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.