Prof. Dr. Patricia Lampreave, EU tax and state aid expert
On 19 December 2018, the European Commission issued a final decision on the Gibraltar tax system. It´s a highly controversial decision and it’s the first time that two different decisions were coupled into one.
Following a Spanish complaint in October 2013, the Commission opened an in-depth investigation into Gibraltar’s corporate tax regime to verify whether the corporate tax exemption regime applied between 2011 and 2013 for interest (mainly arising from intra-group loans) and royalty income selectively favoured certain categories of companies, which would be a breach of EU state aid rules.
In October 2014, the Commission extended its State aid investigation to also cover Gibraltar’s procedures for granting tax rulings. The Commission had concerns that tax rulings granted since the Corporate Tax Act 2010 (ITA 2010) by Gibraltar’s tax authorities, which had wide powers to issue tax law provisions, consistently misapplied the provisions of the Corporate Tax Act 2010.
Analysis of 165 tax rulings indicated that requests for tax rulings provided too little information about the company or its activity. In some cases, even the name of the requestor was not provided as the request was made through a fiduciary or lawyer. Tax authorities, without conducting any substantive ex ante monitoring or ex post control in order to safeguard its national tax base, just rubberstamped requests, holding that the activity of the company was performed wholly outside Gibraltar and therefore the income generated was exempted tax. According to Gibraltar’s legislation, only income accrued in or derived from Gibraltar is subject to a 10 per cent corporate income tax. The 165 tax rulings were categorized by type of income (income derived from intermediaries activities, consultancy fees, passive incomes, profits derived from marketing, from procurement of petroleum products and logistic organisation, income derived from trusts or holding companies and even income derived from tax rulings that prolonged benefits that the 2010 tax act was supposed to abolish). The Commission’s investigation opening in 2014 was accompanied by an annex with the name of the companies that had obtained tax rulings. The vast majority were non-EU multinational enterprises, some of which were resident in tax havens, and some were individuals who were resident in northern Europe.
The final decision issued on 19 December addressed both Spain’s complaint about Gibraltar’s corporate tax regime and the Commissions concern about Gibraltar’s procedures for granting tax rulings. The Commission’s final decision was a pseudo-Solomonic solution. From the 165 tax rulings analysed, the Commission concluded that only 5 tax rulings concerning the tax treatment in Gibraltar of passive income generated by Dutch limited partnerships are selective, and so in breach of EU state aid rules. According to the tax legislation applicable in both Gibraltar and the Netherlands, the 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 so 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.
These five tax rulings continued to exempt the partnerships’ incomes from 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). The total unpaid tax amounts have been calculated to be around €100 million, which the EU has ordered Gibraltar to recoup.
Aside from these five tax rulings, however, and despite all the analysis stated in the Commission’s investigation opening of 2014 concerning Gibraltar’s questionable procedures for granting tax rulings and the content of the other 160 tax rulings listed in the annex, the Commission has decided it has not found unlawful state aid.
Trusted with investigating Gibraltar’s practice of rubberstamping tax rulings, now the Commission is the one who rubberstamps, concluding that Gibraltar’s tax ruling practice was perfect during all these years and that tax authorities have only granted five illegal tax rulings. Of course, the five scapegoats will appeal to the European Court of Justice.