15% sales tax in 2028 in exchange for open border with Spain
As part of a landmark post-Brexit agreement between the UK and Spain, Gibraltar has committed to introducing a 15% Transaction Tax on goods by 2028 – which then rises to 17% within two years. This measure is a key component of the broader settlement aimed at maintaining open borders with Spain and avoiding the imposition of a hard border following the UK’s departure from the EU.
The Transaction Tax will rise as follows:
- 16% after year one;
- 17% after year two
Other rates:
- 5% reduced rate on: antiques; art; children’s clothing; and bikes.
- 0% rate: basic foods; medical supplies; books; pharmaceuticals; electricity; water;
- Exempt: financial services; bunkering fuel; aircraft and ship supplies.
The new 15% levy, effectively functioning as a sales tax, marks the end of Gibraltar’s long-standing VAT-free regime. This shift addresses longstanding concerns from Madrid, which has argued that Gibraltar’s lower tax environment distorted competition and contributed to illicit trade, particularly in products such as tobacco.
Instead of adopting traditional VAT, Gibraltar will apply a “Transaction Tax”—a form of import duty applied at a higher rate—designed to ensure parity with EU tax standards and satisfy Spain’s demand for a level playing field.
Gibraltar retains pre-Brexit open border
Gibraltar, which shares a land border with Spain, found itself outside the EU customs union and Schengen Area post-Brexit, raising the risk of border friction and restricted movement. The UK-Spain agreement now paves the way for continued frictionless movement of people across the border, crucial for Gibraltar’s economy, which heavily depends on cross-border labour and tourism.
Under the terms of the deal:
- Spanish border officials will be stationed at Gibraltar’s airport and port, tasked with conducting Schengen-compliant passport checks.
- In return, free movement will continue between Gibraltar and Spain, effectively integrating Gibraltar into the Schengen zone.
This arrangement is expected to provide economic stability and growth, by safeguarding Gibraltar’s access to European labour and consumer markets.
Transaction Tax three years within ratification
The Transaction Tax is to be implemented within three years of the agreement’s ratification, likely around 2028. The change represents a significant policy shift for Gibraltar, aligning it more closely with EU fiscal norms in exchange for critical border and trade concessions.
The deal marks a historic resolution to decades of political and economic tension between the UK and Spain over Gibraltar, aiming to balance sovereignty concerns, economic interests, and regional cooperation in a post-Brexit context.