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Impact on Companies and Trusts of the UK-Spain Tax Treaty regarding Gibraltar

28.03.2020 | News

Following the signing of the Treaty with Spain on “Taxation and the Protection of Financial Interests”, companies and trusts (referred to in the Treaty as “legal persons, entities and other legal structures or arrangements) established and managed in Gibraltar with connections to Spain need to carefully consider issues that will determine their tax residency.

If you directly or indirectly own or have management involvement with any company or trust that has connections with Spain or you are tax resident in Spain or there is a possibility that you may be considered as a tax resident in Spain, you should act quickly to try to reduce any disadvantage. There is a very small window of opportunity to organise to reduce or avoid possible consequences in Spain.

Relevant Time

The Treaty will come into force once all of Gibraltar’s, the UK’s and Spain’s procedures to give effect to it are completed. These formal procedures have been completed, but certain Gibraltar law provisions may need to be changed to give the authorities the relevant powers. In Spain the procedure is a little unclear but may take longer, as it may involve Parliamentary approval of some sort.

Under the Treaty, tax residency in Spain of such companies and trusts will be determined by:

  • the taxable period starting, or
  • if there are no taxable periods, to cover any charge to tax arising,

on or after the Treaty becomes effective.

This provision provides a window of opportunity during the current taxable period that may allow one to organise these affairs.

Tax Residency

Companies, entities or trusts established and managed in Gibraltar or governed by Gibraltar law will be resident in Spain when the majority of:

(a) its direct or indirect assets are in Spain or are rights exercisable in Spain; or

(b) its annual income derives from Spanish sources as defined in Spanish tax law; or

(c) the majority of individuals effectively managing the business are Spanish tax residents; or

(d) the majority interest in capital, equity or profit-sharing rights are directly or indirectly controlled by Spanish tax resident individuals or linked to companies, entities or trusts linked to Spanish tax residents.

Those referred to in (c) and (d) are not affected if they existed before the 16 November 2018 and the following conditions are satisfied as at 31 December 2018:

(e) has a fixed place in Gibraltar from which the whole or part of the business is carried on and an adequate number of qualified employees and operating expenditure; and

(f) pays Gibraltar Corporation Tax; and

(g) more than 75% of its income for its prior financial year accrues in and derives from sources in Gibraltar; and

(h) in its prior financial year of its income sourced in Spain is less than:

(i) 5% if its annual turnover exceeds €6 million; or

(ii) 10% if its annual turnover is between €3 million and €6 million; or

(iii)15% if its annual turnover does not exceed €3 million;

for which purposes annual turnover includes that of any related party (as defined in IAS 24 on Related Party Disclosures) incorporated in Gibraltar and the Gibraltar designated tax authority will disclose to Spain, by 31st March 2020, all who meet the requirements of (c) to (h) above, including details of legal and beneficial owners and those in charge of effective management.

Any Spanish company, entity or trust whose residency is moved to Gibraltar after the tax treaty enters into force will indefinitely be considered tax resident in Spain irrespective of that change of residency.

Effect of tax residency in Spain

What is the effect of being tax resident in Spain?

  • Such companies or trusts are taxable in Spain under Spanish law on worldwide income and assets with double taxation reliefs given when and where available;
  • If such companies or trusts are paying tax in Gibraltar, then there are circumstances in which Spain will give unilateral tax relief to the amount of any tax paid in Gibraltar, but such companies or trusts are fully taxable throughout that period in Spain under Spanish law on all income and assets worldwide, including Gibraltar.

The Treaty requires elimination of double taxation in accordance with domestic law.

Tax transparency and coordination

The Treaty deals with transparency and cooperation in tax matters, which will be the subject of a separate posting.

The most immediately relevant provisions for such companies and trusts are:

  • Enhanced cooperation is applied;
  • All EU and OECD mutual assistance laws and mechanisms will be applied;
  • Mutual administrative assistance will be provided whether such companies or trusts are resident or non-resident of either Spain or Gibraltar;
  • Automatic exchange of information by Gibraltar on vessels, aircraft and motor vehicles every six months on 31st March and 30th September, also back dated to 1st January 2014 and vice versa for Spain;
  • Direct access to all public beneficial ownership information or on request from the Commissioner of Income Tax.

New era of tax transparency and cooperation

The signing of the Treaty signals a new era of tax transparency cooperation between Gibraltar and Spain that should not be ignored by any companies, entities, trusts, trustees or direct or indirect beneficiaries having connections with Spain. Seek advice now and take steps to ensure certainty over tax residency and reduce the possibility of unfavourable effects.


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