Brussels, 15/11/2011 (Agence Europe) - The Court of Justice of the EU ruled on Tuesday 15 November (Cases C-106/09 P and C-107/09 P) that the proposals on the reform of Gibraltar's corporate tax, submitted by the United Kingdom to the Commission in 2002, were materially selective in that they allowed offshore companies to avoid taxation. The Court thus upheld the content of the 2004 Commission decision that this proposal constituted state aid incompatible with the internal market, and set aside a General Court ruling of 2008 which found that the Commission had not properly established the existence of selective advantages.
The reform of corporation tax proposed by the United Kingdom repealed the former tax system and imposed three taxes applicable to all Gibraltar companies: a companies registration fee, a payroll tax and a business property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 profits.
In a decision of 30 March 2004, the European Commission said that these proposals could not be implemented, taking the view that three aspects of the tax reform were materially selective: (a) 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; (b) 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 (c) 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. It also found that the proposed reform was regionally selective as it provided for a system under which companies in Gibraltar would be taxed, in general, at a lower rate than those in the UK.
The General Court, to which the matter had been referred by Gibraltar and the United Kingdom, annulled the Commission decision (Cases T-211/04 and T-215/04). It held that, in order to prove that the tax system at issue was selective the Commission should have demonstrated that certain of its elements constituted derogations from Gibraltar's common or “normal” tax regime. Moreover, according to the General Court, the reference framework for assessing the reform's regional selectivity corresponded exclusively to Gibraltar's, and not the United Kingdom's, territorial limits, as the Commission had taken.
The Court annulled that judgment, upholding the appeals lodged by Spain and the Commission. The Court of Justice held that the General Court erred in law in finding that the proposed tax reform does not confer selective advantages on offshore companies. It considered that, while 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, such selectivity exists where, as in the present case, 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 undertakings”. In doing so, the Court found 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, from the outset, any taxation of offshore companies. This special treatment compared with other companies subject to the same taxation system “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, 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, as the Commission had said.
The Court noted that, contrary to the General Court's reasoning, 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 rather upon some benefit from derogating provisions that give them a selective advantage. Such an interpretation of the selectivity criterion would require that, 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.
It concluded that “since the proposed tax reform is materially selective in that it grants selective advantages to offshore companies”, it is not relevant to examine whether the proposed reform is territorially selective. (FG/transl.rt)