Gibraltar

On the 18 December 2008 the European Court of First Instance (“ECFI”) finally gave its long awaited judgment in relation to Gibraltar’s tax reform. The ECFI annulled in its entirety the European Commission’s decision of 30 March 20041 that the Government of Gibraltar’s corporate tax proposals constituted state aid.
The European Commission had ruled that the Government of Gibraltar’s tax proposals constituted state aid on the basis that they satisfied the criteria for both regional selectivity and material selectivity. However, the ECFI overturned the decision on both counts.

Regional selectivity

On the first issue of regional selectivity, the ECFI concluded that Gibraltar met all three conditions set out in its judgment on the tax regime in the Azores2. These conditions were:

Institutional autonomy
Procedural autonomy
Economic and financial autonomy

Given that Gibraltar satisfied all three conditions, the ECFI concluded that: “the reference framework for assessing whether the tax reform at issue is regionally selective corresponds exclusively to the geographical limits of the territory of Gibraltar.” Therefore the tax system of Gibraltar could not be compared with that of the United Kingdom for the purpose of establishing regional selectivity.

Material selectivity

On the second issue of material selectivity, the ECFI found that the European Commission had not followed the required three-stage analysis of the proposed tax regime, and this therefore meant that the Commission had gone beyond the limits of its review.

Although an appeal, limited to points of law only, may be brought against the ECFI’s decision within two months of the date of the judgment, this is deemed unlikely given that the ECFI found against all points brought forward by the European Commission.

Going forward

This key decision now allows the Government of Gibraltar to proceed towards a reduction in the rate of corporation tax from the current 27 per cent. The Government has already stated that the rate will be reduced to 10 per cent for the tax year commencing 1 July 2010, and it is expected that the corporation tax rate will be reduced from its current 27 per cent by the next tax year, being the year beginning on 1 July 2009. In addition, it is expected that certain companies will be able to benefit from a lower effective rate of tax after allowing for certain reliefs set out in law.

Gibraltar has finally obtained confirmation of its independent tax status within the European Union, and professionals in the financial services industry are very optimistic that in the years ahead Gibraltar will consolidate its position as a leading international finance centre within the European Union.

Contact desiree.mchard@bdo.gi or christian.summerfield@bdo.gi for further information on how you or your company can benefit from doing business from Gibraltar.


References
1 European Commission decision 2005/261/EC of 30 March 2004.
2 Judgment of the European Court of Justice of 6 September 2006 in Case C-88/03 Portugal v Commission.