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Legislation
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In accordance with the ATAD Directive, the Gibraltar ATAD Regulations came into effect on 1 January 2019.
The Anti Abuse Measures The following sections provide a broad summary of the measures relating to the ATAD Directive and how they have been implemented in Gibraltar law:
1. The Interest Limitation Rule The Interest Limitation Rule is in place to discourage artificial debt arrangements whose objective is to reduce taxes in Gibraltar.
Generally, under the Gibraltar Tax Act 2010 (the Act), interest expenses are tax deductible when the expense relates to a loan incurred by a company to fund its working capital, or a loan to fund trading assets.
The Interest Limitation Rule provides additional criteria when considering the deductibility of interest in relation to exceeding interest expenses. Exceeding interest expenses are the amount of
deductible interest expense which exceeds the taxable interest revenue of an assessable Gibraltar resident company (a Gibco). The Interest Limitation Rule applies to entities in consolidated groups. The rule provides that exceeding interest expenses are deductible up to 30% of the Gibco’s earnings before interest, tax, depreciation and amortization (EBITDA). There is also a safe harbour clause allowing exceeding interest expenses deductions up to €3million (for the group as a whole) irrespective of the EBITDA.
The Gibraltar Government has availed itself of the derogation in the ATAD Directive and therefore does not apply the Interest Limitation Rules in the following circumstances:
1. To standalone companies (i.e. not part of a group);
2. To financial undertakings (e.g. banks, insurance companies etc.);
3. On loans that were concluded before 17 June 2016 which have not since been modified; and
4. On loans to fund a long-term public infrastructure project.
2. The Controlled Foreign Company Rule (the CFC Rule) This is the first CFC legislation to be introduced in Gibraltar. The objective of the CFC Rule is to limit the artificial use of entities in low tax jurisdictions owned directly or indirectly by Gibcos whose use has the objective of avoidance of paying Gibraltar tax.
The main characteristics of the CFC Rule is that it will attribute the undistributed profits of an entity held by a Gibco to the Gibco if:
a) the Gibco either has: 50% of the voting rights; has 50% of the capital; or is entitled to receive more than 50% of the profits of the CFC; and
b) if the actual tax paid on the profits by the CFC is less than 50% of the tax that would have been paid on the same income in Gibraltar; and
c) if the undistributed income arose from non-genuine arrangements whose essential purpose is to gain a tax advantage.
The CFC Rule does not apply to CFCs where the annual accounting profits do not exceed €750,000 and the non-trading income does not exceed €75,000; or the accounting profits amount to no more than 10% of its operating costs.
3. Hybrid Mismatch
This rule applies to associated enterprises. There is no requirement to find a tax avoidance purpose but there must be a different legal classification of the financial instrument or the entity by the two jurisdictions in which the entities are resident for tax purposes.
A Hybrid Mismatch arises in two situations:
l When a payment, expense or loss is allowed as a deduction for tax purposes in one EU Member State and the same payment, expense or loss is then allowed as a deduction in a second Member State of the EU (Double Deduction)
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