Changes to Gibraltar Corporate Tax scope - A Quick Q&A on the Income Tax Act amendments

In the January 2024 session of the Gibraltar Parliament, the Minister for Justice and Financial Services announced an amendment to Gibraltar's Income Tax Act 2010 that brought insurance and DLT companies in scope of provisions relating to tax on ‘trade interest’. 

In a short chat on instant messaging, I asked Anthony Provasoli, Fintech lead at Hassans, about the move. 

SF: How will the extension of tax on trade interest to DLT and insurance companies announced in Parliament impact DLT and FinTech firms operating in Gibraltar? 

AP: My understanding is that the amendment that was announced recently was designed simply to clarify the tax treatment of Gibraltar DLT Providers (and other financial services regulated firms) and more particularly any profits derived from interest bearing or interest bearing-like products and services. I further understand that, in so far as DLT is concerned, the intention was to ensure that profits made by DLT Providers in connection with their staking or earn products should be taxable.

SF: Right, and how would you say this amendment aligns with Gibraltar's overall regulatory approach towards digital assets and FinTech?

AP: Over the years, there has been an uptick in consumers, professional investors and financial institutions' interest in Bitcoin, Ethereum and other forms of cryptocurrencies, including stablecoins. As a result of the perceived demand for this novel asset class, many DLT Providers (or VASPs) have cropped up in the market, offering a multitude of solutions including (i) over-the-counter (OTC) purchase and sale; (ii) custody; (iii) exchange; and (iv) payment services to name a few. 

Gibraltar’s DLT Regulations were introduced to provide an appropriate yet robust regulatory framework for these businesses. It is difficult to regulate activities that are centred on rapidly evolving technology like DLT as businesses are continually adapting to technological advances in various aspects of their operations. In such environments, rigid rules can quickly become outdated and unfit for purpose. Recognising this, Gibraltar adopted a flexible, adaptive approach to the regulation of businesses operating in the DLT sector, where regulatory outcomes remain central but are achieved through the application of ten core principles designed to remain relevant and applicable even as the industry’s landscape, technology and best practices shift. 

Gibraltar’s DLT regulatory framework seeks to establish within Gibraltar a progressive, well-regulated and safe environment allowing DLT Providers to succeed, whilst all the time preserving the good reputation of the jurisdiction. It is intended that effective authorisation and supervision of DLT Providers will reduce the possibility of businesses in this space being used for purposes connected with financial crime, and that the impact of the failure of one DLT Provider on the wider industry will be minimised. It is also intended that consumers are able to understand the benefits and risks associated with DLT Providers’ products and services, that they have confidence in the integrity of the owners and management of these firms, and that they are afforded an appropriate degree of protection.

Gibraltar’s DLT framework was designed to attract DLT Providers and VASPs that wanted to be regulated at the same standard and under similar regulatory requirements as the more traditional financial services firms. In the same vein, I understand the intention with this amendment is to make it clearer that the same taxation principles that apply to banks and other financial institutions in respect of profits made from their interest or interest-like products and services should also apply in the insurance and DLT sectors.  This is more a matter of the pursuit of a fair and even distribution of the contribution citizens and institutional taxpayers make to the cost of running Gibraltar, as it were.

SF: So what impact do you reckon this amendment will have for new and existing businesses in the DLT and FinTech sectors, particularly regarding investment and growth opportunities in Gibraltar?

AP: In my view, this amendment should have very little impact, if any, on the DLT and FinTech sectors as the position remains unchanged.

SF: Finally, from your perspective and a bit more generally, what do you see as the potential future challenges and opportunities for Gibraltar's legal and regulatory framework in the DLT/wider fintech context?  Has your view changed since the inception of the DLT framework here in 2018?

AP: In recent times, we have seen the consequences of simply throwing caution to the wind in the scaling up of innovative new businesses. In my view, regulation is a tool that can be used to ride the wave of innovation more safely. In most jurisdictions, the DLT and virtual asset industry remains largely unregulated. Most if not all FATF countries now require their VASPs to, at the very least, comply with international standard AML rules and regulations. Some of those jurisdictions go above and beyond simple AML regulatory requirements to a certain extent, but few jurisdictions have a regulatory framework designed specifically for the DLT and virtual asset industry, which is also compliant with UK and EU standard financial services regulatory principles.

Gibraltar not only has a model that achieves all of that but also a model that works and which has been tried and tested since January 2018. It is clear that the Financial Promotion Rules in the UK and the impending MiCA regulations, which in my view cover similar ground to the principles and practices already followed in Gibraltar, will have a significant impact on the industry but I certainly believe that Gibraltar regulated DLT Providers are well placed to assimilate compliance with MiCA regulations and other similar specific market or supranational regulatory requirements that are expected to develop.

On the broader FinTech front, Gibraltar licensed financial services firms have the ability, through a simple notification process, to access the UK market. This is one of Gibraltar’s unique selling points when it comes to financial services, given that this is no longer possible from other European jurisdictions after Brexit. The UK is considered one of the biggest hubs for financial services on the globe and for Gibraltar licensed financial services companies to have market access to the UK is huge in my opinion. We will have to wait and see whether these passporting rights will extend to Gibraltar regulated DLT Providers in the future. For now, however, they will have to rely on authorised firms in the UK to approve the content that is accessible by their UK users.