The tax framework between Gibraltar and Spain for companies

The International Agreement on the Taxation and Protection of financial interest between Spain and the UK regarding Gibraltar sets forth rules to determine when a company set up in Gibraltar may be considered as a Spanish tax resident.

The consequences of meeting these conditions entail that, even when a company may have been set up and managed in Gibraltar, it qualifies as a Spanish tax resident and is therefore obliged to fulfill the formalities and payment of taxes in Spain, based on its worldwide income.

This represents a significant change in the tax framework that companies must take into account to accurately fulfill their tax obligations.

✔ Companies set up and managed in Gibraltar or that are subject to its regulations, qualify as Spanish tax residents if one or more of the following circumstances applies:

• i. Most of the assets, owned directly or indirectly, are in Spain or take the form of rights that that can or must be exercised in Spain;
• ii. Most of the income derived in a calendar year is in Spain;
• iii. Most of the individuals in charge of the effective management are Spanish tax residents;
• iv. Most of the share capital, net equity or voting rights are under the direct or indirect control of individual tax residents in Spain or companies related to tax residents in Spain.

✔ One of the most noteworthy changes with regards to these criteria is that the tax residency of the individuals managing the company can be used to determine Spanish tax residency for the company, regardless of the country where the management is carried out. In this sense, it should be noted that one of the criteria of tax residency established by Spanish domestic regulations is whether a company has its effective place of management in Spain, when the management and control of the business is performed in Spain. In case of conflicts of residence, Double taxation agreements signed by Spain also conclude that the place where the effective management is carried out determines which country of residence prevails.

✔ Notwithstanding the above, subparagraphs (iii) and (iv) do not apply to any company set up in Gibraltar before 16 November 2018 nor companies that, on Dec. 31, 2018, if the conditions of the abovementioned subparagraphs are met, can demonstrate that several circumstances concur, including carrying out activity in Gibraltar with human resources in the territory, being subject to corporate tax in Gibraltar, obtaining a substantial amount of their income in Gibraltar and a having a maximum percentage of income from Spain.

✔ These regulations are aimed at avoiding the use of companies subject to a beneficial tax treatment in Gibraltar by Spanish tax resident individuals or by companies with substantial economic activities in Spain. Thus, it requires, if this has not been done yet, and close review of international structures with companies in Gibraltar and with a substantial connection to Spain.