The ECJ vetoes proposed tax reform in Gibraltar

22 November 2011

The ECJ has upheld on 15th November 2011 the 2004 decision of the European Commission: the tax reform of Corporate Income Tax that Gibraltar intended to implement in 2002 is deemed to be illegal, since it establishes a State aid system that is incompatible with the common market.

The tax proposal, announced on 2002, was contemplating the establishment of three types of tax, applicable to all resident companies in Gibraltar: a registration fee, a payroll tax per employee and a business property occupation tax (BPOT). The tax burden of the last two taxes could not be greater than 15 per cent of total profits.

In 2004 the Commission in their negative decision considered that the proposed state aid was regionally selective because companies in Gibraltar were taxed at a lower tax rate than those in United Kingdom, and materially selective by virtue of Gibraltar companies with only offshore operations being exempt from both the payroll and BPOT taxes.

The E.U. Court of First Instance overturned the decision of the Commission in 2008. In this context, the Commission and Spain appealed to the Justice Court with the object of obtaining the nullity of the judgment of the ECJ.

Said judgment considers that the E.U. Court of First Instance incurred in an error of law on the basis that the system was designed so that companies with no real physical presence could avoid taxation because it would be based on the number of employees and the size of business premises occupied in Gibraltar, the court said.

The assessment to levy the tax excludes from the outset any taxation of offshore companies, since they have no employees and also do not occupy business property.

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