Gibraltar Tax Update: New GAAR

Gibraltar is updating its tax system to ensure it remains fair, modern, and in line with international expectations. A key part of this is the Income Tax (Amendment) Act 2025 Bill, introduced on April 10, 2025. This law significantly changes Section 40 of the Income Tax Act 2010 by introducing a stronger General Anti-Avoidance Rule, often called GAAR.

What does this mean for you? Essentially, these new rules give the Commissioner of Income Tax more power to challenge complex arrangements or structures if their main purpose seems to be simply avoiding tax, rather than genuine business activity. This move helps keep Gibraltar's tax system robust and fair.

Understanding these changes is vital for any business operating in Gibraltar. At TAG, we specialise in making complex rules clear and helping you navigate them effectively, ensuring your business stays compliant and confident.

What are the Key Changes? Let's Break It Down:

The new GAAR isn't about stopping legitimate tax planning, but rather targeting artificial arrangements. Here are the main points in straightforward terms:

1. Challenging Unfair Tax Savings: If an arrangement leads to a tax benefit that seems unintended by the law or goes against its spirit, the Commissioner can now disregard the arrangement for tax purposes. This means they can recalculate your tax as if the artificial arrangement never existed.
2. Defining "Tax Avoidance Arrangement": The rules are broad. An arrangement might be flagged if:
   • Its primary goal, or one of its main goals, is obviously tax saving.
   • It gives a tax advantage that clashes with the intended purpose of the tax laws.
   • It undermines the objectives of the overall Income Tax Act.
   • Remember, an "arrangement" can be anything from a formal contract to an informal understanding or a series of transactions. It catches things that might look good on paper but don't reflect real business activity.
3. Looking Beyond the Paperwork ("Substance over Form"): This is a crucial concept. The tax office won't just accept complex legal structures at face value. They will examine the real economic substance – what's really happening? Does the arrangement make genuine commercial sense on its own, or is it overly complicated purely to achieve a tax outcome? For example, routing funds through multiple companies with no real business function in each might be questioned.
4. The Burden of Proof Shifts to You: This is a significant change. If the Commissioner questions an arrangement, it's now generally up to the taxpayer (your business) to demonstrate that it was put in place for valid commercial reasons and not primarily for tax avoidance. Previously, the onus was more often on the tax office to prove avoidance.

Specific Areas Likely Under Scrutiny:

While the GAAR is a general rule, the legislation specifically mentions applying it to certain situations known to carry potential avoidance risks:

• Certain Tax Elections: Especially those linked to international frameworks like Pillar 2. The focus is on ensuring these elections reflect genuine business circumstances aligned with the rules' intent, not just exploiting a potential loophole.
• Profit Accumulation & Liquidation: Deliberately holding profits within a company and then closing it down (voluntary liquidation) primarily to distribute those profits to shareholders at a lower tax rate than dividends could be challenged. The distributions might be reclassified as taxable dividends.
• Remuneration and Short Stays: Payments like salaries, fees, or bonuses, particularly concerning individuals using the "occasional presence" exemption (under 30 days in Gibraltar). The Commissioner can disregard these payments for tax exemption if they seem excessive for the role performed, lack genuine commercial substance, or appear structured mainly to achieve non-taxation under Section 19.

What This Means for Your Business Operations:

• Proactive Review is Essential: Now is the time to look at your key business structures, intercompany agreements, and significant transactions. Ask the critical question: "Does this arrangement make solid commercial sense, even setting the tax benefit aside?"
• Focus on Commercial Rationale: Ensure your business decisions are driven by genuine market opportunities, operational efficiency, strategic goals, or other valid commercial factors – not predominantly by tax minimisation.
• Document Your 'Why': Good record-keeping is more important than ever. Maintain documentation (like board minutes, business plans, commercial rationale reports) that clearly explains the business purpose behind your structures and significant transactions. This helps demonstrate substance if questions arise.
• Future Planning Needs Care: When considering new ventures, restructuring, or major contracts, the potential impact of the GAAR should be a key consideration from the outset.

How TAG Empowers Your Business in This New Environment:

Navigating these updated rules requires expertise and foresight. TAG provides tailored services designed to give you clarity and confidence.

We're more than just advisors; we're your partners in navigating Gibraltar's evolving tax landscape. We translate complexity into practical solutions, ensuring compliance supports, rather than hinders, your business success.

Furthermore, TAG offers a comprehensive range of services to support every facet of your business. From company setup and corporate services to accounting & tax advisory, AML & compliance services, and marketing solutions, we are committed to helping you streamline operations, enhance growth, and maximize success.

Get in Touch

Ready to discuss how the new GAAR affects your business, or need assistance with any of our services? Contact the TAG team today.

• Email: info@tag.gi
• Phone: +350 225 01252
• WhatsApp: +350 540 01546
• Address: Suite 8, Block 2, Watergardens, Gibraltar

- This blog post provides general information for discussion purposes only and does not constitute professional tax advice. Every business situation is unique. You should consult with a qualified advisor from TAG or another professional firm to discuss your specific circumstances and receive tailored guidance.

- Regulated by the Gibraltar Financial Services Commission.