Gibraltar's economy is quite unique. Its largest industry is online gaming, accounting for around 30% of the GDP. This is followed by the financial sector — including banking, insurance, funds, wealth management, and fiduciary services —, contributing to 20% of the GDP, and tourism, with a similar percentage. Historically, a tax regime was created to attract high net worth individuals and companies, with no taxes on wealth, capital gains, inheritances, or donations. Being a territory squeezed between the sea and Spain, this regulation has been a constant source of problems.
Now, the Treaty reflects how Gibraltar's economy has changed and safeguards this transformation. During the 20th century, the colony retained characteristics of a classic free port. This meant that its economic model was based on selling goods much cheaper than those available across the border. However, in the 21st century, Gibraltar's competitive advantage no longer lies in retail trade or cheap tobacco, but in high-value-added activities such as financial services, online gaming, insurance, wealth management, and maritime services, which are lightly regulated internationally and move between different jurisdictions, often in territories with varying shades of gray. The treaty acknowledges this evolution and consolidates it.
To achieve this, it addresses the taxation of goods by creating an indirect tax, which reduces - but does not eliminate - the tax benefits derived from buying something in Gibraltar and selling it in Spain. This should have an impact on tobacco smuggling, as it reduces the margin of arbitrage, although according to the Spanish Civil Guard, this trafficking has plummeted in recent years. However, there are no changes in capital taxes, but a framework for coordination with the EU is established. The Gibraltar linked to cigarette cartons, which was already in marked decline, receives what is probably the final blow from Brussels. The Gibraltar linked to financial and professional services and offshore activities, which are the current source of prosperity for the colony, receives the EU's blessing.
In terms of goods, the changes are evident. Until now, Gibraltar taxed them almost exclusively through tariffs. It was a logical system because practically nothing is manufactured in the Rock. However, from now on, the colony will have a Transaction Tax, which will apply to both imported goods and locally produced ones when destined for the Gibraltar market.
Although it sounds like VAT, it is not. In fact, for London and Gibraltar, keeping the Rock out of the European VAT system was a 'red line' they were not willing to cross. And they have succeeded. It is also not a Sales Tax (like the U.S. Sales Tax). It is something exclusive to Gibraltar, applied only to goods - not services - when they become part of the Gibraltar market. It came into effect on April 10, with a general rate of 15%, which will increase to 16% in 2027. In 2028, it will reach 17%, which will be final, unless the EU's general VAT rate is lower, in which case it will drop to that level.
The goal is not to collect revenue but to reduce the tax gap with Spain and the rest of the EU. This is particularly noticeable in tobacco, where a minimum tax burden of 115 euros per thousand cigarettes is established, and a limit on the price difference with Spain of 80 cents per pack or 15% of the selling price. A tobacco traceability system equivalent to the European one is also established, requiring Gibraltar to record the journey of products from importation or production to distribution, share information with European authorities, and provide data on imports, sales, exports, and stocks.
However, in financial matters, there are no tax changes. Simply put, Gibraltar commits to maintaining regulation equivalent to the European one in combating money laundering and terrorism financing, exchanging information with EU authorities, and cooperating in police and judicial investigations. It also foresees consultation mechanisms when one of the parties considers that a regulatory divergence may create a market distortion. The core of Gibraltar's financial model remains untouched.