Gibraltar Seen as Europe-Beater for Finance Professionals

Gibraltar, the 300-year-old U.K. territory near the southern tip of Spain, is attracting hedge funds by offering low tax rates and regulation that enables managers to market investments across the European Union.

The number of funds in Gibraltar more than quadrupled to at least 200 in 2012 from four years earlier, according to the Financial Services Commission, which supervises the industry. Many of them are run by traders who previously worked in London and Zurich at investment banks such as BNP Paribas SA, UBS AG and Goldman Sachs Group Inc.

“Gibraltar has been quite successful in attracting fund managers because of the regulatory and tax regime,” said Joseph Caruana, who heads the Gibraltar office of Deloitte & Touche, an accounting and business advisory firm. “Affluent people are looking for somewhere they’re going to be welcomed and not heavily taxed.”

Gibraltar surfaced as a hub for traders and fund managers after introducing a regulatory regime in 2005. The enclave approves new funds more quickly than London and it offers “seamless communications between the industry, regulator and government,” according to the Gibraltar Funds & Investments Association. Local laws mirror EU rules, allowing managers to market funds across borders within the 28-country bloc, a process known as “passporting.”

The number of financial-industry jobs in Gibraltar climbed 37 percent to 3,175 since 2005, according to a government survey. Total jobs in the enclave increased 28 percent to 21,519 over the same seven-year period through 2012.

Lower Taxes

The creation of that regulatory regime helped attract traders fed up with London after the U.K. introduced a 50 percent tax rate for top earners in 2010, which was later rolled back to 45 percent. Businesses in Gibraltar are generally taxed at 10 percent of profits, compared with a corporate tax rate of 23 percent in London, and the government doesn’t tax income accrued or derived outside the territory. Gibraltar also limited the amount of income subject to tax to lure hedge-fund managers from established financial centers.

The recruitment of fund managers, as well as insurers and gaming companies, is helping to diversify Gibraltar’s economy from the offshore banking and non-resident shell-company registration that led the Paris-based Organization for Economic Cooperation and Development to label it a tax haven in 2000. Gibraltar was taken off the OECD’s list of tax havens in 2009.

The influx is also helping Gibraltar’s attempts to catch up with other low-tax EU fund centers such as Malta, a group of Mediterranean islands.

Chasing Malta

The net value of investment funds administered in Gibraltar climbed 11-fold to 2.4 billion pounds ($3.9 billion) at the end of December from 212 million pounds in 2006, according to the regulator, known as the FSC. Malta, with a population 14 times Gibraltar’s 30,000, had 482 funds overseeing 9.7 billion euros ($13.1 billion) at the end of 2012, according to the Malta Financial Services Authority. That compared with 156 funds with 4.9 billion euros in 2005.

Only 2.6 square miles, Gibraltar is a little more than twice the size of the City of London, Europe’s financial capital. Hedge-fund managers, private bankers and regulators are within a 15 minute walk of one another. Schooling in English and more than 300 sunny days a year add to the appeal of the territory that’s known as The Rock after its 426-meter (1,400 feet) high limestone promontory.

‘Safe Environment’

“Quality of life is very good down here,” Andrew McGrath, 37, founder and chief investment officer of Burren Capital Advisors Ltd., said in an interview at his offices above O’Reilly’s Irish Bar, where traders mix with British tourists over fish and chips washed down with San Miguel beer. “It’s a safe environment to bring up a family. Our offices are just minutes from an airport with good international links.”

While Burren Capital declined to comment on assets for this article, a March filing with the U.S. Securities and Exchange Commission showed the firm oversaw about $250 million.

The three-century-old dispute with Spain over Gibraltar’s sovereignty as a British overseas territory has been heating up, prompting the EU to organize a mission of officials to investigate delays caused by Spanish police checks on vehicles crossing the border. U.K. Prime Minister David Cameron said on Aug. 30 that the delays were damaging the economies of Spain and Gibraltar and were “unacceptable.”

Tax Breaks

Spain objected to Gibraltar’s July decision to build a reef in waters near the local airport runway that doubles as the main auto route off the peninsula when planes aren’t landing or taking off. That obstructed access to a shell-fishing area for Spanish boats, Spain said.

The spat isn’t directly affecting the financial-services community, according to McGrath, who left BNP Paribas in London and moved to Gibraltar three years ago. McGrath said the enclave’s regulatory regime underpinned by English law was the main reason to pick The Rock over Switzerland, Monaco or the Channel Islands.

The allure of lower taxes helped Gibraltar’s appeal. Burren Capital’s traders benefit from a special fiscal status for “high executives possessing special skills,” which means they won’t usually pay more than 30,000 pounds a year in personal employment and dividend income tax, provided they fulfill criteria as expatriates earning more than 100,000 pounds and owning or renting a residence in Gibraltar.

Tax Agreements

McGrath recruited Martin Patterson to join from Trafalgar Asset Management Ltd. and Peter Germonpre from Sandell Asset Management in London to help run his global arbitrage fund, which trades around developed-market corporate events such as mergers and acquisitions.

Gibraltar, whose economy was once reliant on the British military and on secret bank accounts and companies that couldn’t be traced from abroad, has made new tax information exchange arrangements with 39 countries and worked to attract funds, insurers and gaming firms such as Bwin.Party Digital Entertainment Plc, the largest publicly traded provider of online gambling services.

“The old business model doesn’t work anymore,” said James Tipping, director of the Finance Centre Department. “Tax evasion is a crime.”

Hedge-fund companies including Taler Asset Management Ltd. and Huber & Co. Ltd. say EU passporting is already an advantage of being based in Gibraltar as new legislation impedes access for fund managers outside the bloc.

Dutchmen Philip Van Den Berg and Ron Westdorp both worked at Goldman Sachs before relocating to Gibraltar from London to set up Taler in 2006. Gibraltar-based Huber & Co. counts Swiss bankers including Ralf Huber among its managers.

EU ‘Nightmare’

Andrew Rochford, a 34-year-old hedge-fund manager who set up Calderon Fund PCC Ltd. and moved to Gibraltar this year from Switzerland, said he expects the number of money managers to increase “very quickly” as the “nightmare” of the new EU directive on alternative investment managers kicks in for Swiss traders.

Swiss firms, as non-EU managers, face additional requirements under the new European regime and may not receive permission to distribute services to markets such as London and Frankfurt until 2015, two years after competitors inside the bloc can be approved, according to Joey Garcia, a lawyer at Isolas in Gibraltar.

“The question is always: how much overhead are you producing due to regulation,” Rochford said. “If a Swiss manager wants to distribute into the EU, he needs a solution: one is Liechtenstein, another is Gibraltar.”

Mediterranean Beach

The appeal of sunshine -- it’s possible to ski at Sierra Nevada, Europe’s most southerly ski area 2 ½ hours drive away in Spain, and be on a Mediterranean beach by the afternoon -- hasn’t been lost on Arnulf Metzger, a 33-year-old former analyst at UBS in Zurich, who co-manages Calderon’s 5.7 million-euro hedge fund that’s gained 15 percent a year since 2010. He plans to leave Switzerland by next summer.

Gibraltar’s government remains determined to attract more fund managers and promote the peninsula as “an onshore jurisdiction with strong regulation,” Finance Minister Albert Isola said in an interview, adding that he supports a plan to create a stock exchange where funds can be listed.

Tipping, the finance-department official, said there is a limit to the influx of traders in such a small place.

“I don’t expect a large hedge fund with 90 people to move from London,” he said. “What’s more realistic is they have 20 traders working for them and three or four will want to benefit from higher quality of life and low tax and move to Gibraltar.”

Before it's here, it's on the Bloomberg Terminal.