Companies are assessed on an individual basis, and trading losses of group members may not be offset against profits of other members of the group.
However, a Bill was introduced in 2020 which when enacted will allow the transfer of losses between group entities upon restructuring, provided that there is no change to the ultimate ownership or a change of business within a period of three years. The changes allow losses to be carried forward against a business even if the business is transferred to another company under the same ultimate ownership. Anti-abuse provisions restrict the transfer of losses to instances of legitimate group restructuring. The transfer of accumulated losses from one type of business to another is specifically prohibited.
The Income Tax Act contains a generic anti-avoidance clause that allows the Commissioner to disregard an arrangement that the Commissioner believes is fictitious or artificial. In addition, it includes the following specific anti-avoidance measures.
Where a taxpayer seeks to reduce their liability to tax by creating an artificial split between activities in Gibraltar and outside of Gibraltar, the Commissioner shall use anti-avoidance provisions to defeat such an attempt.
The general anti-avoidance rule in the Income Tax Act should be interpreted in such manner as best secures consistency with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and other documents designated as comprising part of the transfer pricing guidelines.
There is also a specific rule in relation to interest payments. The amount of interest payments to connected persons that are in excess of that payable at arm’s length will be deemed to be a dividend. Where the amount charged for goods and services by connected persons is not at arm’s length, this will be disallowed as a taxable expense. Any expenses allowed will be subject to the lesser of (i) the expense, (ii) 5% of the gross turnover of the company, and (iii) 75% of the pre-expense profit of the company.
Country-by-country (CbC) reporting
Under the CbC reporting regime, a Gibraltar tax resident company that is the ultimate parent entity or surrogate parent of a multinational enterprise group with consolidated revenue of at least 750 million euros (EUR) is required, for fiscal years commencing on or after 1 January 2016, to file, within 12 months of the end of the fiscal year, a CbC report containing information on its group entities and jurisdictions in which the group operates.
A Gibraltar constituent entity of a multinational enterprise group with consolidated revenue of at least EUR 750 million is required in cases where it is not obligated to file a CbC report to notify the Gibraltar tax authorities of the identity and jurisdiction of tax residence of the entity in the group that is required to report.
Interest paid on a loan to related parties that are not companies (or loans where security is provided by related parties) where the ratio of the value of the loan capital to the equity of the company exceeds 5:1 will be considered as dividend payments and thus not deductible for tax purposes. This provision is not applicable to Gibraltar banks or money lenders.
Interest limitation rule
The interest limitation rule provides that exceeding interest expenses are deductible up to the greater of (i) 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA) and (ii) EUR 3 million.
Since interest income is not taxable on back-to-back loans, the interest expense is not deductible.
Income from dual employment contracts is taxed in Gibraltar if both employers are connected persons.
Transfer of assets abroad
Where assets are transferred abroad with the purpose of avoiding tax and the taxpayer has the power to enjoy these assets either now or in the future, then any income or benefits received from these assets will be deemed to be income chargeable to tax.
Controlled foreign company (CFC) rule
The CFC rule attributes to a Gibraltar company the undistributed profits of a CFC (i.e. Gibraltar entity has at least 50% of either the voting rights or the capital or is entitled to receive 50% of the profits and the actual tax paid is less than 50% of the tax that would have been paid in Gibraltar on the same income) from non-genuine arrangements where the purposes is to gain a tax advantage.
A hybrid mismatch that results in a double deduction for tax purposes:
- shall be denied in the investor jurisdiction, and
- where the deduction is not denied in the investor jurisdiction, it shall be denied in the payer jurisdiction.
A hybrid mismatch that results in a tax deduction without inclusion:
- shall be denied in the payer jurisdiction, and
- where the deduction is not denied in the payer jurisdiction, it shall be included in income (for tax purposes) in the payee jurisdiction.
Except where one of the jurisdictions involved in the transaction(s) has made an equivalent adjustment in respect of the hybrid mismatch, a deduction for tax purposes shall be denied for payments that directly or indirectly fund expenditure that gives rise to a hybrid mismatch.
Where a hybrid mismatch results in disregarded PE income, the taxpayer must include the income that would otherwise be attributed to the disregarded PE. This does not apply to income exempted under a double taxation treaty (DTT).
Where a hybrid financial instrument results in withholding tax (WHT) relief to more than one party, the benefit of such relief is limited in proportion to the net taxable income of the payment.
A 'hybrid mismatch' includes any of the following:
- A payment under a financial instrument that gives rise to a tax deduction without inclusion.
- A payment to a hybrid entity that gives rise to a deduction without inclusion.
- A payment to an entity with one or more PEs that gives rise to a deduction without inclusion.
- A payment that gives rise to a deduction without inclusion as a result of a payment to a disregarded PE.
- A payment by a hybrid entity that gives rise to a deduction without inclusion as a result of the payment being disregarded.
- A deemed payment between two PEs that gives rise to a deduction without inclusion as a result of the payment being disregarded or where a double deduction outcome occurs.