Last week it was reported by Gibraltar Broadcasting Corporation that a locally based gaming company had banned its employees from working from home if they reside in Spain. This move was in response to the recently agreed tax agreement between Spain and Gibraltar which sets out the consequences of a Gibraltar company having its management and control in Spain.
GBC reported “The decision is a precautionary measure against the potential tax liability which companies may incur if employees who are considered ‘decision makers’ are deemed to be working for a Gibraltar-based company, while in Spain, by Spanish authorities. It is believed this could apply not only to directors and operators but to those in senior and middle management positions.”
The Gibraltar government stated that in this regard, there was nothing new in the tax agreement which didn’t already exist in Spanish tax law.
However, Spanish residency has perhaps been given a higher profile given the formal acknowledgement in Gibraltar law by virtue of this agreement.
The issue in question relates to Spain being able to claim tax residency of a ‘GibCo’ if the majority of an entity’s income is from Spain or effective management and / or control of that GibCo is undertaken by Spanish tax residents. Article 2.2 sets out the rules in this regard and they are summarised as follows:
Entities established and managed in Gibraltar (which would normally meet the residency criteria in Gibraltar), shall be resident in Spain rather than in Gibraltar when meeting any of the following (summarised) conditions:
1) The majority of assets directly or indirectly owned by the entity are in Spain, or consist of rights that can only be exercised in Spain.
2) The majority of the entity’s accrued income in a calendar year derives from sources in Spain as defined by Spanish legislation on non-residents.
3) The majority of the individuals in charge of effective management (i.e. executive directors) are tax resident in Spain.
4) The majority of the capital or equity, voting or profit- sharing rights (i.e. ordinary shareholders) are directly or indirectly controlled by individuals that are tax resident in Spain or by entities linked to tax residents in Spain.
2) The majority of the entity’s accrued income in a calendar year derives from sources in Spain as defined by Spanish legislation on non-residents.
3) The majority of the individuals in charge of effective management (i.e. executive directors) are tax resident in Spain.
4) The majority of the capital or equity, voting or profit- sharing rights (i.e. ordinary shareholders) are directly or indirectly controlled by individuals that are tax resident in Spain or by entities linked to tax residents in Spain.
If a GibCo falls foul of this rule then instead of the 10% corporation tax levied in Gibraltar, 25% would be due in Spain, as well as potentially other corporate, capital gains and payroll taxes. In essence, all fiscal advantages of being established in Gibraltar would be eroded.
On the face of it, it would appear that simply preventing staff working from home if they are Spanish tax residents has little consequence. However, it is clear that some companies in Gibraltar have a zero risk approach to these clauses and are not willing to risk any work being undertaken in Spain in respect of Gibraltar companies, irrespective of the tax residency of the employee.
In terms of the impact we have experienced at Chestertons, it is clear that directors and shareholders of local companies have sought to move into Gibraltar before the end of this calendar year to mitigate the risk of their Spanish residency negatively impacting their company’s tax residence.
What is now happening, is encouragement from employers that their employees, most notably key decision makers, also move into Gibraltar. Avoiding Spanish tax residency in the first place is the most risk averse approach.
The timing is good. With the completions of Ocean Spa Plaza, Clemence Suites, Quay 29 and Imperial Ocean Plaza in 2019, property supply has increased recently in both the rental and sales markets, which means that tenants and purchasers are benefitting from a more competitive property market than just a few months ago. This recent surge in supply will not last, so if you are seeking to move in to Gibraltar from Spain before the end of the calendar year to avoid the tax agreement implications, now is the time you should talk to us.
Notes
As at the time of writing, the tax agreement has still not been ratified by the Spanish government although it is expected to do so.
The Gibraltar Spain tax agreement is independent of any particular Brexit outcome.
You can read the full text of the Spain Gibraltar Tax Treaty here.
You can read the Summary Notes of the Spain Gibraltar Tax Treaty here.
Our joint venture subsidiary Buckingham Corporate Services Limited can provide Gibraltar tax advice, email us here.
Contributed by Mike Nicholls