Gibraltar interest and royalties tax regime, tax rulings are illegal state aid, EU Commission concludes

Gibraltar’s former corporate tax exemption regime for interest and royalties and five private tax rulings involving Dutch limited partnerships granted illegal state aid, the European Commission today announced.

Following an in-depth investigation, the Commission concluded that Gibraltar provided illegal selective tax benefits totaling about €100 million (USD113.7 million) contrary to EU law, which now must be repaid by the benefited taxpayers to Gibraltar.

Interest and royalties tax exemption

The Commission said that multinationals were exempted from Gibraltar tax on royalties and interest from 2011 to 2013 without a valid justification.

Gibraltar’s tax regime significantly benefited taxpayers with certain functions, such as the granting of intra-group loans or the right to use intellectual property rights, and was designed to attract a limited number of companies belonging to multinational groups, the Commission said.

This preferential treatment is illegal under EU law, the EU Commission asserts.

“EU State aid rules prevent Member States from giving unfair tax benefits only to selected companies. Member States cannot treat certain companies better than others. This distorts competition and is illegal under EU State aid rules.” the Commission said.

Gibraltar’s tax exemption for interest income was abolished in July 2013, the exemption for royalties income ended in January 2014.

Gibralter private tax rulings

The Commission said it also examined 165 Gibraltar tax rulings issued during the same period and concluded that five were illegal state aid.

These illegal rulings were granted to Ash (Gibraltar) One Ltd; Ash (Gibraltar) Two Ltd; Heidrick & Struggles (Gibraltar) Holdings Ltd; Heidrick & Struggles (Gibraltar) Ltd; and (v) MJN Holdings (Gibraltar) Ltd.

All five tax rulings concern the tax treatment in Gibraltar of income generated by Dutch limited partnerships.

According to tax legislation applicable in both Gibraltar and the Netherlands, profits made by a limited partnership in the Netherlands should be taxed at the level of the partners.

In the five cases, even though the partners of the Dutch partnerships were resident for tax purposes in Gibraltar, the entities were not taxed on the royalty and interest income generated at the level of the Dutch partnerships. This treatment continued even after Gibralter’s royalty and interest regime was amended in 2013 and 2014, the Commission said.

The Commission said that the tax treatment sanctioned in the private tax rulings was contrary to the treatment afforded other companies in receipt of other types of income. The rulings are thus illegal under EU State aid rules and the unpaid tax must be recovered, the Commission concluded.

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