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Gibraltar ordered to issue retrospective bills for EUR100 million tax exemptions

Thursday, 20 December, 2018

The European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties between 2011 and 2013 was illegal under EU state aid rules.

The Gibraltar government now has to issue retrospective tax bills of EUR100 million to the multinational groups that benefited from its former policy, which has since been abolished.

The exemption mainly applied to interest received on intra-group loans, and royalty income from licensing out intellectual property. It came under Commission scrutiny in October 2013, along with investigations of several other jurisdictions, including Belgium, Ireland, Luxembourg and the Netherlands, accused of granting generous tax concessions to multinational firms to tempt them to set up local operations. The Commission regards such selective incentives as unfair state aid, and thus contrary to EU rules on free competition. It has already ordered Ireland to recover EUR14 billion of 'state aid' from the US computer firm Apple.

Gibraltar's territorial tax system requires companies to pay corporate taxes on income accrued in, or derived from, Gibraltar. However, the Commission found that companies in receipt of interests or royalties were exempted from taxation in Gibraltar without a valid justification.

The Commission's investigation into Gibraltar was extended to its tax rulings practice in 2015. In the end, it decided that five tax rulings regarding the tax residency of partners in Dutch limited partnerships (LPs) were also unlawful. The LPs’ profits should have been taxed at the level of the partners, who in these cases were tax-resident in Gibraltar and should have been taxed there, but were not, because of the tax rulings previously given to them. Under the Commission's ruling, these companies must now pay the tax that should have been charged by Gibraltar.

The Commission did not identify any selective advantage in relation to the other 160 rulings investigated, and so found that these rulings do not break EU state aid rules.

Gibraltar has already abolished the illegal tax exemptions identified by the Commission in July 2013 for interest income and in January 2014 for royalties income. It has also improved its tax ruling procedure to reinforce its transfer pricing rules, enhance taxpayers' obligations and improve transparency on how it implements its territorial system of taxation. These improved rules took effect in October 2018.