Taxation in Gibraltar (European Court Judgment)
(Limited Text - Ministerial Extracts only)
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The Secretary of State for Foreign and Commonwealth Affairs (Mr William Hague)
On 15 November 2011 the Court of Justice of the European Union (ECJ) published its judgment in appeal cases brought by the European Commission and Spain against the United Kingdom and the Government of Gibraltar on the issue of whether corporation tax changes proposed by the Government of Gibraltar in 2002 breached EU rules on state aid. In this judgment the ECJ has set aside the earlier judgment of the General Court of the European Union (General Court) dated 18 December 2008 and has found that the proposed tax regime, which was abandoned some time ago and was never implemented in Gibraltar, constituted state aid on grounds of material selectivity.
The background to this case is that in August 2002 the UK notified the Commission, pursuant to article 88(3) of the then EC treaty (now article 108(3) TfEU), that Gibraltar proposed to make changes to its tax system that would involve the introduction of a payroll tax and a business property occupation tax (BPOT). The Commission’s decision of March 2004 found that the payroll tax and BPOT were materially selective because they would inherently favour offshore companies that had no physical presence in Gibraltar and which, as a consequence, would not incur corporation tax. The Commission also found that the proposed changes to Gibraltar’s tax system were regionally selective on the grounds that they provided for a system under which companies in Gibraltar would be taxed, in general, at a lower rate than those in the UK.
The UK and the Government of Gibraltar both contested the Commission’s decision in respect of both material and regional selectivity. On 18 December 2008 the Court of First Instance (now the General Court) annulled the Commission’s decision. The General Court found that Gibraltar’s tax proposals did not breach EU rules on state aid on grounds of material selectivity. Moreover the General Court ruled that the frame of reference for assessing whether Gibraltar’s proposals were regionally selective corresponded exclusively to Gibraltar’s territorial limits. The General Court therefore upheld, under EU law, Gibraltar’s freedom to set tax rates that are different from those in the UK.
The Commission and Spain both brought appeal actions asking the ECJ to set aside the General Court’s judgment. The Commission’s single ground of appeal was on the question of material selectivity. Spain appealed on both regional and material selectivity. The ECJ’s judgment of 15 November 2011 is the final ruling in these proceedings. The ECJ found that Gibraltar’s tax proposals were materially selective in that they granted selective advantages to offshore companies. It held that in view of its finding on material selectivity it was not relevant to examine whether Gibraltar’s proposals were regionally selective.
The ECJ’s decision not to examine the issue of regional selectivity means that there has been no change in the principles established by the Court in the Azores case (ECJ case C-88/03 Portugal v Commission). According to those principles autonomous regional bodies within an EU member state may set lower levels of tax than in the rest of the member state without giving rise to state aid provided that certain criteria for determining the autonomous status of the regional body are met. In accordance with its constitutional arrangements, Gibraltar is a fiscally autonomous entity with responsibility for the management of its economy, including taxation, vested in the Government of Gibraltar. The UK is committed to upholding the Gibraltar constitution. The ECJ’s judgment of 15 November 2011 does not change Gibraltar’s constitutional relationship with the UK or Gibraltar’s freedom to set a tax regime that differs from the UK’s.
It is for the Government of Gibraltar, as the authority responsible for the tax system in Gibraltar, to consider the implications for Gibraltar of the ECJ’s ruling on material selectivity.
On 15 November 2011 the then Government of Gibraltar issued a statement which stated that the judgment would have no adverse impact on Gibraltar since the proposed tax scheme that was examined by the ECJ had never been implemented and the proposal had since been abandoned in favour of an income tax of 10% for all companies. The new Government of Gibraltar takes the same view.
The Government will keep the House informed of any further significant developments.