The combination of limited liability, tax transparency, a tax efficient jurisdiction and being part of the European Union makes the Gibraltar Limited Partnership an attractive structure as part of tax planning arrangements.

By Stephen Forster and John Paul Fa*[i]

The purpose of this article is to introduce the Gibraltar Limited Partnership as an entity that may be of interest to Terralex members setting up tax-efficient structures around the world.  By way of introduction, it may be of interest to know a little bit more about the Rock of Gibraltar.  Gibraltar is an overseas territory of the United Kingdom, much like Jersey and Guernsey.  However, the main difference between those jurisdictions and Gibraltar is that Gibraltar has been a member of the European Union ("EU") since 1973 when it joined as part of the United Kingdom.  The legal system of Gibraltar is based on the English common law system although it has its own constitution, tax system and legislature.  Thus Gibraltar will feel very familiar to anyone who knows the English legal system.  This combination of being a tax efficient jurisdiction, having a familiar legal system and being within the EU can obviously be of great potential benefit.

Financial services are well regulated within Gibraltar with that regulation being commended by international bodies.  For example, the IMF (International Monetary Fund) has used Gibraltar as a positive example in connection with licensing and regulatory requirements for offshore jurisdictions.  On the eve of the G20 Summit in London in April of this year, Gibraltar entered into its first TIEA (Tax Information Exchange Agreement) which was with the USA.  Gibraltar has since publicly announced its commitment to the execution of a further 12 TIEA’s prior to November 2009.  This will mean that Gibraltar should move off the OECD "grey list" and onto the "white list".

In December 2008, the eagerly anticipated decision of the European Court of Justice ("ECJ") was handed down in which the ECJ confirmed that Gibraltar is entitled to implement its own taxation system independent to that of the UK.  Based on that ruling, the Chief Minister of Gibraltar has announced that the corporate tax rate in Gibraltar would be reduced in 2010 to a low rate of between 10% and 12%.  In the meantime, any profits of Gibraltar entities that are accrued and derived outside Gibraltar do not attract Gibraltar tax (although advice should be taken in each case and an advance tax ruling obtained where appropriate).  Gibraltar also has no capital gains tax, no value added tax and no inheritance tax.

In Gibraltar, a Limited Partnership is a creature of statute, the Limited Partnership Act, which is primarily based on the English Limited Partnership Act.  The Act deals with the constitution and registration of Limited Partnerships.  These Limited Partnerships have often been used as private equity vehicles in the past, but the wide potential afforded by their flexible structure has seen a rise in popularity over the last few years.

A Limited Partnership is restricted to a maximum of 20 partners.  There is a requirement that there be at least one general partner, who is liable for all debts of the firm, and for one or more limited partners.  It is usually these limited partners who then contribute capital into the Limited Partnership by way of moneys or property.  The limited partners are not liable for the debts or obligations of the firm beyond the capital they contribute.  However, they are not allowed to participate in the business of the Limited Partnership which is run by the general partner.  The law is flexible in allowing entities ranging from corporate bodies to trusts to stand as partners (including as a general partner) of the Limited Partnership.  A new limited liability corporate vehicle can therefore be set up by the parties to be the general partner and to run the business of the Limited Partnership.  The liability of the General Partner can in this way be ring fenced

The registration requirements for a Limited Partnership are not onerous and entail the delivery to the Registrar of Limited Partnerships in Gibraltar of, inter alia, a statement signed by all the partners containing various particulars, including, inter alia, the firm name, the general nature of the partnership and details of the contribution of each partner.  As has been stated, a limited partner must not take part in the management of the Limited Partnership nor have the power to bind the firm.

Unlike in the United Kingdom, a Gibraltar Limited Partnership, once duly registered, will have a separate legal personality under the name contained in the statement provided to the Registrar. This means that a Limited Partnership in Gibraltar is capable of exercising all its functions as a separate legal person.  It can consequently enter into contracts and raise finance as a separate independent entity.

As it is a separate entity, the capital of a Limited Partnership may be charged as security for a loan, debt, or other obligation taken out by the Limited Partnership which can be very helpful in its financing.  The document creating such a security must be recorded in a register of charges kept by the Limited Partnership and also registered with the Registrar of Partnerships within 21 days in much the same manner as a charge created by a company.

Even though it is a separate legal entity, the Gibraltar Limited Partnership is still considered by HM Revenue and Customs in the UK as being tax transparent.  This means that whilst it is a separate legal entity, the Limited Partnership is ignored for the purposes of UK tax and any UK derived profits are taxed in the hands of the individual partners.  This has proved to be beneficial in a number of circumstances.  For Example, it has been possible to minimise the transfer tax on a property in the United Kingdom by the vendor of the property transferring it to a Limited Partnership in which the vendor and the purchaser are limited partners and a subsidiary of the purchaser is the general partner.  If, at the time of transfer and for a certain period thereafter, the vendor has the right to the vast majority of the income from the Limited Partnership, because of the tax transparency, the property is still considered to be owned mainly by the vendor and the value "transferred" to the other partners and on which the transfer tax is payable, is small.  This is the case even where the partys who is the "purchaser" has all the rights to capital on a winding up.  The constitution of the Limited Partnership then provides that, after a stipulated period of time, the vendor's right to income falls to zero and the party who is the "Purchaser" becomes entitled to all the income.  Thus the Purchaser becomes entitled to the benefit of the property but as it is by reason of an automatic provision of the partnership deed there is no "transfer" of the property on which transfer tax is payable.  The vendor's interest in the Limited Partnership at this stage will have little or no value and can be acquired by the other partners at little or no cost. 

In this vein, Gibraltar Limited Partnerships may also be useful in other jurisdictions if, whilst having a separate legal personality, they are also considered tax transparent in those jurisdictions.

Thus the combination of Gibraltar as an attractive jurisdiction along with the benefits of a partnership (tax transparency and flexibility) combined with limited liability may be of interest to tax planners in other jurisdictions. 

This article has been produced for general purposes and guidance only and does not purport to provide legal or professional advice.  Formal professional advice should be sought in each instance.  The information contained in this Article relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.