Gibraltar: connected-party pricing and interest restrictions

Who this applies to

Scope and relationship test

This Guide covers selected Schedule 4 rules for connected-party business and financing. It does not establish complete transfer-pricing, borrowing-cost, hybrid-mismatch or country-by-country reporting compliance. Section 40's anti-avoidance rule operates alongside Schedule 4 and expressly refers to internationally accepted profit-determination principles and OECD transfer-pricing documents. Satisfying one numerical test is not a safe harbour from the remaining provisions. Income Tax Act, section 40(3)–(4).

Determine connected status under Schedule 4 paragraph 9, with control construed under paragraph 10. Common control, control exercised with connected persons, specified family relationships, partnerships, trusts, foundations and persons acting together can be relevant. Do not replace that definition with a single ownership percentage or the separate “associated enterprise” definition used in later Parts of Schedule 4. Obtain a relationship and control analysis before calculating an adjustment. Schedule 4, paragraphs 8, 8A and 9.

Determine control from rights, not just registered shares

Paragraph 10(1) covers a person who exercises, can exercise or is entitled to acquire direct or indirect control over company affairs. Its specific routes include the greater part of share capital or issued share capital, voting power, rights to distributed income, or rights to assets available for distribution. Those routes supplement the general test; a share register alone does not exhaust it. Schedule 4, paragraph 10(1).

Two or more persons satisfying the conditions together are treated as controlling the company. Entitlements arising at a future date count. Rights held by a nominee on a person's behalf, or exercisable on that person's direction, are attributed to that person. Obtain the relevant voting agreements, acquisition rights, nominee documents and distribution rights, including arrangements outside the articles. Paragraph 10(2)–(4).

Example: a person holds 40% of voting rights directly and a nominee holds a further 20% on that person's behalf. The attributed voting position is 40% + 20% = 60%, satisfying the greater-part voting limb on those assumed facts. Conversely, a bare 50% shareholding is not more than half; examine the other control rights and attribution provisions before concluding that control is absent.

Paragraph 10(5) additionally addresses rights of controlled companies and associates, including its specified attribution limits and the rule concerning control by five or fewer participators. Do not repeatedly aggregate the same rights or assume an unrestricted chain of associate attribution: the provision expressly excludes rights attributed to an associate under that same subparagraph. Complex structures require a documented application of the complete wording. Paragraph 10(5).

Connection extends beyond shareholders

Paragraph 9 connects companies under the specified common-control arrangements and a company with a person who controls it, alone or with connected persons. It also covers specified relatives, partnership relationships, settlement trustees, foundations and persons acting together. Its partnership provision has an exception for acquisitions or disposals of partnership assets under bona-fide commercial arrangements. Do not label every transaction with a business acquaintance or every partnership asset transfer connected without applying the relevant limb. Paragraph 9(2)–(8).

A “participator” under paragraph 11 includes persons with interests in company capital or income, rights to acquire capital or votes, specified loan creditors, distribution rights and rights to secure benefits from company income or assets. A loan creditor need not be the registered shareholder. The definition extends to relevant beneficial interests in debt, while paragraph 11(8) excludes a banking-business lender for ordinary-course lending from that loan-creditor treatment. Paragraph 11(1)–(3), (6)–(8).

For associate attribution, paragraph 11(4) addresses relatives, partners, specified trustees and estate representatives. Paragraph 11(5)'s narrower relative wording expressly refers to subparagraph (3), whereas the associate definition appears in (4); this is a textual cross-reference issue requiring legal reconciliation. Do not silently replace paragraph 9's different relative definition or certify a family-attribution conclusion from this summary. Paragraphs 9(9) and 11(4)–(5).

Rates, bands and thresholds

Item	Amount or test	Tax year	Official source
Conditional thin-capitalisation ratio	Greater than 5:1; other financing and arm’s-length conditions also apply	2026	Schedule 4, paragraph 2
Third-party loan backed by connected non-company assets	More than 50% security limb; other conditions remain	2026	Schedule 4, paragraph 2(1)(b)
Untaxed-deposit/investment loan security	50% or more is a substantial part	2026	Schedule 4, paragraphs 5 and 8
Aggregate connected-expense deduction	Least of Expense, 5% of turnover and 75% of pre-Expense profit after brought-forward losses	2026	Schedule 4, paragraph 4(3)–(4)
Ordinary exceeding-borrowing-cost limit	Greater of 30% of tax EBITDA and €3,000,000; floor is group-wide	2026	Schedule 4, paragraph 18(3)–(5)
Group equity comparison tolerance	Up to two percentage points lower; consistent valuation required	2026	Schedule 4, paragraph 18(7)(a)
Disallowed costs / unused capacity	Indefinite carry-forward / maximum five years respectively	2026	Schedule 4, paragraph 18(8)

This is a threshold index, not an exemption table. Apply the complete scope, conditions and unresolved cross-references in the base below; sterling and euro amounts are not converted by this Guide.

The base

Business-profit adjustment and excess interest

Where connected business is arranged so that the taxable person earns no profits, less than ordinary profits, or creates or increases a loss, paragraph 4(1) provides for taxation by reference to the profits expected under the remainder of Schedule 4. Document the transaction, actual performance and pricing evidence; an intercompany invoice alone does not establish the expected profit. Schedule 4, paragraph 4(1).

Paragraph 4(2) separately treats connected-party interest above the amount payable to an arm's-length party as a dividend and denies deduction of that excess. For example, if actual interest is £12,000 and a supported arm's-length amount is £8,000, the excess is £12,000 − £8,000 = £4,000, before considering paragraph 7 and other applicable rules. The example assumes the £8,000 comparison has been established; it is not a suggested rate or benchmark. Schedule 4, paragraph 4(2).

Conditional thin capitalisation

Paragraph 2 applies where the company's loan-capital-to-equity ratio is greater than 5:1 at any time in the accounting period, subject to its exclusion for the specified regulated credit institutions/deposit takers. It additionally requires one of the listed financing arrangements and a loan that is not arm's length as to rate or terms:

• Interest to a connected person that is not a company; or
• Interest to an arm's-length lender on a loan secured wholly or on more than 50% of assets belonging to a connected non-company person, within the paragraph's wording.

When the provision applies, the relevant interest is treated as a dividend and is not deductible. Do not describe every loan above 5:1 as automatically disallowed or every loan at 5:1 as deductible. Schedule 4, paragraph 2.

“Loan capital” means total interest-bearing debt. The specified equity definition includes preference shares regardless of accounting treatment, shareholders' funds and a revaluation reserve only where the Commissioner is satisfied as to its substance. Use this statutory definition instead of automatically copying a balance-sheet equity line. Paragraph 2(1)(c).

Example: qualifying loan capital £600,000 divided by statutory equity £100,000 gives 6:1. That meets the ratio limb; lender, security and arm's-length conditions still need examination. Exactly £500,000/£100,000 gives 5:1, which does not exceed the ratio threshold, but paragraph 4 and other restrictions remain relevant. Check changes during the period, not just the closing balance.

Arm's-length loans secured by untaxed deposits or investments

Schedule 4 paragraph 5 is a separate restriction from the 5:1 thin-capitalisation test. It applies where, at any time in a year, a person pays interest to an arm's-length lender and a substantial part or all of that loan is secured by the specified cash deposit or investments whose income or gains are not assessable under the Act. Paragraph 8 defines substantial part as 50% or more. Do not import paragraph 2's strict “more than 50%” wording into this test. Schedule 4, paragraphs 5 and 8, printed pages 185–187.

The cash-deposit route covers a deposit with the lender or a person connected to that lender, made by the borrower or a person connected to the borrower. The investment route concerns investments and their income belonging to the borrower or a connected person over which the lender or its connected person has security. That route retains a cross-reference to section 3(2)(a) of the Financial Services Act 1989; the current successor definition has not been resolved here, so the cash-deposit example below does not determine which instruments qualify as investments. The requirement that the deposit/investment income or gains are not assessable must be checked separately from lender independence. Paragraph 5.

Where the provision applies, the interest is not deductible. It does not say to disallow only the fraction matching the security percentage. Paragraph 7's exemption and decision/appeal provisions below remain relevant; a bank lender alone does not establish exemption. Confirm the loan, actual security coverage and income treatment before determining the adjustment. Paragraphs 5 and 7.

Retain security deeds, the lender/borrower connection maps, covered loan amounts and changes during the year, interest records, tax treatment of the deposit/investment income, and evidence supporting any paragraph 7 exemption. Allocation between multiple loans, disputed security coverage and the investment-definition cross-reference require further review.

Separate net-borrowing-cost limitation

Schedule 4 Part V paragraph 18 supplies a further test. Apply it to exceeding borrowing costs, not automatically to gross interest or every finance cost in the accounts. Part III defines that amount as deductible borrowing costs exceeding taxable interest revenues and other economically equivalent taxable revenues. First establish those inputs under the Act, including the relevant earlier restrictions, so an expense already disallowed is not claimed a second time in this calculation. Financial undertakings and standalone entities are excluded by paragraph 18(1); apply the complete Part III definitions and group facts before using an ordinary company example. Paragraph 8A also supplies the corporate/PE-specific “taxpayer” definition for this Part. A connected-party loan held by an individual does not itself establish that this Part applies to that individual. Part III definitions and paragraph 18(1), printed pages 187–189 and 200.

For an established in-scope case:

1. Determine exceeding borrowing costs from the legally deductible borrowing-cost and taxable-interest inputs.
2. Calculate tax EBITDA by adding tax-adjusted exceeding borrowing costs, depreciation and amortisation back to assessable income. Exclude income not assessable under the Act.
3. The ordinary paragraph 18(3) limit is the greater of 30% of that tax EBITDA and €3,000,000. Paragraph 18(4) treats the €3,000,000 amount for the entire group. It is not a new €3,000,000 allowance for every group company; establish its application across the actual group before allocating a limit to an entity.
4. Compare the otherwise eligible exceeding borrowing costs with the applicable limit. Costs disallowed by this Part are added back in the tax working paper, subject to any independently established paragraph 18(7) alternative below. An exclusion from this Part or unused capacity does not itself prove deductibility under the rest of the Act.

Paragraph 18(3)–(5), printed pages 200–201.

A consolidated-group member may elect the paragraph 18(7)(a) full-deduction route if its equity-to-total-assets ratio meets the group ratio, with a ratio lower by up to two percentage points treated as equal and the required consistent asset/liability valuation. Alternatively, paragraph 18(7)(b) supplies a higher group-ratio limit: group exceeding borrowing costs vis-à-vis third parties ÷ group EBITDA, multiplied by the taxpayer's paragraph 18(5) EBITDA. Establish the complete statutory conditions, underlying consolidated accounts and the actual comparison before replacing the ordinary limit. Do not assume an exemption merely because accounts are consolidated. Paragraph 18(7), printed page 201.

Exceeding borrowing costs not deductible under paragraphs 18(3)–(7) may be carried forward indefinitely. Unused interest capacity may be carried forward for a maximum of five years. Keep those as separate dated ledgers; the statute does not give unused capacity an indefinite life. The treatment of capacity generated through the group-wide floor, group allocation, foreign-currency conversion and current return fields is not established by the illustrations below. Paragraph 18(8), printed page 202.

Explicit cross-reference limit: paragraph 18(6) describes pre-17 June 2016 loans, excluding later modifications, and specified infrastructure borrowing, but its operative reference is to paragraph 19(3). Do not silently rewrite that reference to 18(3) or use this Guide to certify either exemption. These cases need that textual issue reconciled; the ordinary illustrations expressly assume no borrowing within those descriptions. Paragraph 18(6), printed page 201.

Ordinary illustration: assume an established in-scope taxpayer, €4,000,000 exceeding borrowing costs, €6,000,000 tax EBITDA and an independently established applicable group-wide floor of €3,000,000, with no competing group claim, paragraph 18(7) alternative, paragraph 18(6) case or other restriction. Thirty percent of EBITDA is €1,800,000; the ordinary limit is €3,000,000. Deduct €3,000,000 under this Part and carry forward €1,000,000 disallowed costs. All inputs are expressed in euros solely to illustrate the statutory comparison; this is not a sterling conversion or final company-tax assessment.

Equality boundary: on the same scope assumptions, €3,000,000 exceeding borrowing costs and €10,000,000 tax EBITDA put both limbs at €3,000,000. Nothing is disallowed by this limit. Eligibility, other deduction restrictions and the actual group-wide amount still require proof. The two supplementary arithmetic controls retain these illustrations without adding extra main examples.

Aggregate connected-expense cap

Paragraph 4(3) refers to the aggregate expenses incurred in favour of connected parties, collectively the “Expense”. Subject to the applicable exemption and other provisions, the deduction is the least of:

1. The Expense itself;
2. 5% of gross turnover; and
3. 75% of pre-Expense net profit, after first deducting available brought-forward losses.

Pre-Expense net profit adds the Expense back to net profit; paragraph 4(4) specifies the tax-computed profit and turnover bases. The test is aggregate, not a fresh allowance for each invoice or connected supplier. Schedule 4, paragraph 4(3)–(4).

Example: aggregate Expense £80,000, statutory gross turnover £1,000,000, pre-Expense net profit £100,000 and available brought-forward losses £40,000. The limits are £80,000, £50,000, and 75% × (£100,000 − £40,000) = £45,000. The least is £45,000, giving a £35,000 restriction if that £80,000 was otherwise deducted, before assessing exemptions and other adjustments. No negative-profit case or interaction between overlapping disallowances is resolved by this example.

Shareholder advances and deemed distributions

Section 22 is a recipient-income rule, separate from the company's interest deduction tests above. It addresses specified company advances, loans, asset distributions and payments on behalf of or for the benefit of shareholders or connected persons. Its wording includes ordinary residence, excludes another company from the stated connected-person category, and excludes amounts charged under Schedule 7 Chapter 6. Establish the recipient's status, relationship and any employment-benefit charge before deciding which provision applies. Do not treat every debit on a director's loan account as automatically taxable under section 22. Section 22(1).

The Commissioner determines how much represents a distribution of income. That amount is deemed income as if a dividend had been paid in the year of assessment when the advance, distribution or payment occurs. A loan agreement or accounting label does not, by itself, establish that the Commissioner regards the entire amount as capital or a genuine non-distribution. Equally, this provision does not impose an automatic charge on every outstanding loan balance each year. Section 22(1).

In forming that opinion, the Commissioner can presume the company distributes income before capital and distributes income in the order it arose historically, unless the company demonstrates otherwise to the Commissioner's satisfaction. Retain the income/capital history and the evidence for any different treatment; a board minute alone does not prove the statutory exception has been accepted. Section 22(2).

If a later dividend is paid and set off against an advance, loan or payment already deemed income, section 22(3) prevents the dividend being assessable again to the extent of that set-off. Match the dividend, earlier deemed-income amount and actual debt satisfaction. The rule does not exempt an unrelated dividend or establish a general refund following cash repayment. Section 22(3).

Exemption and evidence

Paragraph 7 states that paragraphs 2 and 4–6 do not apply where the person establishes the prescribed matters to the Commissioner's satisfaction. Its wording addresses absence of tax-avoidance purpose, bona-fide commercial transactions not designed to avoid tax, and the reasonableness and proportionality of the amount to the business. Review the complete provision and its decision/appeal route; commercial labelling alone is not proof of an exemption. Do not omit this provision when presenting the numerical restrictions. Schedule 4, paragraph 7.

Paragraph 7(2) expressly applies the section 35 appeal route to the exemption decision as if it were an assessment, excluding Schedule 2 paragraph 13 and permitting the Tribunal to confirm, vary or quash that decision. This specific remedy differs from the section 43(3) confirm-or-remit rule below; identify which decision is challenged before selecting the remedy. Schedule 4, paragraph 7(2).

A practical file should contain the relationship/control map, signed agreements, evidence of services or financing provided, pricing support, debt and equity movements, security documents, aggregate connected expenses, profit/loss reconciliation and any Commissioner correspondence. These are preparation controls rather than a claim that a particular statutory local-file form or filing deadline has been verified.

Apply the resulting adjustment once in the tax computation and reconcile it to the corporate-tax Guide. Preserve supporting evidence under the records Guide. The independent country review and bounded repair closure are recorded in the country research archive; professional attestation remains pending. Complex attribution and the paragraph 11 relative cross-reference, exemption application, overlapping restrictions, the paragraph 5 investment-definition cross-reference and complex security allocations, the paragraph 18(6) exemption cross-reference, group allocation/currency/return implementation and international reporting need further work before comprehensive coverage can be claimed.

Deadlines and filing

Seeking clearance under section 42

An applicant seeking confirmation that an effected or proposed arrangement is not taxable under section 40 or Schedule 4 must furnish full particulars in writing and agree to publication of the arrangement and decision in anonymised form. This is a clearance about the stated anti-avoidance provisions, not a certificate that every tax consequence is approved. Section 42(1).

The statutory sequence distinguishes several 21-day periods:

Event	Required next step
Commissioner receives insufficient particulars or further information	Within 21 days, notify the applicant of further information required under subsection (2).
Applicant is notified of that request	Supply it within 21 days from notification, or the further time allowed; otherwise the Commissioner need not proceed under subsection (3).
Commissioner receives particulars or all requested further information	Within 21 days, notify applicability/non-applicability or the need for a further 21 days to consider the information under subsection (4).
No written decision by the relevant statutory period	The applicant can send a written subsection (6) notice seeking a decision within 21 days of the Commissioner's receipt of that notice.

Section 42(2)–(7). Keep receipt and notification evidence and every information request; distinguish the statutory notification trigger from the date someone actually reads the request. See section 10 service rules. There is no universal 21-day approval promise measured from the first email. A further-information request under subsection (7)(c) is treated as a subsection (2) request, engaging the corresponding information and decision sequence.

Subsection (8) permits reliance on failure to decide within the period specified by subsection (6), while preserving the Commissioner's general assessment powers for other reasons. Silence after the initial application alone is not that rule. Before relying on deemed acceptance, establish the qualifying written follow-up notice, receipt date, expiry and effect of any further-information request. This Guide does not establish the current submission channel or resolve disputed service/day-count facts. Section 42(6)–(8).

Boundary examples: a taxpayer who sent only an initial application and received no answer cannot infer subsection (8) acceptance merely because 21 days passed. A taxpayer who receives a valid further-information request must track the response/restarted decision sequence; the original application date is no longer a sufficient deadline model. These are procedural distinctions, not findings that an unreviewed claim has deemed clearance.

A notification is void where the disclosure omits material facts or is not full and accurate, or where those facts and circumstances change. Clearance for one arrangement does not prevent section 40 or Schedule 4 applying to a wider arrangement incorporating it. Maintain the submitted factual record and compare implementation with it. Sections 42(11)–(12) also condition advance interpretation/clearance on willingness to accept anonymised publication. Section 42(9)–(12).

Anti-avoidance decisions and appeal scope

Section 43 requires a written decision identifying the person assessed, affected/disregarded parts of the arrangements, reasons and proposed assessment amount. Section 35 appeal provisions apply, subject to section 43(3): Schedule 2 paragraph 13 does not apply, and the Tribunal can confirm the decision or remit it for reconsideration on its findings of law and fact. Do not assume every ordinary assessment-appeal power carries over unchanged. Preserve the decision and service evidence and use the appeals Guide for the general deadline framework. Section 43(1)–(3).

The clearance sequence is not a corporate return or payment calendar. Use the corporate-tax Guide for that separate calendar. Current Part V return fields, group-floor allocation, currency conversion and the clearance submission channel remain unverified here.

Penalties and interest

This Guide does not establish a separate penalty or interest computation for a connected-party adjustment. Use the separately sourced corporate-tax Guide and assessment/appeals Guide for their stated scopes. Do not infer that a restriction, pending clearance or the absence of a charge in this summary eliminates an otherwise applicable penalty or payment surcharge.

Cross-border points

The Schedule 4 restrictions apply according to their statutory scope; the presence of a foreign counterparty alone establishes neither treaty relief nor an exemption. This Guide does not supply a foreign corresponding adjustment, a treaty claim, international reporting compliance or another jurisdiction’s tax treatment. Read the foreign-tax-relief Guide for its distinct domestic/treaty and corporate residence-exit methods. The group and currency limitations in the base remain open.

Two worked examples that recompute

Example 1: secured-deposit threshold and boundary

Conditional boundary example: assume a £200,000 loan, £12,000 interest, qualifying cash-deposit security covering £100,000 of the loan, non-assessable deposit income and no applicable paragraph 7 exemption. Security covers 50%, meeting the substantial-part threshold, and the paragraph 5 adjustment is £12,000, not £6,000. If established security coverage is £99,999, it is 49.9995% and does not alone meet this threshold. That second case is not proof of deductibility under other provisions. Security coverage is an assumed legal fact, not automatically the deposit's account balance.

name: Secured cash-deposit loan substantial-part boundary
inputs:
  loan: 200000
  qualifying_security: 100000
  below_boundary_security: 99999
  interest_paid: 12000
steps:
  - security_percent: qualifying_security / loan * 100
  - below_boundary_percent: below_boundary_security / loan * 100
  - conditional_disallowance: interest_paid
expected:
  security_percent: 50
  below_boundary_percent: 49.9995
  conditional_disallowance: 12000

Example 2: dividend set-off after a deemed distribution

Worked example: assume an earlier £30,000 advance was fully treated as income under section 22(1). A later £40,000 dividend is actually applied £30,000 against that advance, with £10,000 paid separately. Section 22(3) protects the £30,000 set-off from repeat assessment; the remaining £10,000 needs its own ordinary dividend analysis. This is an allocation, not a tax-rate calculation.

name: Gibraltar dividend set-off against previously deemed shareholder income
inputs:
  previously_deemed_advance: 30000
  later_dividend: 40000
  actual_setoff: 30000
steps:
  - protected_setoff: min(previously_deemed_advance, actual_setoff)
  - dividend_requiring_separate_analysis: later_dividend - protected_setoff
expected:
  protected_setoff: 30000
  dividend_requiring_separate_analysis: 10000

If only £12,000 of that dividend is actually set off, this provision protects only £12,000; a £30,000 historic deemed-income balance does not itself exempt £30,000 of every later dividend. Preserve the original assessment, transaction dates, account movements, dividend resolution and set-off evidence. These are recommended controls; the current return fields, administrative claim/correction route, disputed classification and cash-repayment consequences remain to verify. Coordinate with the individual income-tax Guide and the payroll benefit rules where relevant.

Ask the client first

1. Who are the legal and beneficial parties, and what voting, acquisition, nominee and distribution rights connect them?
2. What were the debt, statutory equity and security positions throughout the period, and how was the arm’s-length amount supported?
3. What aggregate connected expenses, tax-computed profit, turnover and brought-forward losses enter the computation?
4. For Part V, what corporate/PE scope, exclusion status, consolidated group facts and group-wide floor application have been established?
5. Were shareholder advances previously assessed, and what later dividend amount was actually set off?
6. What Commissioner decisions, exemption evidence, clearance notices and service dates exist?

Sources

Source	Actual read scope	Read on
Income Tax Act 2010, 23 March 2026 consolidation	Sections 22, 40(1)–(4), 42–43; Schedule 4 paragraphs 2, 4–5, 7–11, targeted Part III definitions and complete Part V paragraph 18(1)–(8); not the whole 297-page Act newly read	2026-10-28
Same Act, sections 22, 40, 42–43 and Schedule 4 earlier methods	Earlier source reads and completed reviews retained in the lending/appeals full review; this date does not claim a fresh reread of every old provision	2026-10-22

The complete rule ledger and old-topics map and independent country review records identify the exact revisions checked, findings and bounded repair closure. Earlier reviews retain their stated scopes. This remains a source-cited draft; professional attestation is pending.

Not yet confirmed: complex control/associate attribution and the paragraph 11 relative cross-reference; the paragraph 5 investment-definition successor; disputed exemptions and overlapping restrictions; paragraph 18(6)'s reference to 19(3), group-wide floor allocation, foreign-currency conversion, capacity amounts and current return fields; wider international documentation/reporting and other later-Part regimes. The ordinary paragraph 18 limit and separate carry-forward periods above do not resolve those specific questions.