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The Rock is open for business

Sponsored post: Gibraltar has no natural resources, a negligible local market of 30,000 people and imports everything. If it has any resource at all, it is the trading nous of its business community.

 Unlike most of the world, Gibraltar has bucked the economic trend of the past five years. Employment is close to its all-time high, and, while the pace of economic growth has slowed compared to the first decade of the century, this year the Rock’s economy is forecast to knock out a cracking 6 per cent increase. How has it pulled this off? By doing what it does best and focusing on niche business.

Gibraltar’s economic resilience has been born out of a survival instinct honed by years of maltreatment. Three centuries of antagonism from a large temperamental neighbour has shaped Gibraltarians’ stubborn refusal to succumb to Spain’s intermittent campaigns of hectoring and bullying. The real economic transformation, though, has taken place in the past 30 years or so, when Spain re-opened the frontier as a prerequisite to its joining the EU . With an open frontier, Gibraltar could once more, after a 16-year blockade, promote itself to the millions of tourists visiting the Costa del Sol. And today Gibraltar is the single most popular tourist attraction for holidaymakers on the Costa.

Tourism was one for the first pillars of the economy to be developed once the garrison packed its bags and left the Rock at the end of the 1980s. Tourists come in droves: each year about ten million of them, by car, by air and by sea.

Gibraltar’s position at the western end of the Mediterranean makes it an obvious port of call for visiting cruise ships. As well as the tourists, around 100,000 vessels a year pass through the narrow 14-kilometre-wide Strait of Gibraltar and 10 per cent of them choose the Rock to pick up the low-sulphur fuel needed to operate in the European ports. The advantage which Gibraltar offers visiting vessels is that they do not need to diverge much from their plotted course. These merchant vessels call at Gibraltar’s small but bustling port to pick up fuel (bunkers), supplies and spare parts. With its international airport a five-minute drive from the port, Gibraltar is one of the very few ports in the world where crew changes for merchant ships can happen without a visa. Relief crews are flown out from Heathrow or Gatwick to pick up the visiting vessel and then go on their way.

On land, the Rock’s business community has been hard at work developing the Finance Centre over the past 25 years. Being small, Gibraltar can be nimble and legislation is drafted in consultation with industry practitioners, regulators and the local government. There is bureaucracy but not as much as you find in large jurisdictions like the City of London, Frankfurt or New York. Ready access to the regulator or relevant civil servant is one of the benefits of doing business in Gibraltar. There are protocols and processes that need to be adhered to. And for regulated activities such as financial services, the levels of disclosure and capital requirements are no less onerous that what one would find in the large financial capitals of the world. However, as everything is so much smaller, relation- ships are forged more quickly and decisions can be taken more swiftly. Word of mouth and personal reputation in the small community often count just as much as formal qualifications. Easy personal contact is a hidden benefit of the Rock.

The introduction of the single European passport for insurance in 1998 enabled locally licensed insurers to offer their services across Europe. This led to significant growth in the number of insurance companies setting up in Gibraltar: licences granted have more than tripled in the past decade.

Separately, new legislation was enacted in 2005 in a bid to develop a specific niche in the funds industry. Further amendments were made to update the legislation in 2012 and the number of funds has quadrupled in just four years, according to the GIA, the local industry association.

Gibraltar is home to a growing number of hedge funds and fund administrators. There has also been an increase in the number of family offices run from Gibraltar. The beneficiaries may not live on the Rock all the time, but the pool of professional expertise in terms of investment appraisal, fund management, tax and trust advisory is on a par with anything you would find in St James’s or Georgetown.

It is Gibraltar’s finance sector which has probably seen the greatest change. Affected as it is by legislation created elsewhere, particularly in Brussels, Gibraltar has had constantly to adapt in order to compete. Despite having undergone significant change in the past 15 years, perceptions trail the reality. Gibraltar is labelled (still!) as a tax haven by those who want to follow a more political agenda.

Single tax rate

The dual tax system, where offshore companies paid no tax and onshore companies did pay tax, ceased to exist at the end of 2010. Gibraltar now has a single uniform corporate tax rate for all companies trading in the territory. Corporation tax is a competitive tax and governments set it at rate they hope will attract companies on the one hand and also generate sufficient revenue to fulfil their commitments. Gibraltar’s corporate tax rate is levied at 10 per cent of prof- its. An added attraction is that Gibraltar is outside the EU customs union so there is no sales tax (VAT). Neither is there capital gains tax nor inheritance tax.

While each of these is likely to be attractive both to individuals and to companies alike, they are unlikely on their own to be sufficient for anyone wishing to set up a business in Gibraltar.

Staffing can be an issue for start-ups and the costs of transferring staff from elsewhere can be high. The online gaming industry certainly found this when it first came here 15 years ago. Now the pool of talent with the right experience is fairly stable, but it has taken time to develop.

One of the first contacts most new businesses make is to the local Chamber of Commerce. It is small but well plugged in to the business community. Apart from proving local statistical information, they are able to point new businesses in the right direction to go, what licence they need, and which government department to speak to. Once you are set up they will also lobby on your behalf and keep you informed of what is going on. Be sure to get in contact.


 by Christian Hernandez, president, Gibraltar Chamber of Commerce

Photo: Getty
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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.'