As an international finance centre in its own right Gibraltar finds itself held back by the 'offshore' tag. Sarah Godfrey assesses how it has built its reputation and how Gibraltar hopes to maintain it as it goes forward
Not every so-called offshore finance centre is an island. Gibraltar - though as isolated as an island for some of its recent history - is attached to the Spanish mainland, but its geography is not the only reason Gibraltar's financial services community would rather it did not bear the 'offshore' tag.
"We're moving away from the offshore label - we're an international finance centre," says David Parody, chief operating officer of the Gibraltar Financial Services Commission. "Protecting Gibraltar's reputation is our biggest role. As a small centre, knocks are felt more keenly. Gibraltar has a very good reputation; we have worked hard for that and we are keen to keep it that way," he adds.
Perched on the edge of Europe, Gibraltar's strategic importance has earned it a colourful history. First occupied by the Moors in 711 AD, it was named Jebel Tarik - the mountain of Tarik - which has been corrupted over time into its current form. The Spanish arrived in 1462, and controlled the territory until it was captured by the British in 1702.
Military scaling back: financial expansion
Gibraltar's military heritage is still plain to see, from its fortifications to the 32 miles of tunnels within the rock itself. But it was a scaling back of the British military presence there that set the scene for the expansion of Gibraltar's finance industry.
In 1967, Gibraltar - still effectively a British garrison, but with an entrepreneurial civilian population that had grown up over several centuries from as far afield as India and Italy - introduced its exempt companies regime, whereby companies incorporating in the territory could apply for a 0% corporate tax rate. This regime helped Gibraltar weather the difficult years of the closure of its land border with Spain, from 1969 to 1982, when foot traffic was first allowed, and 1985, when the border was reopened fully as a condition of Spain's accession to the EU.
The reopening of the border saw an influx of Spanish banks to the territory, though these left again in the European recession of the late 1980s, and it was not really until the recession was over in about 1994 that Gibraltar saw the next stage in its development as a finance centre.
Gibraltar Finance Centre director James Tipping says this pick-up in activity coincided with the birth of the internet age. "We realised we could market not just to the UK for historical reasons and Spain and Portugal for proximity, but that you can go global from Gibraltar," he explains. "That's when we started to see significant development in the importance of financial services."
It was also in the 1990s that Gibraltar - a member of the EU (though not the common customs arrangement) since 1973 - began to get up to speed with the implementation of EU directives. "Another key moment was the realisation that EU membership brought not just obligations, but benefits," says Tipping. "The most obvious benefit not being derived in the 1990s was free movement of services - we had the right to benefit from passporting."
Passporting really took off first in the insurance sector, when a hardening in the global market after the 9/11 attacks and the dotcom crash saw fronting fees from non-EU captive insurance providers rise, making it more economic to offer captive insurance from an EU base. The number of insurance licenses in Gibraltar has risen from 13 in 1999 to over 60 today, with around a further 40 held in cell captive form.
Insurance has been one of the biggest growth areas for Gibraltar, but it has also seen growth in its banking and funds sectors, all underpinned by a strong legal community able to advise on trust and corporate structures. A high net worth tax residence regime has also been set up. Gibraltar residents pay tax only on their earned income - all interest and investment income is tax-free.
Not that the financial services industry is fairly diversified - and indeed financial services itself is part of a diversified economy, with significant inputs from shipping, tourism and online gambling companies - the exempt company regime that started the whole thing off is being phased out.
"We don't want to be swimming against the tide," says chief minister Peter Caruana. "We're in the EU single market and we have access to the whole market. We formed a view it was unlikely that Gibraltar would be allowed to access everybody else's markets indefinitely from a zero-tax location."
The territory will introduce a level playing field for corporate taxation by 2010, with all companies being subject to a tax rate of 10-12% - a significant cut for the currently non-exempt companies, which in May's Budget saw their tax rate cut from 33% to 27%.
"Our model has moved away from the old brass-plate tax haven to a system that doesn't discriminate between offshore and onshore business and fully complies with legislation," says Caruana.
On the funds side, the experienced investor funds (EIF) regime launched in 2005 has seen considerable interest. "We always had collective investment scheme regulations, but that was basically Ucits toned down a bit," says James Lasry, a partner at law firm Hassans and a prominent figure in the Gibraltar funds scene. "The EIF regime took what we had been doing with private funds and codified it, giving it the regulatory imprimatur and allowing us to take it out to the experienced investing public.
EIFs are available to those with net worth over EUR1m, or who are investing more than EUR100,000 in the fund. The regime means funds can set up and start trading and only need to inform the regulator that they have done so, as long as counsel and the fund administrators have signed off the fund. Lasry says that with the exception of specialist funds in Luxembourg, no other EU jurisdiction offers such a quick turnaround on setting up funds. There are now more than 30 EIFs running in Gibraltar.
The next step for the Gibraltar funds industry is the introduction of a more tightly regulated professional investor funds regime.
Lasry says: "We are proposing a EUR25,000-50,000 minimum investment, a minimum diversification requirement, and one of the service providers - probably the fund administrator - having a supervisory/enforcement role to ensure compliance with the regulations and the prospectus. When dealing with quasi-retail money that extra layer of supervision is probably a good thing. We've proposed this new regime to the government and we will see when they have a chance to look at it.
Joanne Beiso, the manager of banking and investment services supervision at Gibraltar's regulator, the Financial Services Commission, adds: "The Commission is of the view that the introduction of such a type of scheme would pose no regulatory issues, subject to the relevant regulations including all the required provisions."
Tipping says he would like to see the funds regime in Gibraltar emulate the growth in the insurance sector. "EIFs in Gibraltar are cost-effective at about EUR5m, so they could be aimed at high net worth investors, family offices or institutions - they don't need a huge number of investors," he says. "I'd like to get to the stage where Gibraltar EIFs are automatically considered for that kind of activity."
With just 30,000 people in six square kilometres of land, Gibraltar is keenly pursuing the half a billion potential customers to which its EU membership opens it up. But it is equally keen to guard its reputation as a well-regulated, professional jurisdiction. "We're not open for business to just anyone," says Caruana. "We are small enough to be selective and limit ourselves to those who share our views on the importance of high standards and reputation. At the end of the day, that's all Gibraltar has: if we don't look after the way the world thinks of us as a business location, we don't have much else on which to build."
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