Gibraltar’s state aid battle with the EU Commission over tax rulings

By Dr. Patricia Lampreave, Professor, Instituto de Estudios Busatiles, Madrid

The European Commission on December 19 issued its highly controversial final decision about Gibraltar’s tax system. Although the Commission concluded that Gibraltar granted tax benefits to multinationals that amounted to illegal state aid, the decision can only be viewed as a stunning victory for the British territory.

For the first time, the Commission addressed two different issues in one decision. This is especially unusual given that one issue arose from a Spanish complaint and the other is an ex officio investigation launched by the European Commission where Spain is just an interested party.

Due to the Spanish complaint, the Commission opened an in-depth investigation in October 2014  to verify whether Gibraltar’s 2011—2013 corporate tax exemption regime for interest income (mainly arising from intra-group loans) and royalty income selectively favoured certain categories of companies in breach of EU state aid rules.

In October 2014 the Commission extended its State aid investigation to also assess Gibraltar’s tax ruling practice as a de facto scheme and 165 private tax rulings (out of 365 tax rulings requested by the Commission) granted from 2011–2013 (under ITA 2010).

The Commission had concerns that Gibraltar’s tax rulings practice consistently misapplied the provisions of ITA 2010. Such misapplication was possible because of broad powers granted to the Gibraltar tax authorities to interpret the tax law.

Rubber stamps

The Commission’s analysis revealed that multinationals’ requests for tax rulings provided very little information about the company or its activity. Sometimes even the name of the requestor was not indicated if the ruling request was made through a fiduciary or lawyer.

The Gibraltar tax authorities, without conducting any substantive ex-ante monitoring or ex-post control to safeguard its national tax base, just rubber stamped that company activity was performed wholly outside Gibraltar and therefore income generated was tax exempt, the Commission concluded.  (According to Gibraltar tax law, only income accrued in or derived from Gibraltar is subject to 10% CIT).

The Commission categorized the 165 tax rulings by type of income, namely, income derived from intermediaries activities; consultancy fees; passive income; marketing, procurement of petroleum products, or logistic organization; trusts or holding companies; and even tax rulings which prolong the existing benefit under the tax exemption regime that was abolished.

A 2014 listing of the companies in showed that the vast majority were non-EU MNEs (e.g., URSS, US, China) including some resident in tax havens, but also northern Europe as the final tax rulings considered unlawful.

Five private tax rulings?

In its final decision of December 19, the Commission reached a pseudo-Solomonic solution.

Of the 165 tax rulings analyzed, the Commission determined that only five tax rulings concerning the tax treatment in Gibraltar of passive income generated by Dutch limited partnerships were selective.

Of the 165 tax rulings analyzed, the Commission determined that only five tax rulings concerning the tax treatment in Gibraltar of passive income generated by Dutch limited partnerships were selective.

According to the Commission, under 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, the partners of the Dutch partnerships were resident for tax purposes in Gibraltar and should have been taxed there. However, under the five contested tax rulings, the companies were not taxed on the royalty and interest income generated at the level of the Dutch partnerships, contrary to other companies in receipt of other types of income.

The tax rulings continued to apply and to exempt interest and royalties from taxation even after Gibraltar adopted legislative amendments to bring this income within the scope of taxation in 2013 (passive interest) and 2014 (royalties).

Thus, the Commission concluded that both the former corporate tax exemption regime for interest and royalties and five private tax rulings involving Dutch limited partnerships granted illegal state aid.

Gibraltar wins

The total unpaid tax amounts from the illegal aid have been calculated at around €100 million.

In contrast, after all the analysis stated in the opening of 2014 concerning Gibraltar’s tax rulings practice and the content of the other 160 tax rulings listed in the annex, the Commission has decided not to find aid.

Undoubtedly, this solution was reached to not greatly disturb the United Kingdom, given the actual situation of Brexit.

Who wins? Gibraltar. Bien joué!

Despite the Commission’s overall review of Gibraltar’s transfer pricing regulations or tax rulings procedure (DG Competition is not empowered as a supra tax authority who can review or force to change tax legislation in member states or their territories) now it is the Commission who rubber stamps that Gibraltar tax ruling practice was perfect during all these years and the tax authorities only granted five illegal tax rulings.

Of course, the five scapegoats will now appeal the Commission decision to the European Court of Justice.

Patricia Lampreave

Patricia Lampreave

Independent EU and fiscal state aid expert, tax professor at Patrecia Lampreave

Dr. Patricia Lampreave is a tax lawyer and accredited Tax Professor by the Spanish ministry of education with over 20 years of experience in International taxation as Tax Director of MNEs (Cepsa, Ferrovial, Vodafone).

She started her career as a policy advisor at the European Commission in TAXUD and in 2014 returned at the European Commission as an International Tax Expert in DG Competition (fiscal state aid). She currently teaches Tax and Financial Law (I.E.B, Madrid) and provides advice to the private sector as an independent EU and Fiscal state aid. She is also the economic Director of a Spanish think-tank (FIDE).

Patricia holds a law degree from ICADE University, a Maîtrise in International and European Law by Université de Lovain-la Neuve, and a Ph.D. in International Tax Law (cum laude) from the Universidad Complutense de Madrid. She has been a visiting professor at Harvard, the Université Libre de Bruxelles, Georgia State University, Hong-Kong University, Shanghai University, and University College London, among others.. She regularly publishes in Spanish and international tax reviews and collaborates with the economic media.

Patricia Lampreave
Patricia Lampreave

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  1. It is unclear why the author calls the Commission’s ruling “highly controversial” and “pseudo-Solomonic”, coming as it did after an extraordinarily long investigation of five years. Is she hinting at skulduggery? Or is the truth simply that after 5 years of investigation the EC found very little wrong with Gibraltar’s corporate tax system? The author’s original article in Expansión ( reveals more clearly that “highly controversial” simply means that the decision did not go in Spain’s favour.

    • This comments come from a person working for Gibraltar, I alreday answered you when you wrote me to my private email because you did not like my article. Freedom of expression!. I respect that you think differently.

      • It’s not a question of like or dislike, or, indeed of freedom of expression. It’s more about the fact that you say that a five year long investigation by the European Commission was basically a white wash, a farce. Does this apply to all the Commission’s investigations?

        You go on to say that “Undoubtedly, this solution was reached to not greatly disturb the United Kingdom, given the actual situation of Brexit.” This is in stark contrast with the reality of Brexit negotiations which have not shown the European Commission inclined to give Britain an easy ride.

        So, to conclude, in the absence of any evidence that the Commission did not do its job, the decision reached basically shows that the Commission found very little wrong with Gibraltar’s corporate tax system after 5 years of investigation.

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