Gibraltar and Brexit – Rock and a Hard Place?

Written by Jason Morris on Monday November 21, 2016

Brexit has been a huge story all year, and will continue to be so throughout 2017 as Article 50 is triggered.

2017 should see us learn more about the details of Brexit and what it will look like for the UK. There have been a seemingly endless stream of articles already written on this subject, delving deeply into the detail, and providing opinions of how good, bad or indifferent the post-Brexit Britain will be, which have triggered healthy debate in workplaces up and down the country.

Living and working here in the UK, I’m constantly bombarded with opinions telling me what the potential impact of leaving the EU could have on me and my family’s future. But what about the UK overseas territories? Gibraltar, for example, which, from memory, was the first region to declare their results from the EU referendum on June 23rd - voted an overwhelming 96% for the ‘Remain’ side. What are the implications of the overall result for this unique part of the UK?

How are Gibraltar affected?

Gibraltar’s economy has flourished through its membership of the EU, in particular through the free movement of people, capital and services via the single market, and the impact of losing this could be considerable.

Let’s be clear, a UK exit from the EU means a Gibraltar exit from the EU too, that much is obvious. As many of you will know, Gibraltar is a well-regulated international financial centre, and this remains an important element of the Gibraltar economy. Britain's withdrawal from the EU has certainly put their economy under pressure, and the impact felt in Gibraltar is likely to be greater than in the UK. You only have to look at their import/export figures to see how this could happen.

In 2014, Gibraltar exported $1.03bn with the main destinations being Spain ($655m), Malta ($103m), Poland ($69.3m) and Italy ($59.7m), all of whom are members of the EU. The risk is that these countries will impose duties on these exports, making them less attractive to customers, and which could result in export figures dropping substantially.

It’s a similar story with imports, (totalling $13.3bn in 2014), where the top import origins are Belgium-Luxembourg ($2.07bn), Spain ($1.89bn), USA ($1.83bn), Italy ($1.43bn) and Greece ($852m). So only one of the top five import origins for Gibraltar is from outside of the EU, meaning well over half of Gibraltar’s total imports come from within the EU, leaving them exposed to import duties over which they would have no control.

The threat from Spain

More worryingly though, is the potential threat of Spanish aggression towards securing ownership of the peninsula as part of the negotiations between the EU and the UK. It’s clear they could make life very difficult for Gibraltarians; for example, the border operated between Spain and Gibraltar is currently subject to EU rules regarding the free movement of people, and is used by many people on a daily basis who live in Spain and work in Gibraltar (and vice versa). However, after the UK leaves, this border could effectively become a wall, with much more stringent Spanish controls in place affecting these commutes which the UK would not be able to do anything about.

Many can envision a complete closure of the border, demanding that Gibraltar passport-holders obtain costly visas to visit or transit Spain, or a frontier toll on motorists driving into or out of Gibraltar. The latter idea was in fact floated by the Spanish Government three years ago, but dropped when the EU Commission indicated that any such toll would contravene EU law.

The UK will of course continue to support Gibraltar by keeping its doors open to trade and services in the wake of the Brexit vote, however Spain have said they would reject any negotiation proposals to keep Gibraltar in the single market. Spanish Prime Minister Mariano Rajoy insisted Gibraltar would have to leave the single market if Britain also did, as different conditions for each will not be accepted. He added that the only way for Gibraltar to stay in the EU would be to have joint-sovereignty with Spain, which would hand power over the 30,000 inhabitants to Madrid, despite their preference for London to retain exclusive jurisdiction. (A sovereignty referendum in 2002 found only 1.03% of inhabitants supported sharing sovereignty of the territory between the UK and Spain).

Financial Services Sector

The financial services sector are likely to suffer significantly if passporting rights (which currently allow the financial services institutions to service EU businesses and customers directly) are lost. Currently, special arrangements apply to Gibraltar, under the Gibraltar Order, which essentially allows Gibraltar firms to be treated as an EEA firm.

Other changes that could take place relate to tax. Gibraltar has always met its obligations in relation to the relevant EU rules and Directives, but equally, it does not necessarily agree with aspects of the EU's moves towards harmonisation of corporate taxes across member states.

Fiscal matters are consistently at the root of the EU, but Gibraltar's 'special relationship' with Britain has allowed them considerable latitude in relation to what taxes it imposes or those it doesn't. However, in recent years, Gibraltar has found this latitude on tax matters has been severely restricted.

Gibraltar has benefitted from several EU Directives introduced to harmonise and support the freedom of establishment, particularly the Parent-Subsidiary Directive which prohibits withholding taxes on cross-border intra-group interest dividend and royalty payments made within the EU.

Following Brexit, EU subsidiaries will no longer be able to rely on these Directives to allow tax-free dividend or interest payments to their holding companies based in Gibraltar. In the case of the UK, bilateral double tax treaties will no doubt mitigate the impact of the non-application of any tax related Directives. Gibraltar, however, is not currently a party to any bilateral double tax treaties. Accordingly, Gibraltar would either have to seek from the UK the extension of all or some of the UK’s bilateral tax treaties to Gibraltar or it would need to negotiate its own network of bilateral double tax treaties with a whole series of EU and non EU Member States. To say the least, neither of these options would be straightforward to implement at short notice and would need the full support of the British Government.

Are there any benefits to Brexit for Gibraltar?

Whilst Gibraltar’s economy is likely to be adversely affected with Brexit, there may be some potential benefits. An EU exit would result in fewer regulations and possibly may provide Gibraltar with greater exposure to emerging economies.

From a tax perspective, Gibraltar would be able to introduce tax rules and incentives that would provide the Government with more freedom to adopt competitive tax regimes. Of course, this would have to be countered with the OECD’s anti-tax avoidance drive which impacts on all reputable jurisdictions both in and out of the EU.

Going forward, it is imperative to Gibraltar that the UK represents them in any negotiations that take place with the EU. The interests of Gibraltar, and with particular consideration to their geographical position and the potential Spanish threat, must be borne in mind.

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