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EU accuses Gibraltar of unfair tax practices

Thursday, 2 October, 2014

The European Commission unexpectedly announced this week that it is including Gibraltar in its intensive review of jurisdictions alleged to have given unjustified favourable tax treatment to foreign companies.

The Commission began its investigation of Gibraltar in October 2013, prompted by Spanish complaints. The British dependency's territorial corporate tax system, established in 2010, exempts royalties and interest from corporate tax irrespective of the source of the income. According to Spain, this departure from the usual corporation tax system breaches European Union (EU) rules by favouring offshore companies, which are more likely to produce this type of income.

Nothing further has been heard until this week, when the Commission revealed that it has received enough supporting evidence from the UK authorities to justify an in-depth investigation. This evidence suggests that the Gibraltar tax authorities have been in the habit of granting so-called 'Section 42 tax rulings' (agreements not to tax certain types of corporate income) without properly checking whether the income was earned outside Gibraltar and is thus exempted from Gibraltar taxation. The claim is based on 165 tax rulings granted by the Gibraltar tax authorities to different companies in the period 2011 – 2013.

'Even if the Gibraltar tax authorities are given considerable margin of manoeuvre under the ITA 2010 [corporation tax regime] a misapplication of its provisions cannot be excluded at this stage', said the EU's competition commissioner Joaquín Almunia. 'The Commission has concerns that potentially all assessed rulings may contain state aid, because none of them are based on sufficient information so as to ensure that the level of taxation of the activities concerned is in line with the tax paid by other companies, which generate income that is to be considered accrued in or derived from Gibraltar.'

The Gibraltar government considers the Commission's investigation to be evidence of bias on the part of Almunia, who is a Spanish national. It said it has 'very little confidence in the work of EU institutions where Spanish nationals can influence the outcome'. 'Outgoing Spanish commissioner Almunia has acted, not unsurprisingly, in the national interests of Spain and not objectively', said the Gibraltar authorities in a press statement. They intend to withhold cooperation with the investigation until Almunia leaves office at the end of the month.

  • It is not the first time Gibraltar has been in dispute with the European Union over corporate taxation. Both its previous business tax regimes had to be amended because they contravened EU state aid rules.