Gibraltar, home of the world’s four largest online gaming companies, is preparing to make sweeping reforms to its corporate tax regime.

The reforms are expected to impact the way online gaming and other foreign companies are taxed.

Speaking to Accountancy Age, Gibraltar’s chief minister Peter Caruana said Gibraltar was on the brink of replacing its current exempt foreign company regime with a low tax rate for all businesses based on the peninsula.

The exempt foreign company regime offered foreign companies a 0% corporation tax rate, while local companies paid a rate of 35%. This system was challenged by the European Union, which argued that it was a breach of EU state aid rules by the UK and Gibraltar.

Gibraltar eventually agreed to phase out exempt company status by 2010. Caruana said the territory was planning to introduce a low tax rate for all companies based in Gibraltar within the next 18 months.

Gaming giants such as FTSE listed PartyGaming and 888 Holdings have enjoyed exempt-company status, but will soon be required to pay a higher rate of tax when the exempt company regime is closed.

However, Caruana promised that Gibraltar remained committed to a low corporate tax rate that would remain attractive to large online gaming groups and other foreign companies. ‘We are moving away from zero tax to low tax. An internationally competitive tax rate is an important attraction for business.

‘Our philosophy remains that a low tax rate encourages investment and delivers wealth,’ Caruana said.

But the new tax rate is yet to be confirmed as Gibraltar is still facing EU opposition to its attempts to establish a corporate tax system that differs from that of the UK.

Gibraltar’s case is now before the European Court of First Instance, which is to release a judgment on whether Gibraltar’s links with the UK mean it cannot set its own tax policy. A ruling is expected in September or October this year.

James Tipping, director of Gibraltar’s Finance Centre, was bullish on the Rock’s chances of victory because of a similar case involving the Azores and Portugal.

In the Azores case, the European Court of Justice ruled that although the Azores was an integral part of Portugal’s economy, it remained an autonomous jurisdiction and should be allowed to have a separate tax regime to that of Portugal.

‘We are confident in our case because Gibraltar is not a part of the UK in any sense,’ said Tipping.

Should Gibraltar win its case as predicted, the new tax rate is likely to match the rates set in other EU jurisdictions, such as Ireland and Malta.

Caruana emphasised, however, that the low rate would be based on Gibraltar’s revenue requirements and not on the rates of other regions.

‘We are not going to come in and make our rate just a smidgen lower than other regions. This is not an auction. We have our economic and public needs, which have to be met,’ Caruana said.