EU’s E100m negative tax decision hides positive result for Gibraltar

A European Commission investigation has found that aspects of Gibraltar’s corporate tax laws were illegal under EU state aid rules and that, as a result, five companies will have to return around 100 million euros in unpaid taxes to Gibraltar.

The investigation focused on aspects of the tax legislation relating to certain interest and royalty income and on a practice known as tax rulings.

But while the Commission’s highly-technical findings may appear negative for Gibraltar at first blush, the conclusions are nuanced and reflect years of close work between the Gibraltar Government and EU officials.

The issues raised by the EU on interest and royalty income were addressed years ago through amendments to legislation on a no prejudice basis.

Likewise the Commission analysed 165 tax rulings and, while pointing to issues in five cases, found no problem with the other rulings, or with the practice itself.

“Our investigation has found that Gibraltar gave unfair and selective tax benefits to several multinational companies, through a corporate tax exemption scheme and through five tax rulings,” said Commissioner Margrethe Vestager, in charge of competition policy.

“This preferential tax treatment is illegal under EU State aid rules and Gibraltar must now recover the unpaid taxes.”

“At the same time, I very much welcome the significant actions taken by Gibraltar to remove the illegal tax exemptions, streamline its tax ruling practice, and reinforce its transfer pricing rules.”

“This should help ensure that these issues remain in the past.”

The Commission’s investigation dates back to 2014 when the then Spanish competition Commissioner, Joaquin Almunia, extended an ongoing investigation into Gibraltar’s tax framework to include the practice of tax rulings.

The decision – which the Gibraltar Government believes was coloured by Spanish national interests – triggered a legal challenge from the Gibraltar Government which is still live.

But Gibraltar also remained fully engaged with the Commission and its investigation into tax rulings, with extensive exchanges and meetings to answer questions posed by officials.

The Commission had concerns that these tax rulings involved State aid because they were not based on sufficient information to ensure that the companies concerned by the rulings were taxed on equal terms with other companies generating or deriving income from Gibraltar.

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 has found that both Gibraltar's corporate tax exemption regime for interest and royalties from 2011 to 2013, as well as five individual tax rulings, provide such selective tax benefits and are illegal under EU State aid rules.

But Gibraltar was able to persuade the Commission that there was no systematic problem with the practice of tax rulings in Gibraltar, as the Commission thought there was, and that in its tax rulings the Income Tax Office simply provided an expression of the law applicable to a particular case and based on the facts submitted to it.

“It is vitally important to bear in mind that in today’s decision, the Commission has accepted Gibraltar’s arguments that the tax ruling practice, as a whole, under the ITA 2010 does not constitute State aid,” No.6 Convent Place said.

“The Government’s approach is fully vindicated in today’s decision, which allows us to continue with the practice of tax rulings.”

“Furthermore, of the 165 tax rulings that the Commission has been investigating it has found errors only in relation to five of them, all of which concern transactions involving Dutch limited partnerships which have also been controversial in other EU jurisdictions.”

“None of the five in Gibraltar present any serious problems or issues.”

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

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 at hand, 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 type of income.

As a matter of principle, EU State aid rules require that incompatible State aid is recovered in order to remove the distortion of competition created by the aid.

There are no fines under EU State aid rules and recovery does not penalise the company in question. It simply restores equal treatment with other companies.

Gibraltar must now recover unpaid taxes from: the companies that benefitted from Gibraltar's corporate tax exemption regime for interest and royalties between 2011 and 2013.

The individual companies that have benefitted from the exemption regime and the precise amounts of tax to be recovered from each company must now be determined by the Gibraltar tax authorities, on the basis of the methodology established in the Commission decision.

The companies that benefitted from the illegal tax treatment under the five tax rulings are: Ash (Gibraltar) One Ltd; Ash (Gibraltar) Two Ltd; Heidrick & Struggles (Gibraltar) Holdings Ltd; Heidrick & Struggles (Gibraltar) Ltd; and MJN Holdings (Gibraltar) Ltd.

These companies must also start to pay taxes on their profits in Gibraltar like any other company.

The recovery amounts will depend on the fiscal situation of each beneficiary and must now be determined by the Gibraltar tax authorities, on the basis of the methodology established in the Commission decision.

“In contrast, following an in-depth analysis of each addressee's situation, the Commission did not identify any selective advantage in relation to the other 160 rulings investigated and therefore found that these rulings do not break EU State aid rules,” the Commission added in a statement.

“Furthermore, during the Commission's investigation, Gibraltar amended its tax rules to enhance its tax ruling procedure, reinforce its transfer pricing rules, enhance taxpayers' obligations and improve transparency on how it implements its territorial system of taxation.”

Last night, Chief Minister Fabian Picardo said he was “absolutely delighted” by the Commission’s decision.

“Although it is a negative decision, its effect is minor whilst at the same time it vindicates our view that there is nothing fundamentally unlawful or wrong with our Income Tax Act 2010,” he said.

“Indeed, considering that the entirety of the Act was under examination by the European Commission, the result of the investigation, which in total has taken over six years, is a remarkable success for Gibraltar and a massive blow for all those who seek to denigrate Gibraltar as a tax jurisdiction.”

“The entire investigation has required us to only make minor amendments to the Act on interest and royalties and to place on a more solid legal footing the practice of tax rulings in Gibraltar.”

“The net result of this investigation is that the Income Tax Act now enjoys a full clean bill of health from the Commission. This is great, great news indeed.”

“I will be studying further the dense decision with my legal team and shall make any further announcements that may emerge from that analysis.”