Category 2 Tax Rules
Category 2 tax residents have their tax capped at a maximum of approximately £30,000 per annum. This capped amount is calculated based on a total income of £80,000, but the capped amount varies from year to year due to changes in the tax band. Therefore, the maximum tax payable for the current 2015/2016 tax year is calculated as follows:
|£4,000 x 14% =||£560|
|£12,000 x 17% =||£2,040|
|£64,000 x 39% =||£24,960|
|Total tax payable||£27,560|
Therefore the total tax payable for a Category 2 resident for 2015/2016 is £27,560.
If as a Category 2 resident there is no Gibraltar source income then you would pay the minimum £22,000.
In addition, there is no capital gains tax, inheritance tax, wealth tax or sales tax in Gibraltar. This makes it a very attractive low tax location for individuals.
The key conditions of obtaining Category 2 status are as follows:
- The Category 2 individual must be of substantial and sound financial standing and have a minimum net worth of £2 million.
- The Category 2 resident must either own or rent approved residential accommodation in Gibraltar. The accommodation must be approved by the Gibraltar Finance Centre and be used exclusively by the Category 2 individual and his direct family. His direct family includes his spouse, children, brother, sister, parents and his spouse’s parents. Therefore, the Category 2 individual cannot rent the property and is limited to occasionally allowing others to stay there, otherwise he will not be deemed to have “exclusive use” and would consequently lose his status.
- The Category 2 individual cannot have been resident in Gibraltar during the five years immediately proceeding the year of assessment. Previous residency (as defined in the Category 2 rules) includes 183 days in any tax year during the previous 5 years or an average of 90 days in any three of the previous 5 years.
- The Category 2 individual is not allowed to engage in a trade, business or employment in Gibraltar. Exceptions to this rule include where duties are incidental to a business outside of Gibraltar or the Category 2 resident is a director of a Gibraltar Exempt Company or a director of a Company which does not transact any trade or business in Gibraltar. The Gibraltar Finance Centre has issued guidelines in the form of a circular confirming the list of permissible activities that a Category 2 individual may in principle carry out. In addition to this, it is also possible to apply for a ruling to determine whether proposed activities would contravene the Category 2 rules.
- Category 2 status is granted on an indefinite basis, but the Category 2 residency certificate needs to be sent to the Gibraltar Finance Centre for endorsement every three years.
- The Category 2 individual must have medical cover in Gibraltar (usually in the form of private medical cover).
- There is no minimum stay in Gibraltar for a Category 2 resident individual, therefore as long as the individual fulfills all of the above conditions he will retain his Gibraltar residency without the need to spend any time in Gibraltar.
Tax Advice in relation to Category 2 residency
It is vitally important that you obtain tax advice if you are considering becoming Category 2 resident.
An individual is sucessful in obtaining Category 2 status. They like Spain and decide to purchase a holiday home due to the variety of golf courses, beaches etc, but only intend to use the holiday home sporadically. They enjoy spending time in Spain and start to spend more time there. At the end of the calendar year (the tax year in Spain) they realise that they have spent more than 183 days in Spain.
The individual has automatically become Spanish tax resident and is liable to Spanish tax on a worldwide basis therefore making his Category 2 residency status pointless as he will be resident and liable to tax in both states.
The above is a very simple example but the key point is that you must fully review your tax position before becoming resident in Gibraltar as well as review your position during your residency.
We have over 15 years experience in correctly advising clients of their tax position and are perfectly placed to identify whether Category 2 status is an option before spending money on the application process.
If you wish to apply for Category 2 status then please do not hesitate to contact us: firstname.lastname@example.org. We will review your position before hand and ascertain it’s viability for you.