In its recent ruling in Joined Cases Commission and Spain v Government of Gibraltar and United Kingdom (C-106 and 107/09 P), the Court of Justice has set aside the judgment of the General Court (Cases T-211 and 215/04) and upheld the Commission’s decision to prevent the United Kingdom from implementing Gibraltar’s proposed reform of corporate tax. This decision, which seems to depart from the Court’s case-law on the application of State aid rules to measures relating to direct business taxation, is also a stepping stone in the fight against unfair tax competition within the European Union.
The proposed reform created a tax system applicable to all Gibraltar companies. The system, however, was clearly intended to favour offshore companies, since it was largely based on criteria linked to the number of employees and the occupation of business property, thus exempting companies which have no real physical presence in Gibraltar. The Commission decided that this proposal constituted a scheme of State aid (Decision 2005/261/EC), but the Court of First Instance (now the General Court) annulled this decision, on the grounds that the Commission had not demonstrated that offshore companies benefited from a derogatory tax regime.
The Court of Justice, however, held that the General Court’s reasoning was vitiated by an error in law. It held that it was not necessary for the tax system to include derogatory provisions applying to some companies for an advantage to be identified as a State aid scheme: a tax system may achieve the same result ‘by adjusting and combining the tax rules in such a way that their very application results in a different tax burden for different undertakings’ (§ 93). Even a tax regime that applies to all, or most companies, can be set up so as to exempt a category of undertakings, as was the case here, through general features such as the criteria on which the regime is based. According to the Court, the material selectivity of a tax regime does not depend on the use of a certain regulatory technique. On the contrary, any tax system having selective effects of this kind should be prohibited. The Court therefore quashed the first instance ruling, and gave final judgment on the matter, dismissing the action brought by the United Kingdom and the Government of Gibraltar and upholding the Commission’s decision.
It is worth noting that the Court seems to have taken into account the aims of the proposed reform, not only its probable effects. According to it, ‘the fact that offshore companies are not taxed is not a random consequence of the regime at issue, but the inevitable consequence of the fact that the bases of assessment are specifically designed so that offshore companies... have no tax base’ (§ 106). This is interesting, since the Advocate General had explicitly rejected the Commission’s proposal of a new concept of an ‘inherently discriminatory’ tax system, holding that in the case of State aid schemes regarding direct business taxation, a reference framework was especially important in order to determine the amount of the supposed aid. According to him, a more general approach would lead to confusion between the concepts of selectivity and advantage. Although Gibraltar’s intention to create a system of harmful tax competition was clear, he thought that the derogation-based approach should not be departed from, and that Article 87(1) EC (now Article 107(1) TFEU) was not the appropriate instrument to fight against bad fiscal practices such as tax exemption of offshore companies. The Court seems to have accepted the Commission’s proposal, insofar as it held that the general features of a tax system, which favours certain types of companies without creating a derogatory regime, can nevertheless lead to selective effects that may constitute a State aid scheme, clearly taking into account the policy issues raised by the Commission.
Reproduction autorisée avec l’indication: Turmo Araceli, "Tax exemption for offshore companies in Gibraltar constitutes a State aid scheme incompatible with the internal market", www.ceje.ch, actualité du 18 novembre 2011.