To recall, in 2004 the European Commission decided that the proposals notified by the United Kingdom for the reform of corporate tax in Gibraltar constituted a scheme of State aid that was incompatible with the internal market and consequently that those proposals could not be implemented. The Commission also found 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.” Then the Government of Gibraltar and the United Kingdom brought an action before the Court of First Instance (the General Court) for the annulment of the Commission decision. In 2008 the General Court held, inter alia, that the Commission had failed to demonstrate that the tax system at issue was selective. The General Court annulled the 2004 Commission’s decision on the aid scheme, which the United Kingdom is planning to implement as regards the Government of Gibraltar Corporation Tax Reform. Then, the European Commission and Spain brought appeals before the Court of Justice in order to have the General Court’s judgment set aside.
In its judgment delivered yesterday (15 November) in Joined Cases C-106/09 and C-107/09, Commission and Spain v Government of Gibraltar and United Kingdom, the ECJ held that the General Court “erred in law” in finding that the reform of corporate tax in Gibraltar does not confer selective advantages on offshore companies. Accordingly, the Court concluded 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.” Consequently, according to the Court such companies “enjoy selective advantages.” The Court held that “the proposed tax reform is materially selective in that it grants selective advantages to offshore companies.”
The ECJ ruled, therefore, “A tax system designed in such a way that offshore companies avoid taxation constitutes a State aid scheme that is incompatible with the internal market.”
The ECJ set aside the judgment of the General Court and decided to uphold the Commission’s decision that considered the proposed tax reform to amount illegal State aid, which the United Kingdom is not authorised to implement.
This ruling was, therefore, a victory for the European Commission and Spain and defeat for Gibraltar and UK. According to the European Voice, Giles Chichester, Ashley Fox and Julie Girling MEPs, said “We are dismayed that Gibraltarians' growing prosperity will be undermined by this attack on their right to set tax levels as they please. It is deeply regrettable that the European Court of Justice has chosen not to back people's freedoms.”
