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EC concludes Gibraltar gave around €100m of illegal tax advantages to multinational companies

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Staff Writer | Thursday December 20, 2018 3:17AM ET
Gibraltar
Europe   Gibraltar

The European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.


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The beneficiaries now have to return unpaid taxes of around €100 million to Gibraltar.

In October 2013, the Commission opened an in-depth investigation into Gibraltar's corporate tax regime, to verify whether the corporate taxexemption regime applied between 2011 and 2013 for interest (mainly arising from intra-group loans) and royalty income selectively favoured certain categories of companies, in breach of EU State aid rules.

In October 2014, the Commission extended its State aid investigation to also cover Gibraltar's tax rulings practice, with a particular focus on 165 tax rulings granted between 2011 and 2013The European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

The Commission had concerns that these tax rulings involved State aid because they were not based on sufficient information to ensure that the companies concerned by the rulings were taxed on equal terms with other companies generating or deriving income from Gibraltar.

EU State aid rules prevent Member States from giving unfair tax benefits only to selected companiesThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

Member States cannot treat certain companies better than othersThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

This distorts competition and is illegal under EU State aid rules.

The Commission has found that both Gibraltar's corporate tax exemption regime for interest and royalties from 2011 to 2013, as well as five individual tax rulings, provide such selective tax benefits and are illegal under EU State aid rules.

According to the territorial tax system applicable in Gibraltar, companies should pay corporate taxes on income accrued in or derived from GibraltarThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

However, the Commission's investigation found that companies in receipt of interests or royalties were exempted from taxation in Gibraltar without a valid justification.

This measure significantly favoured a set of companies belonging to multinational groups entrusted with certain functions (such as the granting of intra-group loans or the right to use intellectual property rights)The European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

As a result, the Commission concluded that the exemption was designed to attract multinational companies to Gibraltar and that it effectively reduced the corporate income tax of a limited number of companies belonging to multinational groups.

This selective tax treatment in favour of multinational companies granted these companies an advantage vis-a-vis other companies and distorted competition within the EU's Single Market, in breach of EU State aid rulesThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

The Commission therefore concluded that the tax exemption for companies in receipt of interest and royalties, as applied in Gibraltar between 2011 and 2013, is illegal under EU State aid rules and must be recovered from the companies.

The Commission welcomes the fact that Gibraltar has alreadyabolished the illegal tax exemption – in July 2013 for interest income and in January 2014 for royalties income.

After carefully reviewing 165 tax rulings granted by Gibraltar, the Commission concluded that five of these tax rulings granted by the tax authorities of Gibraltar to large multinational companies in 2011 and 2012 involved illegal State aid.

The five contested tax rulings concern the tax treatment in Gibraltar of certain income generated by Dutch limited partnershipsThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

According to the tax legislation applicable in both Gibraltar and the Netherlands, the profits made by a limited partnership in the Netherlands should be taxed at the level of the partnersThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

In the five cases at hand, the partners of the Dutch parnerships were resident for tax purposes in Gibraltar and should have been taxed there.

However, under the five contested tax rulings, the companies were not taxed on the royalty and interest income generated at the level of the Dutch partnerships , contrary to other companies in receipt of other type of income.

These rulings continued to apply and to exempt interest and royalties from taxation even after Gibraltar adopted legislative amendments to bring this income within the scope of taxation in 2013 (passive interest) and 2014 (royalties).

Since the exemptions in question gave their beneficiaries an undue and selective advantage, the Commission concluded that the five tax rulings concerned were illegal under EU State aid rules and that this advantage must be recovered.

In contrast, following an in-depth analysis of each addressee's situation, the Commission did not identify any selective advantage in relation to the other 160 rulings investigated and therefore found that these rulings do not break EU State aid rules.

Furthermore, during the Commission's investigation, Gibraltar amended its tax rules to enhance its tax ruling procedure, reinforce its transfer pricing rules, enhance taxpayers' obligations (e.gThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

The Commission welcomes these improved rules, which entered into effect in October 2018.

As a matter of principle, EU State aid rules require that incompatible State aid is recovered in order to remove the distortion of competition created by the aidThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

There are no fines under EU State aid rules and recovery does not penalise the company in questionThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

It simply restores equal treatment with other companies.

Gibraltar must now recover unpaid taxes from:

- the companies that benefitted from Gibraltar's corporate tax exemption regime for interest and royalties between 2011 and 2013. The individual companies that have benefitted from the exemption regime and the precise amounts of tax to be recovered from each company must now be determined by the Gibraltar tax authorities, on the basis of the methodology established in the Commission decision.

- the companies that benefitted from the illegal tax treatment under the five tax rulings are: (i) Ash (Gibraltar) One Ltd; (ii) Ash (Gibraltar) Two Ltd; (iii) Heidrick & Struggles (Gibraltar) Holdings Ltd; Heidrick & Struggles (Gibraltar) Ltd; and (v) MJN Holdings (Gibraltar) Ltd; these companies must also start to pay taxes on their profits in Gibraltar like any other companyThe European Commission has found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules.

The recovery amounts will depend on the fiscal situation of each beneficiary and must now be determined by the Gibraltar tax authorities, on the basis of the methodology established in the Commission decision.

The Commission estimates, based on currently available information, that the total unpaid tax amounts to around €100 million in total.

 

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