security management, and philanthropy.

 

  1. Enterprise/investment

This represents the crux of the family office’s day-to-day activities. Office managers will in effect provide a range of investment management services: making decisions in respect of asset allocation (bonds, equities, private equity etc.); identify sectors and industries to invest in; provide feedback to the managing board in respect of the financial performance of the company; and very frequently, back the family members in other enterprises that are not necessarily within the remit of the family office.

Gibraltar is a thriving, modern and efficient European financial centre, compliant with all the latest international fiscal and administrative standards and with almost full employment. Gibraltar is part of the European Union, and any family office situated in the jurisdiction can accordingly benefit from the associated advantages. Significantly, however, Gibraltar is exempt from VAT, which has an important bearing on service provision costs, both locally and from within the EU, which is generally a significant expense incurred by family offices.

The jurisdiction also offers additional advantages. Gibraltar company law largely follows that of England and Wales, and the recently enacted Companies Act and Insolvency Act have done much to provide a consolidated and modern statutory regime. In addition, Gibraltar’s financial services regulator has developed a reputation for robust regulation, together with an efficient regulatory process.

 

  1. Governance and compliance

 

The family office is manned by a host of suitably qualified and experienced professionals, who are each allocated specific titles, roles and responsibilities. Lawyers are also regularly engaged, be it as private third party consultants or as in-house counsel. In the context of the family office, the lawyer’s role is thus not only to advise on the technical side of the law, but also to advise on a suitable organisational structure that assists and promotes the objectives of the family company.

Family members are not precluded from staffing the family office, although in many instances, family input comes at the board level of the family office, or at the family council level.

Monitoring how the family office runs has become fundamentally important in recent years. The corporate structure employed is thus paramount, with suitable management and control as well as a sufficiently substantive physical presence in the chosen jurisdiction. The existing fiscal and administrative infrastructure in Gibraltar both on the corporate and personal side is such that it allows for the Gibraltar-based family office to properly discharge its numerous functions without any detrimental effect on the structure.

 

  1. Risk and security management

Ultra-wealthy families ordinarily tend to shy away from publicity and the limelight. There are also additional physical security and confidentiality considerations to be weighed up. By its very nature, the Rock’s physical geographical situation, its stable socio-political and economic climate, and its friendly, family-oriented atmosphere are conducive to allowing families the privacy and safety to run their respective offices without undue concern for their wellbeing.

 

  1. Philanthropy

The family office is also very well placed to manage the family’s philanthropic efforts, not only in terms of evaluating philanthropic proposals the office may receive from third parties, but also administering their own charitable foundations or trusts. In the Gibraltar context, there is a local Charity Commissioner at the Supreme Court with whom Gibraltar charities are registered. The roles, functions and responsibilities of the local Charity Commissioner are similar to those of the Charity Commission for England and Wales.

Gibraltar’s unique geo-political status and fiscal and administrative infrastructure has to date, allowed the jurisdiction to flourish and to be at the forefront of trends in wealth management, preservation and succession planning. For reasons discussed in this piece, Gibraltar is well placed to accommodate the family office, and to this extent, the Gibraltar family office is open for business.

Isaac Levy and Stephen Noguera are lawyers at Hassans International Law Firm


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Gibraltar - impact of Brexit

Last week our editor took a general overview of some of the scenarios for Gibraltar if Britain were to leave the Euro. This week, as the atmosphere in the British Conservative Party becomes ever more toxic, Michael Castiel, partner at Hassans lawyers on the Rock, goes into more detail (this piece written before the Iain Duncan Smith resignation and subsequent arguments happened).

However unlikely it may prove, the prospect of Britain's withdrawal from the EU sends shivers through Gibraltar's financial services, gaming and tourism industries, which are at the core of Gibraltar’s economy. For, if Britain leaves the EU, Gibraltar goes too, and, should Brexit occur, it is Gibraltar’s relationship with the UK that as in the past, largely will shape Gibraltar's future.

Gibraltar joined the European Union in 1973 as part of the UK. While rights to freedom of services across borders of EU member states apply between Gibraltar and the rest of the EU, because Gibraltar is not a separate member state (and is in fact part of the UK Member State) those rights do not apply between Gibraltar and the UK. Instead a bilateral agreement, formalised almost two decades ago, gives Gibraltar's financial service companies the equivalent EU passporting rights into the UK. Accordingly and pursuant to such agreement, where EU rights in banking, insurance and other financial services are concerned, the UK treats Gibraltar as if it is a separate member state.

This reliance on the special relationship with the UK is recognised by both the Government and the Opposition in Gibraltar, and when the territory (which in this instance as part of the UK electorate) goes to the polls on 23 June, the vote to remain in the EU is likely to be overwhelming. This may have symbolic significance but realistically seems unlikely to influence the outcome. In actual terms, although some non-EU jurisdictions use Gibraltar and its EU passporting rights as a stepping stone into Europe, almost 80% of Gibraltar’s business dealings are with the UK.

But whether or not Britain maintains the 'special relationship' with Gibraltar, if Brexit becomes a reality, other factors will come into play, with the ever-present Spanish Government’s historic sovereignty claim over Gibraltar topping the list.

Recently Spain's caretaker Foreign Minister Jose Maria Margallo went on record that if the UK voted to leave the EU he would immediately 'raise with the UK the question of Gibraltar.' If this was to come about it could take one or more of several different forms, ranging from a complete closure of the border between Spain and Gibraltar, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, imposing more stringent border controls, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

Here, again, imponderables come into play, for much will depend on which political parties will form the next Spanish government. A Spanish government headed by the right wing PP party is likely to take a less accommodating attitude towards Gibraltar (the Foreign Minister having recently indicated that in case of Brexit the Spanish Government may opportunistically push once again for a joint sovereignty deal with the UK over Gibraltar) whereas a left of centre coalition will likely adopt a more pragmatic and cooperative relationship with Gibraltar in the event of EU exit.

The most significant changes to Gibraltar's post-Brexit operation as an international finance centre are likely to be in the sphere of tax, and while Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, it has also been slightly uncomfortable with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Although it was formed as a free market alliance, since its inception fiscal matters have been at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed considerable latitude in relation to what taxes it imposes or those it doesn't. However, as is the case with other member states, Gibraltar has increasingly found in recent years its fiscal sovereignty eroded and its latitude on tax matters severely curtailed.

As in Britain, Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

As a stepping stone for foreign direct investment, should Brexit come about EU subsidiaries could no longer rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar (subject of course to the agreement by the relevant counterparties) or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the wholehearted support of the British Government

Whilst Gibraltar’s economy is likely to be adversely affected should Brexit occur, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, an EU exit would probably enable Gibraltar to introduce tax rules and incentives that are contrary to EU tax laws and would provide the Gibraltar Government more freedom to adopt competitive tax regimes that may be considered contrary to EU state aid rules. How possible or effective any such strategy would be is doubtful given the OECD driven anti-tax avoidance climate affecting all reputable jurisdictions whether within or outside the EU.

In this as well as other possible change much will hinge on any post-Brexit relationship with the UK - an issue which the Gibraltar Government addressed recently in a paper sent to Westminster's Foreign Affairs Committee. It stressed not only that 'EU membership has been an important factor in the development of Gibraltar’s economy' but also the importance of 'clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations.'