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ECJ Overrules Gibraltar Tax Reform Proposal

Wed 16th Nov 2011
ECJ Overrules Gibraltar Tax Reform Proposal

The European Court of Justice (ECJ) has overruled the judgement of the General Court, and upheld the EU Commission's decision not to permit the UK to implement the reform of Gibraltar's corporate tax laws proposed in 2002.

The ECJ ruled that the proposed tax reform gives a effectively encourages companies to register offshore in a tax avoidance measure, aided by the state.

In August 2002 the UK notified the EU Commission of the reform of corporate taxation laws proposed by the government of Gibraltar. The proposal included the repeal of the old tax system and the creation of 3 new taxes for all Gibraltar companies : a company registration tax; a payroll tax and a business property occupation tax (‘BPOT'), with a cap on liability to payroll tax and BPOT of 15% of profits.<7p>

In 2004, the Commission decided the proposals amounted to `State aid´ which was incompatible with the internal market and that the reforms could not be implemented. It was also found that a number of points were `materially selective´, and that the proposed reform was `regionally selective´ as it amounted to companies registered in Gibraltar being taxed less than those in the UK.

ECJ Court found that a feature of Gibraltar's tax regime is a combination of the payroll tax and BPOT as the only considerations, meaning that a business is taxed according to it´s number of employees and the physical size of the business premises. This discriminates between companies which are in a comparable situation with regards to the proposed new system, basically in introducing a general system of taxation for all companies registered Gibraltar.

As a result many offshore companies have been able to avoid taxation due to specific features, such as number of employees and size of office.

The ECJ overruled the General Court´s earlier decision, saying : "the classification of a tax system as ‘selective' is not conditional upon that system being designed in such a way that all undertakings are liable to the same tax burden but some benefit from derogating provisions that give them a selective advantage.

Such an interpretation of the selectivity criterion would require that, in order for a tax system to be classifiable as ‘selective', it must be designed in accordance with a certain regulatory technique.

The consequence of that approach would be that national tax rules would fall, from the outset, outside the scope of control of state aid merely because they were adopted under a different regulatory technique although they produce the same effects. 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 territorially selective."

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