Announcement of the investigation came on Wednesday, in a statement in which the Commission also said it regarded a recently-introduced British scheme to give tax breaks for patent income as harmful tax competition.
Gibraltar’s official response to the announcement that an element of its tax regime is to be investigated was relaxed. Indeed, “there was, in fact, “much…to be welcomed” in the European Commission’s statement on Wednesday, in which the scope of the investigation was outlined, the Government of Gibraltar said in its own statement.
Complaint from Spain
The announcement of the EC investigation comes 16 months after the European Commission received a complaint from Spain – Gibraltar’s fellow EU neighbour to the north, with which its relations have been strained for generations – about the tax regime in question. It comes two months after relations between Gibraltar and Spain reached a rare low point, after Spain began making crossings back and forth between Gibraltar and Spain more difficult, reportedly in retaliation for a decision by the government of Gibraltar to create an artificial reef in British waters off Gibraltar’s coast.
According to the EC statement on Wednesday, Spain alleged that the element of the Gibraltar tax code it was objecting to would enable Gibraltar to “continue to grant a selective advantage to offshore companies”.
Following this complaint, in June 2012, the commission said, it had carried out a preliminary investigation, and on the basis of this, had decided to consider the matter further.
The Commission said it will focus in particular on an exemption that the Gibraltar tax regime gives to those taxpayers who receive passive income, such as dividends, royalties and certain types of interest income.
“At this stage, the Commission considers that the tax exemption for passive interest and royalty income may involve state aid, because it departs from the general corporation tax system,” the EC statement said.
“This could grant a special advantage to the particular group of companies that produce this type of income.
“Unlike for dividends – the exemption of which can be justified by the need to avoid double taxation – the Commission has, at this stage, found no valid justification for such an exemption.”
Although Gibraltar introduced an amendment to the legislation which, as of 1 July 2013, repeals the exemption for inter-company loan interest, whether from Gibraltar or abroad, the Commission said it still needed to examine “whether the passive interest exemption was in breach of the state aid rules during the period when it was in force”.
t is the fact of this finite time period that Gibraltar officials say gives them a reason not to be overly concerned about the pending investigation, and to their claim of being “pleased” by the EC’s position with respect to its tax regime.
“HM Government of Gibraltar notes that the investigation concerns only two limited aspects of our corporate tax regime,” the Gibraltar response said.
“HMGoG is confident that it can take legislative action swiftly in order to address [these] issues…
“[Meanwhile], the European Commission does not call into question the territorial system of taxation, which is the reference system of corporate taxation under the Income Tax Act 2010, and which has been in operation in Gibraltar since the 1950s.
“….Of even greater importance, the European Commission has categorically rejected Spain’s argument that the corporate tax system in Gibraltar is regionally selective.
"This is…arguably the most important aspect of today’s decision, [for it] is the first time ever that the European Commission has officially and formally stated its opinion on the critical issue of regional selectivity and Gibraltar since the European Court judgments under the previous tax regime. It is the first time ever that the European Commission finds that the far-reaching principle of regional selectivity does not apply to Gibraltar.
“This is very positive news indeed.”
Gibraltar’s chief minister, Fabian Picardo, reiterated the Gibraltar government’s belief that on balance, the European Commission’s concerns over "two discreet elements of our corporate tax system" that had already been flagged up and earmarked for change were more than outweighed by the fact that the rest of the code was accepted without a problem.