Gibraltar

Ian Le Breton is Managing Director at Sovereign Trust (Gibraltar) Limited. He explains why Gibraltar can no longer be characterised as an “offshore tax haven”.

When Gibraltar’s new income tax regime came into force on 1 January 2011, it signalled the end of a long journey to reposition its financial services centre from an offshore tax haven to an onshore European Union (EU) finance centre.

The new regime brought Gibraltar into compliance with the rest of the EU by doing away with the previous exempt status tax regime. The new Act ended any discriminatory distinctions between onshore and offshore business by introducing a single 10% corporation tax across the board.

As an onshore EU country with competitive rates of corporate and personal taxation – as well as the absence of capital gains, value added, inheritance, wealth or gift taxes – Gibraltar now offers opportunities that few other international finance centres, or specialised finance centres as Gibraltar prefers to be known, can match.

Gibraltar firms engaged in financial services are regulated by the Financial Services Commission. Implementation is critically important and by all measures, Gibraltar benefits from excellent regulation. The Gibraltar government is highly responsive; recent changes to legislation have allowed the industry to develop in such vital areas as insurance, funds and investment management. 

When considering financial services, professional advice should be sought at the earliest opportunity.  Options can be explored but it is critically important that corporate or trust structures comply with reporting requirements and that any tax implications are carefully considered. 

One way to demonstrate international credibility is to appear on the OECD Global Forum’s “white list”. The main criterion for achieving such a cherished position was for a jurisdiction to have entered into a series of bilateral Tax Information Exchange Agreements (TIEAs). Demonstrating the willingness of the two signatory countries to exchange information relating to a taxpayer, Gibraltar has engaged fully with the process and entered into such accords with 20 separate countries. 

Gibraltar competes effectively with its peers within the diverse sectors that make up the finance centre. Several global banks are represented providing a full range of banking services and investment management is another important cog in the wheel. In particular, Gibraltar benefits from Experienced Investor Fund (EIF) legislation and its funds regime has a well-deserved excellent reputation globally. Insurance is another vitally important component of the finance industry. 

Under EU “passporting” rules, regulated Gibraltar firms are permitted to expand across Europe in respect of insurance, reinsurance, banking and investment services.

The establishment of companies, trusts and other structures remains core to firms such as Sovereign. The larger firms have diversified into other areas including investment management, accounting and insurance services. A few also able provide marine and aviation services including registration of yachts and aircraft. In our own case, established a quarter of a century ago, we boast 25 offices around the world. With over 70 staff, Gibraltar remains our largest office hence we are well placed to provide the services and advice international clients will need.

Overall then, Gibraltar has a good story to tell. The next time you come across lurid reports about international tax havens, rest assured that Gibraltar is now recognised as a preeminent onshore EU finance centre and all of us in the finance industry are striving to ensure that this story can only get better in the future.

Trust & Company Management: International reach and depth of service

Milestone GRP - The main trend over the last decade has been global integration and compliance. How has this im- pacted  Gibraltar's economy and how has it impacted  the Trust and Company Management industry in particular?

Mr. Ian Le Breton - Looking at compliance, we are regulated by the Financial Services Commission (FSC) with a strong but, at the same time, cooperative hand. They have turned what could otherwise have been extremely onerous, difficult to im- plement policies, into something that remains costly and time consuming, but is  done with a cooperative spirit with them. From  time to time we have discussions  with them,  and the relationship is good. I describe it as a hand in hand approach, not a hand in glove one. It is a partnership type of approach. There is lot of new regulation to take on, and other internati- onal groups, the OECD, IMF, the EU, are going to impact us.

You need to have a pragmatic view and simply live with this, and even the Government cannot  do anything about it. We work with this, whether we like it or not, we have to move with the times  and we do it fairly successfully. That means  that Gibraltar can look to the world and say that we comply with all these groups; we are signing all these TIEAs, we might soon have double tax  agreements, and we’ve moved from being considered an offshore financial centre to what  it is now an international specialised financial centre.

Milestone GRP -  Gibraltar and the  Government  are often described as agile and nimble. Do you agree with that cha- racterization?

Mr. Le Breton - It is very true. Agile and nimble, but also po- sitively reactive is the type of word  to describe it. Proactive too, as we tend, in Gibraltar, to identify trends and adapt to them. That is what we do in Sovereign and a number of firms with whom we share the space in Gibraltar, too. We need to reinvent ourselves as we go along, and any firm like us that does not have this approach is going to find themselves falling behind because legislation and rules are changing all over the world at all times. So if you cannot be agile and nimble then you are lost. That  takes us back to our small but  perfectly formed nature.

It is not difficult to talk to the Government's departments, even to members of the  Government themselves, if we need to, quickly. Obviously legislation changes take time but we cer- tainly have a good rapport with these people and that means that we can be agile and nimble.

Milestone GRP - How has the global downturn affected the growth of the company? What  areas are you are develo- ping?

Mr. Le Breton - We have certainly seen growth  despite the economic downturn. In the last 4 years our staffing has grown by 10%  or more.  As  for our product  here, it is certain that

there is an increasing depth to our services. We do a certain amount of work on the personal pension side, particularly the UK transfers, the  Qualifying Recognised Overseas Pension Schemes (QROPS), and Qualifying Non-UK Pension Schemes (QNUPS), which is a different model altogether but has simi- larities. We are  expending our marine division that is based in  Gibraltar, looking at yachts, and last year we  established an aviation division. Again looking at clients with big jets, big yachts: these are the  types of clients we need to approach anywhere. So our strategy is to use these subsidiary groups to look at markets in a slightly different way.

Milestone GRP - How have Gibraltar’s infrastructure deve- lopment contributed to  these specific opportunities, such as the registration of yachts or aircraft?

Mr.  Le Breton -  The growth  of Gibraltar's  infrastructure  is extremely useful to us. For Sovereign it is important that the infrastructure continues to develop in Gibraltar, not just for the business itself, but also for our staff. It is important that they continue to find this an attractive place to live and work. From Sovereign's point of view, we are one of 25 offices, so whilst we were established here in 1987 and here is where everything started and it continues to be our largest base.

Milestone GRP - Are there any limitations to operating here?

Mr. Le Breton - There are limitations. We are never going to land a jumbo jet at the airport, so are we going to set up direct links with New York with 300 people on board  a plane? No, we will not. But, using this as an example, we have infrastruc- ture that is not right here but just a short drive up the road in Malaga where we have  a full international airport, so that is not a real limitation.
We have a wonderful  time  zone advantage,  the  climate  is great, and this is important since people are attracted to Gib- raltar for its climate and lifestyle. A lot of people like our firm are doing what they can to build it up. We have a lot of compe- tition out there, but generally overall we are doing a good job. I encourage executives from wherever they are in the world to come and have a look.
Milestone GRP - As a well established foreigner in Gibraltar, what do you see as existing misconceptions about the place?

Mr. Le Breton - One area I want to work on is the impression that Gibraltar is just open for the British. That is not the case. Brits make up a percentage of the client base, but just a  per- centage of it, and that is a message I want to get across. We are ready to build our market from around the world. Europe is obviously a main area of course, but there are advantages for other parts of the world, too. Gibraltar is a good place to headquarter a company and maybe the CEOs from around the world may want to start considering that, and then come to talk with us when they do.

Partnerships in today’s world

We keep hearing governments across Europe tell us that “we’re all in this together”. British newspapers in particular seem to take great delight in reporting examples of how some of the more wealthy members of the current cabinet are “out of touch” with ordinary people. The recent story about whether or not to charge VAT on hot “pasties” was just one example. But in general, it seems that most people in the UK realise that by working together – in partnership if you will – things will eventually get better. Certainly the huge deficit is being reined in although there is a long way to go.

Since the last edition, I have had the pleasure of attending the long awaited wedding of two good friends. It was a lovely affair; my partner and I had a very jolly time and we wish the newlyweds a long and above all, a very happy, marriage.

Going to the ceremony got me thinking – weddings do that, don’t they? – and all the talk of partnerships led me down several paths. What constitutes a partnership anyway? And when we hear the term in a business context, is it based on the same principles as two people who call themselves “partners”?

A simple definition of partnership is that it is an arrangement where parties agree to cooperate to advance their mutual interests. But let’s go back a little to explore the term used by individuals in their personal lives, rather than the business context.

Years ago, if one was neither married nor engaged but still committed to another person in a steady relationship, the words “boyfriend” or “girlfriend” seemed to do perfectly well (although I accept it sounded rather odd when describing people old enough to be one’s parents). The term “common law marriage” was one taught to me by my mother although I used to get alarmed at the level of vitriol in her voice when she said “common” – as if there were something dreadfully wrong about it all.

Fast forward 25 years and the word “partner” seems now to be the in-phrase. Time was, just a few years ago in fact, that if I had referred to my partner in polite company, there’d be a short intake of breath for it was taken as read that I had to be referring to another man. In these days when so many people maintain a relationship without ever entering into marriage, the term partner could just as well refer to a girlfriend of several years’ standing. It’s all become rather confusing.

In the UK, it was the Labour government that took the politically brave and potentially risky decision to enact civil partnership legislation in 2004. Possibly soon to be extended to Gibraltar, the legislation set out clear guidelines for the first time relating to the responsibilities of partners and the benefits to be gained from entering into such an arrangement. Aimed at same-sex couples, there have been complaints of discrimination ever since from straight couples who do not wish to enter into marriage but seek the financial and legal benefits of a partnership arrangement. So far the government has maintained that such people can simply get married but sometimes it’s more complicated than that.

The civil partnership legislation is very clear. In exchange for a series of undertakings and legal definitions of what constitutes the partnership between two people, several important benefits arise. The most important implications from a financial perspective are probably those dealing with succession issues and inheritance tax in the UK and the setting out of new rules relating to next of kin and a lot more besides. Sadly – but inevitably – it also goes into considerable detail about how such partnerships should be dissolved.

These new rules in effect brought into force for individuals important aspects of legislation that had previously only been available in a corporate setting. Business partnerships, as we shall see, are nothing new. Legal partnerships come in several shapes and sizes but they all follow a similar pattern. It is also now very common to see the initials LP (standing for limited partnership) or LLP (limited liability partnership) appended to the name of many of our large firms, legal and accountancy in particular.

But hang on. Surely partnerships – law firms, doctors and so on – were not supposed to be able to limit their liability. Wasn’t that the whole point? In exchange for the comforting knowledge that the partners in question, whether they were drafting a contract or diagnosing a condition, were putting not just their professional reputations on the line but also their assets. Of course, insurance was used to mitigate some of this risk but ultimately their judgment, and that of their colleagues, was backed by individual partners’ wealth.

In several jurisdictions, many of them based on English law, partnerships as a separate legal entity have become far more popular in recent years. Essentially the intention was to retain the benefits of partnership whilst allowing at least some protection associated with limited liability. But this concept is not restricted to English law and is certainly nothing new.

In the third Century BC, Roman societates publicanorum exhibited many similarities to the company structures we see today – but at least one partner had to be included who was fully liable for the entity’s debts. Across the Islamic world too, such arrangements became common. In Europe, the Italian commenda of the tenth Century were the forerunners of the LPs and LLPs we see today.

As always there are differences across the various jurisdictions where such structures can be established but the general principles are similar enough. A limited partnership may typically have up to 20 members, at least one of which is a “general” partner. This general partner has the power to bind the partnership by entering into contracts and so on and also assumes unlimited liability for the debts and obligations of the partnership. This potential liability can itself be mitigated if the general partner is itself established as a limited company.

In these circumstances, the other partners could enjoy “limited” liability in respect of the partnership in much the same way that shareholders in a company know that their financial risk is limited to the amount of capital that they have invested into the company. It follows that these limited partners may not take part in the management of the company nor are they able to bind it contractually. The limited liability partnership differs in that there are limitations in liability for all partners.

Assuming such partnerships are properly structured from the outset, limited partnerships can be extremely flexible. Within reason, they are able to do anything a “natural person” – that is someone like you or me acting in an individual capacity – can do. A partnership can enter into contracts, own assets and, importantly, it can carry on in existence despite any changes in the status of the individual partners. In other words, in many ways such partnership “entities” are much more closely related to companies than a traditional partnership of old.

Tax advantages are likely to result because, generally speaking, these types of structures are established so that profits are taxable in the hands of the partners rather than the partnership itself – in the US, this is often referred to as “look-through treatment” because the taxman will “look-through” the partnership structure to assess the individual partners. Additionally, limited partnerships allow for the issue of shares in cases where other corporate facilities may not be desirable.

In summary, partnerships can offer the managers of businesses a more flexible, modern approach to liability and risk management in general. Their benefits were there for the Romans more than 2,000 years ago and I imagine the law relating to partnerships will continue to develop further in millennia to come. They are not necessarily simple to establish so, as always, professional advice should be sought at the earliest stage.

And so back to those friends whose marriage we have just celebrated. I happen to know that they read The Gibraltar Magazine – at least I hope they do for the lady in question happens to be the magazine’s editor. From my own partner and me and on behalf of my colleagues at Sovereign too, I say congratulations and we wish you a long and happy partnership.