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ECJ rules that Gibraltar tax reform constitutes a materially selective State aid


The ECJ Grand Chamber today gave judgment holding that a proposed Gibraltar tax reform constitutes a State aid on the grounds that it is materially selective.

By its Decision, the Commission had found that three aspects of the tax reform applicable to all Gibraltar companies were materially selective: (1) the requirement that a company must make a profit before it becomes liable to payroll tax and business property occupation tax (‘BPOT'), since that requirement would favour companies which make no profit; (2) the cap limiting liability to payroll tax and BPOT to 15% of profits, since that cap would favour companies which, for the tax year in question, have profits that are low in relation to their number of employees and their occupation of business property; and (3) the payroll tax and BPOT, since those two taxes would inherently favour offshore companies which have no real physical presence in Gibraltar and which as a consequence do not incur corporate tax. It also found that the proposed reform was regionally selective since it provided for a system under which companies in Gibraltar would be taxed, in general, at a lower rate than those in the United Kingdom.

The General Court had annulled the Decision on the basis that the Commission had not followed a correct method of analysis as regards the material selectivity of the proposed reform. According to the General Court, in order to prove that the tax system at issue was selective the Commission should have demonstrated that certain of its elements constituted derogations from Gibraltar's common or ‘normal' tax regime. Moreover, the General Court held that the reference framework for assessing the reform's regional selectivity corresponded exclusively to Gibraltar's, and not the United Kingdom's, territorial limits, upholding the arguments of the United Kingdom on this point.

The ECJ set aside the judgment of the General Court (unlike the Advocate General, who had upheld that judgment). The ECJ held that, since it was sufficient for the Commission to be correct on the former basis, there was, in fact, no need to examine whether or not the tax was regionally selective.

The judgment is here.

The ECJ press release is here.

David Anderson QC and Margaret Gray acted for the United Kingdom before the ECJ. David Anderson QC and Helen Davies QC were instructed before the General Court.