Commentary on the UK/Gibraltar Double Taxation Agreement

On 15 October 2019, the text of a new comprehensive double tax treaty (DTT) between the UK and Gibraltar was released (the Treaty).  The Crown Dependencies (CD) (Jersey, Guernsey and the Isle of Man) have had treaties with the UK for a number of years, and these were replaced with comprehensive treaties in 2018 (with effect from 1 January 2019). Gibraltar, (along with other British Overseas Territories (OT) did not have a double tax treaty with the UK.

Nor could Gibraltar rely on EU tax law vis a vis the UK as it is part of the same member state as the UK[1].    But whether you are a CD or OT is, as far as the real world is concerned, neither here nor there.   Just like business people do not care if the tax benefit is a tax relief or a tax exemption; they just see tax or no tax.   Likewise, businesses see a country with a DTT with (for example) a property development loophole[2], and one without a DTT at all.

So, this new DTT is a coup for Gibraltar.  What does it mean?   We will look at the key articles together with some examples of common cases.  We assume that the reader has some knowledge of DTTs, and has read a copy of the Treaty.  If the answer to both of the above is ‘No’, then this commentary will only raise more questions than it answers (although owing to Brexit we all seem to know more about international treaties and protocols than we ever wanted to know in the first place).   For more answers, please email steve@internationaltax.eu or stephen@internationaltax.eu.

Article 1 – Persons Covered

Article 1 starts in the usual way by stating that the Treaty applies to persons who are residents of one or both territories.   ‘Persons’ does not include trusts, bodies without legal personality, e.g. clubs and associations, however, Article 3(1)(d) states that “persons” includes an individual, a company (which includes any body corporate treated as a company for tax purposes, e.g. unit trusts[3]) and any other body of persons. In the UK, the trustees of a settlement are a “body of persons” even if there is only one of them[4].  So, importantly for our client base, Gibraltar resident trustees are included in the scope of the DTT.

Article 2 – Taxes Covered

The taxes to which this Treaty applies are income tax and corporation tax in both countries, and CGT in the UK (Gibraltar has no CGT equivalent).    Article 2(4) goes on to say that it also “shall apply to any identical or substantially similar taxes… which … has effect in addition to, or in place of, the existing taxes”.   We would say, diverted profits tax[5] (DPT), which is a transfer pricing anti avoidance /  avoidance of a permanent establishment tax would qualify although this is contrary to the view taken by HMRC (and of course they are entitled to their view but it is for the courts to decide and given that the Treaty is set out in a statutory instrument in identical wording to the “full” treaties, then HMRC’s position does seem untenable[6]); and possibly the pre-owned assets tax[7], which is an income tax (well that is what the charge is headed as, and it is returnable on the income tax return), but is an IHT anti-avoidance provision, is discussed in HMRC’s IHT Manual[8] and can be avoided by election if one agrees to pay IHT[9].  The current Finance Bill (Finance Bill 2019-20) contains draft legislation for the new digital services tax[10] (DST) which aligns itself to corporation tax, is aimed at large companies (hence £25m threshold for revenues), allows deduction of related expenses and is charged at 2% pa on the net revenues of sales to UK customers.   We therefore think that this could also be covered by the DTT.

Article 3 – Definitions

Defined terms include the UK, for however long it exists, and in (1)(k) there is a definition for pension schemes which would include QROPS and QNUPS.   See Article 1 above re the definition of ‘person’ in respect of trusts.

Article 4 – Resident

The usual definition of reference to domicile, residence, etc. applies, and excludes any person who is liable to tax in that territory only in respect of income or capital gains in that country.  For example, a Gibraltar trust selling its holding in a Gibraltar company which is also a UK property rich company for UK tax purposes, would NOT be a resident of the UK if that was its only UK tax obligation[11].

Prima facie Gibraltar Category 2 residents are eligible but it is doubtful whether HMRC would agree.  UK resident but non-domiciled individuals are also able to benefit from the treaty to the extent that overseas and income and gains are remitted to the UK (Article 28(3)).

Charities and other similar organisations are included[12].

There is a tie breaker for individuals who are regarded as resident in both territories to determine residence for the purposes of the treaty.  The tie breaker looks first at the territory in which the individual has his permanent home, and if that is not conclusive, the test is where the individual has his habitual abode.  If it is still not possible to conclude an individual’s residence status, the position is determined by  the mutual agreement of the competent authorities[13].

For persons other than individuals, the tie breaker is mutual agreement of the competent authorities only and if there is no agreement, then there is no access to the Treaty[14].  What this means is that if you want to claim to be resident in a particular country, substance is crucial (as always).

Article 5 – Permanent establishment (PE)

Article 5 contains the usual exceptions to the definition of a PE, for example in respect of auxiliary and preparatory provisions. In line with  the UK’s BEPS[15] provision, an aggregate of excepted activities may still create a PE unless the overall activity remains auxiliary or preparatory in nature[16].

Article 5(7) is a reminder that anyone who habitually exercises authority in a country on behalf of a non-resident, could make the non-resident locally tax resident, subject to the independent broker exclusion in Article 5(8).   Finally, Article 5(9) confirms that control of an enterprise in one territory by a resident of the other does not give rise to a PE.

Article 6 – Income from immovable property

In Scotland, the sale of rents is personal property, whereas in England and Wales it is immovable property[17].  Would a sale of Scottish rents by a Gibraltar company be regarded as immovable property for the DTT?   We suggest that owing to the inclusion of “usufruct” in the definition of immovable property, that the answer is yes.

Articles 7 to 9

There is nothing particular of note in Articles 7 (Business Profits), 8 (International Shipping) and 9 (Associated Enterprises).

Article 10 – Dividends

Neither the UK nor Gibraltar ordinarily tax companies in receipt of dividends.  Indeed, the UK only does so where there is an unusual feature of the dividend or it is received from a company resident in a country which does NOT have a DTT with a full non-discrimination article (NDA).  So, once the Treaty enters into force, one might expect dividends received by UK companies from Gibraltar companies to no longer be taxable. However, the list of countries with whom the UK has treaties containing a ‘full’ NDA (see HMRC Manuals at INTM412090[18]) does not include the Crown Dependencies of Jersey, Guernsey or the Isle of Man, notwithstanding that the DTTs with these countries concluded in 2018 each contain an NDA on identical terms to those apply to ”full’ treaty countries. Hong Kong is similarly not a full treaty country despite the DTT with the UK containing an NDA, the common factor being that Hong Kong, like the Crown Dependencies, is not a sovereign state. As Gibraltar is a British Overseas Territory, HMRC wil no doubt maintain that the Treaty will therefore also not be regarded as a full DTT, even though the treaty contains an NDA written in identical terms to other “full” double tax treaties.   HMRC will therefore no doubt maintain therefore that dividends payable from Gibraltar resident companies will continue to be taxable in the hands a UK recipient company if that company is ‘small’[19].

The Treaty has no impact on Dividends received by UK Individuals from Gibraltarian companies and, as is the case currently, these will be taxed in the same way as UK dividends.

Article 10(2)(b) reduces the withholding tax on property income dividends (PIDs) paid from a UK Real Estate Investment Trust (REIT) from 20% to 15%. This puts Gibraltar on a par with Luxembourg (which is where most international investors put their UK REIT shareholdings) in this regard.

Articles 11 (Interest) and 12 (Royalties)

The Interest and Royalties Articles are considered these together as they are substantially the same.  A Gibraltar resident receiving interest from the UK will pay only Gibraltarian tax, provided the recipient meets the conditions in paragraph (3) of each Article.  These include individuals and also companies listed on a recognised stock exchange, which includes the Gibraltar Stock Exchange for Gibraltar resident companies (see Article 2 of the Protocol to the Treaty).

Also included are banks, buildings societies and similar financial institutions which derive their profits from the financial markets or taking deposits, or providing finance.  Would this include a Bitcoin investor or trader?   Probably not unless they were lending money in Bitcoin.[20]

The Articles also include the UK’s limitation of benefit (LOB) clause of choice, (i.e. the most taxpayer friendly version) which states that any person can benefit under the treaty provided that using the DTT to secure the benefit of one of these two Articles was not the principal purpose of using the DTT.

A company which is owned as to less than 25% by non-residents does not have to overcome the principal purpose test to access treaty benefits.

For example, a Gibraltar resident company owned 76% by Kaiane Aldorino and 24% by the Right Honourable Dianne Abbott MP PC would be entitled to receive UK source interest and royalties free from UK withholding tax.   However, if it were 74% / 26%, then it could not.

Our practice is familiar with a lot of Gibraltar companies which are wholly owned by Gibraltar resident trustees.  The underlying Gibraltarian company is the beneficial owner of the interest or royalty (as required by Articles 11(1) and 12(1)[21]).  The trust[22] is probably not the beneficial owner of the shares in the company in normal parlance but does control its voting rights, and is entitled to its dividends and proceeds of sale (bearing the risk and reward of changes in value). On the basis of UK case law[23], the trustees are therefore regarded as the beneficial owner of those shares for tax purposes, so a company in such a position can obtain interest or royalties gross of UK withholding tax.

Referring back to Article 1 and Article 3(1)(d), a trust is a person and if it owns 100% of the Gibraltar company, then Articles 11(3)(iv) and 12(3)(iv) will apply to allow payments to be made gross.

However, if the trustees have mandated the dividends of the company to someone with an interest in possession in the income, and that person is not resident in Gibraltar, then withholding tax will apply.

In 2017, the UK stated an intention to tax offshore IP companies and in a Consultation Document published on 1 December 2017 proposed a “Royalty Withholding Tax” to apply where the royalty was not related to a trade carried on by the recipient[24].   For once, responses to the Consultation produced results and HMRC were persuaded that there was a better way of dealing with this which we now see in the Offshore Receipts in respect of Intangible Property (ORIP) rules in ITTOIA 2005, Chapter 2A, ss.608A to 608Z.   Section 608A(1) states that these provisions do not apply where the recipient is resident in a territory having a DTT with the UK which includes a “full” NDA, and therefore the same problem arises as noted above in relation to dividends in that the UK/Gibraltar DTT will not be regarded as a ‘full’ DTT.  Subject to our comments on Article 10 above, the ORIP legislation will therfore continue to apply once this treaty is in force.

Both Articles 11 and 12 contain the usual provisions denying treaty relief in respect of excessive amounts paid owing to a special relationship between the payer and recipient.

Article 13 – Capital Gains

The Capital Gains Article is fairly standard, and protects against gains (even though Gibraltar, could, but does not tax them.  The Article also  carves out land related gains and negates the UK close company apportionment anti-avoidance rule known as “s.13” but is now in TCGA 1992, s.3[25].   At least that will make our advice a little shorter once the DTT is in force!

Article 13(2) applies to land related gains.   From 1 April 2019, the UK now taxes everyone, regardless of where they are resident, to CGT on disposals of UK land, whether residential or commercial.   For those not already in scope, assets were rebased as at 1 April 2019.   The new regime also taxes the sale of UK land rich companies on any increase since April 2019 where:

• The seller has more than 25% of the company; and
• The UK land value represents 75% or more of the value of the net assets of the company.

To illustrate, if a company owns land in the UK and land in Czechia which is worth more than the UK land, then the UK charge will not apply and also the treaty will deny UK taxing rights as well.  If the property holdings were the other way around, the under the DTT the UK would have the right to tax but unless the 25% and 75% tests referred to above were passed, there would be no UK CGT liability.

Article 20 –  Other income

We always welcome the inclusion of this Article as it makes life so much simpler when clients ask about taxation of swap payments, and other esotery.   It also contains provisions for the taxation of income of estates of deceased persons and allows that tax to be credited to the beneficiary.

Article 23 – Non-discrimination (NDA)

The NDA of a DTT is frequently the most important Article in a treaty. In itself, the Article simply states that each party will not apply more burdensome rules on the residents of the other state.   However, in its battle against global tax avoidance, being a country with a DTT with an NDA means that large parts of the domestic UK tax code, (mainly the nasty complicated international parts) either will not apply or will not apply to SMEs.

We have already mentioned royalty income and ITTOIA 2005 Chapter 2A, and dividend taxation in Article 10 above.  But there are more.

Transfer pricing and DPT do not apply if you are an SME in a country with a DTT with an NDA.  Transfer pricing for ‘small’ businesses does not apply at all (as above, the definition of ‘small’ accords to EU and OECD standards, i.e. where there are fewer than 50 employees and turnover and/or balance sheet of up to €10m for an accounting period).  For ‘medium-sized’ companies (those with 250 or fewer employees and a turnover of no more than €50 million and/or a balance sheet total of below €43 million), the transfer pricing legislation can be applied by HMRC direction.

It also means that a UK resident trading business with Gibraltar branches can exclude any profits arising to that branch from UK taxation[26]; and as time moves on, more provisions will be excluded.

As mentioned above, the difficulty with the UK/Gibraltar DTT is that, notwithstanding the inclusion of an NDA, the treaty is, in HMRC’s view unlikely to be regarded as a comprehensive DTT for the purposes of the transfer pricing regulations, dividend exemption, ORIP rules etc., but as that is ultimately for the courts to decide, not HMRC, the opportunity is there.

Article 25 – Exchange of Information

There has been a tax information exchange agreement (TIEA) in place between the UK and Gibraltar since 2009, but frankly if anyone in the last 10, if not 20 years, has not been working on the assumption that the tax man can see everything, everywhere, then you could, and in our view should, be exposed.

Article 29 – When?   Entry into Force

The first step to bring the Treaty into force is ratification by both Parliaments, which in the case of the UK could be some time, and following that for the UK the Treaty comes into force on the following dates:

• For withholdings, the first day of the second month after the Treaty comes into force;
• For income tax, the 6^th April following the Treaty coming into force; and
• For corporation tax the 1^st April following the Treaty coming into force.

And for Gibraltar:

• For withholdings, the first day of the second month after the Treaty comes into force
• For income tax , the 1^st July following the Treaty coming into force
• For corporation tax the 1^st July following the Treaty coming into force

Summary

The Treaty represents great news for those qualifying for exception or reduction in withholding taxes.

All of the above points apply to all of the UK treaties with CDOTs.   Whilst confirmation is awaited from HMRC as to whether Gibraltar will be regarded as a ‘full’ treaty country given the inclusion of a NDA, or a court case (ultimately to the Privy Council of the Supreme Court) resolves the point, the conclusion of the treaty means that at least Gibraltar now has a more level fiscal international tax playing field than before.

References

[1] See Fisher v HMRC [2014] UKFTT 804.  Although the UK government has treated Gibraltar as another member state in some cases, e.g. regulation of financial services.

[2] Now closed by removing the residence rule from property development taxation, see Finance Act 2016.

[3] TCGA 1992, s.99

[4] TCGA 1992, s.69

[5] Finance Act 2015, Part 3 and especially relevant to property groups and gaming groups.

[6] HMRC’s argument that treaties with CDOTs refer to territories, not states, as the CDOTs are not independent countries. This does appear ridiculous in this context.  A DTT is there to prevent double taxation and allocate taxing rights between two competing tax systems.

[7] Finance Act 2004, s.84 and sch. 15

[8] IHTM 44000

[9] See IHT form 500, Finance Act 1984, sch 15 paras 21 – 23.

[10] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816361/Digital_services_tax.pdf

[11] Article 4(1)

[12] Article 4(a).   Gibraltar has not applied to be recognised as a relevant territory for the UK tax legislation on charities under FA 2010, sch 2 para 6.   So far only Norway, Iceland and Liechtenstein have been added.

[13] Article 4(3)

[14] Article 4(4).

[15] If you need the biggest event in international taxation in the last ten years to be explained to you, then perhaps you should not be reading this commentary.

[16] Article 5(4)(f)

[17] In re Whitting ex parte Hall (1879) 10 Ch D 615 CA, referred to in IRC v John Lewis Properties plc [2001] STC 1118 and Pumahaven Limited v Williams (Insp of Taxes) [2002] STC 1423).

[18] The list at INTM 412090 applies for transfer pricing purposes, however, it seems reasonable to conclude that the same approach would be adopted in considering the application of the dividend exemption in CTA 2009 Pt 9A.

[19] A company is small if, in an accounting period, it has: (i) fewer than 50 employees; and (ii) an annual turnover and/or a total balance sheet not exceeding €10m.

[20] Cross reference Jacqui article in Tax Adviser

[21] See also Indofoods case, Indofood International Finance Limited v JP Morgan Chase Bank NA, London branch [2016] STC 1195 CA.

[22] Interest in possession trusts would have a beneficiary entitled to the income of the trust and therefore could disapply Article 11(3)(iv) and 12(3)(iv).

[23] J Sainsbury plc v O’Connor (1991) 64 TC 208 CA, distinguishing Wood Preservation v Prior 48 TC 112.

[24]  See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/663889/Royalties_Withholding_Tax_-_consultation.pdf

[25] Article 13(6)

[26] Foreign branch election, CTA 2009, s.18.