Jurisdiction's chief minister announces move in light of programme to phase out tax exempt companies
Gibraltar will reduce its corporate tax rate to as low as 10% by 2010, from its current rate of 33%.
The move follows pressure from the EU for Gibraltar to fall into line with other European States, by abandoning the tax exempt company regime, which applies one tax system to local companies and another to foreign companies.
Chief Minister Paul Caruana also announced in his latest Budget that corporate tax rates would be gradually reduced in the meantime - by 2% in 2007/08 to 33%, and by 3% in the following two years. This will bring it down to 27% by the 2009/2010 tax year.
Caruana said: "In order to comply with EU law we must phase out the tax exempt company in 2010. However, in order to sustain our successful economic model we must retain a commitment to a very competitive corporate tax model.
"Without a low tax system for overseas companies they will leave, and our economy will suffer hugely."
Caruana said the tax rate was likely to be set at 10%, following consultation with industry, and would be no more than 12% - which will bring it into line with competing jurisdictions such as Ireland where it is 12.5% and Cyprus where it is 10%.However, the introduction of the new tax rate does face some hurdles, with a court case looming over the EU's stance that Gibraltar should not be allowed to establish a corporate rate system different from the UK.
James Tipping, director at the Gibraltar Finance Centre, said Gibraltar was arguing in the Court of First Instance against the EU Commission's position that it is a region of the UK, and should have the same corporate tax rate system. A decision is expected in the autumn. Tipping said: "We are confident based on legal advice that we will win the court case. We have always had a separate fiscal regime."
However, Tipping said even if Gibraltar lost the case, there were other justifications for it having a separate tax regime, and it remained committed to introducing low corporate tax.
In addition to the corporate tax rate announcement, Caruana unveiled a dual income tax system to be introduced immediately. Under the changes, taxpayers will have the option of choosing between the existing allowance based system, with a top tax rate of 40% but the ability to make deductions, or a gross income based system, in which the taxpayer will receive no allowances but will pay a lower rate of tax.
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