Court of Justice confirms that a proposed Gibraltar corporate tax system constitutes a State aid scheme incompatible with the internal market

The United Kingdom notified in 2002 the European Commission of the Government of Gibraltar’s proposed reform of corporate tax. The reform included the repeal of the former tax system and the imposition of three taxes applicable to all Gibraltar companies, namely a company registration fee, a payroll tax and a business property occupation tax (“BPOT”), with a cap on liability to payroll tax and BPOT of 15% of a company’s profits.

The European Commission, in 2004, through Commission Decision 2005/261/ EC (OJ 2005 L 85, p. 1), decided that the proposals notified for the reform of the system of corporate taxation in Gibraltar constituted a scheme of State aid; incompatible with the internal market and accordingly that such proposals could not be implemented.

The European Commission considered that specific aspects of the proposed tax reform were de facto selective. In a nutshell: (i) the requirement that a company must make a profit before it becomes liable to payroll tax and BPOT, since that requirement would favour companies which make no profit; (ii) the cap limiting liability to payroll tax and BPOT to 15% of profits, since that cap would favour companies which, for the tax year in question, have profits that are low in relation to their number of employees and their occupation of business property; and (iii) the payroll tax and BPOT, since those two taxes would inherently favour offshore companies which have no real physical presence in Gibraltar and which as a consequence do not incur corporate tax.

In the Decision the Commission also states that the proposed reform was regionally selective since it provided for a system under which companies in Gibraltar would be taxed, in general, at a lower rate than those in the United Kingdom.

On 18 December 2008, ruling upon appeals submitted by the Government of Gibraltar and the United Kingdom, the General Court annulled the Commission Decision – see judgment in joined cases T-211/04 and T-215/04. In its ruling, the General Court held inter alia that the Commission had not followed an adequate method of analysis as regards the material selectivity of the proposed tax reform. According to the General Court, the Commission, in order to sustain that the proposed tax system was selective, should have demonstrated that certain of its elements constituted derogations from Gibraltar’s common tax regime. For this purpose, the Commission was not entitled to regard general tax measures as being selective pursuant to their material effects, as it had occurred in the decision. In addition, the Court considered that the reference for assessing the proposed tax reform selectivity corresponded exclusively to Gibraltar territory, and not the United Kingdom’s territorial limits.

Following the referred ruling of the General Court, the European Commission and Spain submitted an appeal to the Court of Justice in order to have the General Court’s judgment dismissed – see joined cases C-106/09P and C-107/09P.

In the judgment rendered on 15 November 2011, the Court of Justice declared that the General Court erred in law in declaring that the proposed tax reform does not confer a selective advantage to offshore companies.

The Court of Justice in the ruling states that a different tax burden resulting from the application of a general tax regime is not sufficient on its own to establish the selectivity of taxation. Notwithstanding, it holds that such selectivity exists where, as in the case of the proposed Gibraltar tax reform, the criteria for assessment which are adopted by a tax system are such as to characterise the recipient undertakings, by virtue of the properties which are specific to them, as a privileged category of companies.

In this context, the Court of Justice finds that a particular feature of Gibraltar’s tax regime is a combination of the payroll tax and BPOT as the sole bases of assessment, resulting in taxation according to the number of employees and the size of the business premises occupied. However, due to the absence of other bases of assessment, combining those two bases of assessment (which are founded on criteria that are in themselves of a general nature) excludes a priori any taxation of offshore companies, since they have no employees and also do not occupy business property. Those criteria therefore discriminate between companies which are in a comparable situation with regard to the objective of the proposed tax reform, namely to introduce a general system of taxation for all companies established in Gibraltar.

Consequently, the Court concludes in the judgment that the fact that offshore companies are not taxed in Gibraltar is not a random consequence of the regime at issue, but the inevitable consequence of the fact that both corporate taxes (in particular, their bases of assessment) are specifically designed so that offshore companies, which by their nature have no employees and do not occupy business premises, avoid taxation. Thus, the fact that offshore companies avoid taxation precisely on account of the specific features characteristic of that group of companies gives reason to conclude that they enjoy selective advantages.

Since the proposed tax reform is materially selective in that it grants selective advantages to offshore companies, the Court considers that it is not relevant to examine whether the proposed reform is also territorially selective.

Thus, the Court of Justice set aside the judgment of the General Court and uphold the decision of the Commission, which determined that the proposed Gibraltar tax reform constitutes a State aid scheme incompatible with the internal market.