GIBRALTAR Law and Practice Contributed by: Stuart Dalmedo, Adrian Pilcher and Louise Anne Turnock, ISOLAS LLP
6.5 Controlled Foreign Corporation-Type Rules CFC rules have been introduced, under which the non-distributed income of a company or permanent establishment arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage must be included as income of the taxpayer for that tax period. In order for an entity or permanent establishment to be considered a CFC under the Regulations, two condi - tions must be satisfied: • first, in the case of an entity, the taxpayer must by itself or together with its associated enterprises hold a direct or indirect participation of more than 50% of the voting rights or capital, or must be entitled to receive more than 50% of the profits of that entity; and • secondly, the actual tax paid on its profits by that entity or permanent establishment is lower than the difference between the tax that would have been charged on the entity or permanent establishment in accordance with the Income Tax Act and the actual tax paid on its profits. An arrangement or a series thereof is regarded as non- genuine under the Regulations to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risk that gen - erates all or part of its income if it were not controlled by a company where the significant people functions that are relevant to those assets and risks are car - ried out and are instrumental in generating the CFC’s income. Where there is such a non-genuine arrange - ment, the income to be included will be calculated in accordance with the arm’s length principle. In order to ensure that there is no double deduction, the following applies: • where the entity distributes profits to the taxpayer, and those distributed profits are included in the assessable income of the taxpayer, the amounts of income previously included as income of the taxpayer shall be deducted from the income of the taxpayer when calculating the amount of tax due on the distributed profits;
• where the taxpayer disposes of its participation in the entity of the business carried out by the permanent establishment, and of any part of the proceeds from the disposal previously having been included in the income of the taxpayer, that amount shall be deducted from the income of the taxpayer when calculating the amount of tax due on those proceeds; and • the Commissioner of Income Tax shall also allow a deduction of the tax paid by the entity or perma - nent establishment in its state of residence or loca - tion from the tax liability of the taxpayer in accord - ance with Section 37 of the Income Tax Act. Entities or permanent establishments with accounting profits of no more than EUR750,000 and non-trading income of no more than EUR75,000, or those whose accounting profits amount to no more than 10% of their operating costs for the tax period, will not be considered CFCs under the Regulations. 6.6 The Substance of Non-Local Affiliates There are no rules applicable to the substance of non- local affiliates. 6.7 The Sale of Shares in Non-Local Affiliates There is no capital gains taxation in Gibraltar. Gibraltar has a strengthened and wide-ranging Gener - al Anti Avoidance Rule (GAAR), introduced through the 2024 amendments to the Income Tax Act. The GAAR allows the Commissioner of Income Tax to counter - act or disregard any arrangement where one of the main purposes is to obtain a tax advantage, where the outcome is inconsistent with the legislative intent of the relevant provision, or where the arrangement undermines the objectives of the Act. This applies a broad substance over form test to all transactions. The Income Tax Act also retains the traditional anti- avoidance rule enabling the Commissioner to disre - gard transactions considered “artificial or fictitious”, and provides authority to adjust arrangements that are not consistent with OECD Transfer Pricing Guidelines. 7. Anti-Avoidance Provisions 7.1 Overarching Provisions
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