EU Commission publishes decision to extend Gibraltar state aid probe to tax rulings

by Julie Martin

The European Commission has published a non confidential version of its decision to open an investigation into whether Gibraltar’s tax ruling practice violates EU state aid rules.

The decision, announced October 1, 2014, was previously only available in summary form.

After analyzing 165 Gibraltar tax rulings, the Commission’s preliminary view is that not only are all the rulings reviewed illegal state aid, but Gibraltar’s entire tax ruling practice is a state aid measure.

The Commission therefore decided to extend the scope of an ongoing state aid investigation into Gibraltar’s corporate tax system, opened in October 2013, to include an assessment of the nation’s tax ruling practices.

Profits accruing or derived from Gibraltar

The Commission analyzed tax rulings granted to multinationals in 2011, 2012, and 2013, issued after Gibraltar amended its tax law to introduce a corporate tax of 10 percent on company profits “accruing in or derived from” Gibraltar.

The rulings, typically 2–3 paragraphs long, all concluded that there was no taxpayer activity in Gibraltar and thus no corporate tax would be chargeable there.

The Commission said the tax authority did not appear to conduct any substantive analysis or provide any reasoning in the tax rulings, though.

In most cases the only information provided by the company to obtain the ruling was a short letter with few details. Further, sometimes those details suggested that the company may have have had activity in Gibraltar, the Commission said.

Gibraltar’s tax authority also issued tax rulings that found only “minimal income” in Gibraltar and therefore exempted all activities from tax. The concept of minimal income is not mentioned anywhere in the law, though, the Commission observed.

Intermediaries, consultancy fees, royalties, interest

Intermediaries’ activities and consultancy fees were were systematically exempted from taxation in Gibraltar through the tax rulings without any investigation, the Commission said.

Other rulings exempted intragroup interest income despite the fact that this income was subject to tax.

Rulings also exempted from tax royalty income without verifying where the user of the IP was located, the Commission said.

UK arguments

Arguing on Gibraltar’s behalf, the UK said that to carry out an assessment and to apply the territoriality principle it is not always necessary to have a full description of the activity in question.

The UK also said that Gibraltar’s tax office can be reasonably sure that the activity described is not carried out in Gibraltar, on the basis of local knowledge.

“It would be difficult for a company to conduct any activity within Gibraltar without that fact coming to the attention of the Gibraltar tax authorities,” the UK said.

The UK also argued that there is no evidence of selectivity as the rulings do not apply primarily or exclusively to any identifiable category or group of companies or industries, and thus they do not involve state aid.

Commission decision

According to the Commission, though, there is factual evidence that selective advantages were granted to companies through tax rulings on the basis of a scheme that exempted them from taxation.

By granting the tax rulings only to certain multinational companies, as opposed to other, purely domestic companies that did not apply for a tax ruling, the tax authorities treated companies in a similar legal and factual situation differently and also benefited only those that applied for a ruling, the Commission said.

The Commission also said it has doubts that UK and Gibraltar tax authorities took steps to ensure the existence of appropriate control and monitoring procedures to achieve a coherent application of the tax system. The Commission invited the tax officials to provide evidence of ex post control.

The Commission further asked the UK and Gibraltar to provide evidence that the state aid was compatible with the internal market.

The names of the 165 companies that obtained the Gibraltar tax rulings in question are listed in the decision’s annex.

See:

• Letter to Member State

Related MNE Tax articles:

• EU says 165 Gibraltar private rulings may contain illegal state aid; Gibraltar claims EU competition chief is biased