Introduction
Evolving Economy
Single Market Agreement
Securities Repackaging
Modernizing Legislation
Tax Reform
Outlook
Gibraltar has not been immune to recent challenges that have faced international finance centres. Some challenges have arisen from the framework of the European Union, given Gibraltar's unique status within the community, while others have developed from the ongoing international initiatives directed at financial centres. Clearly the increasing coherence in the approach of each of these initiatives means that concerted international pressure for reform will affect all centres and will not diminish.
The OECD, UN and EU programmes have common threads that reveal a global and coordinated agenda. Many of the recent changes in Gibraltar have been in response to this agenda and it is likely that future reform will remain dominated by the need to keep abreast of these initiatives.
The most recent changes have been accompanied by the continued diversification of the Gibraltar economy. The relocation to Gibraltar of a number of international gaming operations has created buoyancy in the property and employment markets and attracted much press attention. But many other developments in the economy have taken place more quietly; the increasing pace of financial services work has meant new areas of development in the industry.
The past year has seen the consolidation of greater investor confidence, kept on course earlier this year with the re-election of Chief Minister Peter Caruana's government for a further four years.
On April 19 a series of agreements were finalized between Britain and Spain that will significantly enhance the practicalities of Gibraltar companies operating within the European Union.
Gibraltar's membership of the European Union arises specifically from the provisions of Article 299(4) of the Treaty of Rome, that extends membership to European territories "for whose external relations a member state is responsible." Gibraltar has a unique status within the European Union, having elected to join the United Kingdom in 1973 but remaining a separate and distinct jurisdiction. It is required to transpose EU directives independently (ie, not as part of the United Kingdom) and to have its own competent authorities to undertake the various functions provided for in EU legislation.
This singular basis of membership previously caused doubts as to how Gibraltar competent authorities (such as the Financial Services Commission) should notify other competent authorities within the European Union. This issue is of great importance, being directly connected to the country's ability to exercise its rights to operate in the Single Market. It has been settled in the agreement confirming that the UK will continue to be able to designate Gibraltar's own authorities as the European Union competent authority in Gibraltar.
Because it is not a member state in its own right, the agreement further provides that Gibraltar competent authorities must communicate formally with their opposite numbers in other member states, by sending written communications through the Foreign & Commonwealth Office. This procedure, known as the post box, will not involve the United Kingdom having any say in the acts or decisions of the Gibraltar competent authority; it simply establishes a procedure for conveying formal communications and decisions between Gibraltar authorities and their counterparts in EU member states.
This arrangement is relevant to the areas of insurance and banking where passporting rights from Gibraltar to the rest of the European Union are in place. Significant business in insurance is already taking place on a cross-border basis and it is expected that the volume of this activity will increase in view of the improved system.
The new arrangements will also give impetus to the process of Gibraltar achieving passporting rights in the area of investment services. The Investment Services Directive and most other relevant legislation has already been enacted. The major outstanding issue is the introduction of an Investor Compensation Scheme along the lines of that introduced two years ago in conformity with EU requirements regarding bank deposits.
A number of portfolio management and investment advisory operations have already expressed interest in establishing themselves in Gibraltar, in order to benefit from EU access. Many such operations are also attracted to Gibraltar because there is perceived value in being located in an EU jurisdiction which meets the highest standards of regulation.
The growth of Gibraltar as a jurisdiction for securitization work is a fine example of recent innovation in our financial services sector. Gibraltar company law is flexible and well complemented by a fiscal regime that is attractive and easy to use.
One of the attractions of Gibraltar is that securities offered by a Gibraltar company incorporated to act as a special purpose vehicle (SPV), qualify as EU paper. This has interested major firms, for example, UBS Warburg (the investment banking arm of Swiss group UBS AG) recently established a €15 billion multi-issue note programme via a Gibraltar SPV.
A number of developments in company law legislation will facilitate various aspects of corporate activity. Many of the changes have come in response to EU requirements but others have come from the industry seeking to improve the functioning of Gibraltar-based companies. The most important developments are as follows:
- There is now a wider range of possibilities open for the re-categorization of companies. Companies may convert to or from a limited to unlimited company, to a company limited by guarantee and, in certain circumstances, to a limited partnership.
- The rules relating to re-domiciliation have been extended. It is now possible to domicile companies to and from a larger number of jurisdictions, including many well-established finance centres.
- Numerous amendments have improved the management of Gibraltar companies and have facilitated their administration. For example, it is now possible to reinstate a dissolved company by application to the registrar, without the need to apply to court. This will reduce the time and costs of such an exercise.
- Legal personality has been given to limited partnerships. This, together with other changes, enhances the use of these vehicles in a number of planning areas.
- As part of the modernization of legislation relating to business, amendments have been introduced to provide for the protection of business names used on the Web. This is the first step in a series of legislation designed to develop e-commerce activity from Gibraltar.
- EU Directives 4 and 7 on the publication of company accounts have recently been fully transposed into Gibraltar law, effective from April 1 2000. There are, however, various transitional provisions and abbreviated balance-sheet formats applicable to small companies. It is anticipated that the various options open to small companies (which the vast majority of companies run by company managers will fall within) will greatly mitigate any perceived negative aspects on the introduction of the legislation. In fact, over the last four years (and not withstanding the pending implementation of these directives) company incorporations have continued to increase steadily.
The European Union and OECD (Organization for Economic Cooperation and Development) agenda on tax harmonization has been the subject of intense discussion recently. The government has reaffirmed its intention to reform Gibraltar's fiscal regime, in particular to reduce the anomaly between the rates of tax paid by domestic and international commercial activities, and has stated that it will be working to reform the fiscal system over the next five years.
Gibraltar is generally well placed to introduce these changes. Dependence on corporate taxes is not critical and it should be possible to produce other income streams to fund public expenditure. The aim will be to ensure that Gibraltar remains competitive. It is envisaged that the current duality in the tax system (which provides nil or little tax for international business and high levels of tax for domestic business) will be replaced by low tax, applicable to all business activities. It is likely that certain types of income will be exempted from tax altogether.
The next 12 to18 months will be a busy time in the development of financial services. News on tax reforms is likely. The OECD has requested jurisdictions to respond to its initiative by July 2001. It is probable that by then Gibraltar will have determined the broad nature of the changes that will be introduced.
For further information on this topic please contact Peter C Montegriffo at Hassans by telephone (+350 79000) or by fax (+350 71966) or by e-mail ([email protected]).
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