JUDGMENT OF THE COURT (Grand Chamber)

15 November 2011 ([\*](#Footnote*))

Table of contents

I –  Legal context

II –  Facts

A –  Background to the Government of Gibraltar’s reform of corporate tax

B –  The Government of Gibraltar’s reform of corporate tax

III –  The administrative procedure and the contested decision

IV –  The proceedings at first instance and the judgment under appeal

V –  Procedure before the Court of Justice and forms of order sought

VI –  The appeals

A –  The Commission’s single ground of appeal and the eighth ground of appeal of the Kingdom of Spain

1.  Grounds of the judgment under appeal

2.  Arguments of the parties

3.  Findings of the Court

(a) The requirement to make a profit and the capping of tax

(b) Advantages accruing to offshore companies

VII –  The actions before the General Court

A – The second plea of the Government of Gibraltar and the United Kingdom, and the second part of the Government of Gibraltar’s
third plea

1. The second part of the second plea

2. The second part of the third plea, put forward by the Government of Gibraltar

3. The first part of the second plea

(a) Arguments of the parties

(b) Findings of the Court

4. The third part of the second plea

(a) Arguments of the parties

(b) Findings of the Court

B – The United Kingdom’s third plea and the first part of the Government of Gibraltar’s third plea, alleging breach of the
rights of the defence

1. Arguments of the parties

2. Findings of the Court

C – The first plea, relating to regional selectivity

VIII –  Costs

(Appeal – State aid – Material selectivity – Tax regime – Gibraltar – Offshore companies)

In Joined Cases C‐106/09 P and C‐107/09 P,

TWO APPEALS under Article 56 of the Statute of the Court of Justice, lodged on 16 March 2009,

**European Commission,** (C-106/09 P), represented by R. Lyal, V. Di Bucci and N. Khan, acting as Agents, with an address for service in Luxembourg,

appellant,

the other parties to the proceedings being:

**Government of Gibraltar,** represented by J. Temple Lang, Solicitor, M. Llamas, Barrister, and A. Petersen, advokat,

**United Kingdom of Great Britain and Northern Ireland,** represented by I. Rao, acting as Agent, D. Anderson QC and M. Gray, Barrister,

applicants at first instance,

supported by

**Ireland,** represented by D. O’Hagan, acting as Agent, and B. Doherty, Barrister, with an address for service in Luxembourg,

intervener in the appeal,

**Kingdom of Spain,** represented by N. Díaz Abad and J.M. Rodríguez Cárcamo, acting as Agents, with an address for service in Luxembourg,

intervener at first instance,

and

**Kingdom of Spain,** (C-107/09 P), represented by N. Díaz Abad and J.M. Rodríguez Cárcamo, acting as Agents, with an address for service in Luxembourg,

appellant,

the other parties to the proceedings being:

**European Commission,** represented by R. Lyal, V. Di Bucci and N. Khan, acting as Agents, with an address for service in Luxembourg,

defendant at first instance,

**Government of Gibraltar,** represented by J. Temple Lang, Solicitor, M. Llamas, Barrister, and A. Petersen, advokat,

**United Kingdom of Great Britain and Northern Ireland,** represented by I. Rao, acting as Agent, D. Anderson QC and M. Gray, Barrister,

applicants at first instance,

THE COURT (Grand Chamber),

composed of V. Skouris, President, A. Tizzano, J.N. Cunha Rodrigues, K. Lenaerts, J.-C. Bonichot and A. Prechal, Presidents
of Chambers, A. Rosas, K. Schiemann, E. Juhász, T. von Danwitz (Rapporteur), D. Šváby, M. Berger and E. Jarašiūnas, Judges,

Advocate General: N. Jääskinen,

Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 16 November 2010,

after hearing the Opinion of the Advocate General at the sitting on 7 April 2011,

gives the following

**Judgment**

1        By their appeals, the Commission of the European Communities and the Kingdom of Spain seek to have set aside the judgment
of the Court of First Instance of the European Communities (now ‘the General Court’) of 18 December 2008 in Joined Cases T‐211/04
and T‐215/04 *Government of Gibraltar and United Kingdom* v *Commission* [2008] ECR II‐3745 (‘the judgment under appeal’), by which that Court annulled Commission Decision 2005/261/EC of 30 March
2004 on the aid scheme which the United Kingdom is planning to implement as regards the Government of Gibraltar Corporation
Tax Reform (OJ 2005 L 85, p. 1; ‘the contested decision’).

I –  **Legal context**

2        Article 6 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article
[88 EC] (OJ 1999 L 83, p. 1) provides:

‘Formal investigation procedure

1.      The decision to initiate the formal investigation procedure shall summarise the relevant issues of fact and law, shall include
a preliminary assessment of the Commission as to the aid character of the proposed measure and shall set out the doubts as
to its compatibility with the common market. The decision shall call upon the Member State concerned and upon other interested
parties to submit comments within a prescribed period which shall normally not exceed one month. In duly justified cases,
the Commission may extend the prescribed period.

2.      The comments received shall be submitted to the Member State concerned. If an interested party so requests, on grounds of
potential damage, its identity shall be withheld from the Member State concerned. The Member State concerned may reply to
the comments submitted within a prescribed period which shall normally not exceed one month. In duly justified cases, the
Commission may extend the prescribed period.’

II –  **Facts**

A –  *Background to the Government of Gibraltar’s reform of corporate tax*

3        On 11 July 2001, the Commission decided to initiate the formal investigation procedure under Article 88(2) EC in respect of
two corporate tax measures applied in Gibraltar, respectively concerning ‘exempt companies’ (OJ 2002 C 26, p. 13) and ‘qualifying
companies’ (OJ 2002 C 26, p. 9).

4        In order to qualify for exempt company status, a company had to meet a number of conditions. Those conditions included the
prohibition of carrying on or transacting any trade or business in Gibraltar, other than with other exempt or qualifying companies.
With some exceptions, an exempt company was exempted from payment of income tax in Gibraltar and was liable only to taxation
at a fixed sum of GBP 225 per annum.

5        The conditions for the grant of qualifying company status were, essentially, identical to those necessary for exempt company
status. Qualifying companies paid tax at a rate negotiated with the Gibraltar tax authorities of between 2% and 10% of profits.

6        By judgment of 30 April 2002 in Joined Cases T-195/01 and T-207/01 *Government of Gibraltar* v *Commission* [2002] ECR II-2309, the General Court, first, annulled the decision initiating the formal investigation procedure relating
to exempt companies on the ground that the Commission had classified the entire scheme relating to such companies as new aid
and, second, dismissed the application for annulment of the decision to initiate the procedure relating to qualifying companies.

7        The procedure relating to exempt companies resulted in the Commission’s decision of 19 January 2005 to propose appropriate
measures, which were accepted by the United Kingdom on 18 February 2005 (OJ 2005 C 228, p. 9). Following the procedure relating
to qualifying companies, on 30 March 2004 the Commission adopted Decision 2005/77/EC on the aid scheme implemented by the
United Kingdom in favour of Gibraltar Qualifying Companies (OJ 2005 L 29, p. 24), by which it declared the regime relating
to those companies incompatible with the common market.

B –  *The Government of Gibraltar’s reform of corporate tax*

8        On 27 April 2002, without prejudice to whether or not the tax regimes relating to exempt companies and to qualifying companies
constituted State aid, the Government of Gibraltar announced its intention to repeal all its corporate tax laws and introduce
an entirely new corporate tax regime for all companies in Gibraltar. This reform of corporate tax by the Government of Gibraltar
forms the subject-matter of the present dispute.

9        By letter of 12 August 2002, the United Kingdom of Great Britain and Northern Ireland notified the Commission, pursuant to
Article 88(3) EC, of the proposed reform of corporate tax (‘the proposed tax reform’) which the Government of Gibraltar planned
to introduce.

10      In order to be implemented by the Government of Gibraltar, the proposed tax reform had first to be passed by the Gibraltar
House of Assembly. As part of the reform, the legislation governing exempt companies and qualifying companies up until that
time was to be repealed with immediate effect.

11      The proposed tax reform comprises, as is apparent from paragraph 18 of the judgment under appeal, a system of taxation applicable
to all companies established in Gibraltar and a top-up (or penalty) tax applicable solely to companies in the financial services
sector and to utilities, which include undertakings operating in the telecommunications, electricity and water sectors.

12      The features of the system of taxation that would be introduced under that proposal are set out as follows in paragraphs 21
to 25 of the judgment under appeal:

‘21      The system of taxation that is introduced by the reform and will be applicable to all companies established in Gibraltar consists
of a payroll tax, a business property occupation tax and a registration fee:

–        payroll tax: all Gibraltar companies will be liable to a payroll tax in the amount of GBP 3 000 per employee each year; every
“employer” in Gibraltar will be required to pay payroll tax in respect of the total number of its full-time and part-time
“employees” who are “employed in Gibraltar”; the legislation relating to the tax reform will define the abovementioned terms;

–        business property occupation tax (“BPOT”): all companies occupying property in Gibraltar for business purposes will have to
pay a tax on the occupation of that property at a rate equivalent to a percentage of their liability to the general rates
charged on property in Gibraltar;

–        registration fee: all Gibraltar companies will have to pay an annual registration fee, of GBP 150 per annum in the case of
companies not intended to generate income and of GBP 300 per annum in the case of companies intended to generate income.

22      Liability to payroll tax together with BPOT will be capped at 15% of profits. The effect of this cap is that companies will
pay payroll tax and BPOT only if they make a profit, and in an amount not exceeding 15% of profits.

...

23      Certain activities, namely financial services and activities of utilities, will be subject to a top-up (or penalty) tax on
profits generated by them. The top-up tax will apply only to profits that can be allocated to those activities.

24      Thus, financial services companies will be charged, in addition to payroll tax and BPOT, a top-up (or penalty) tax on profits
from financial services activities at a rate of between 4% and 6% of profits (calculated in accordance with internationally
accepted accounting standards); such companies will have their tax liability (payroll tax, BPOT and top-up tax) capped, in
aggregate, at 15% of profits.

25      Utility companies will be charged, in addition to payroll tax and BPOT, a top-up (or penalty) tax on profits from their activities
at the rate of 35% of profits (calculated in accordance with internationally accepted accounting standards). Such companies
will be permitted to deduct payroll tax and BPOT from their liability to top-up tax. Although utility companies will also
have their annual liability to payroll tax and BPOT capped, in aggregate, at 15% of profits, the operation of the utilities
top-up tax will ensure that these companies always pay a tax equal to 35% of profits.’

III –  **The administrative procedure and the contested decision**

13      After the United Kingdom had notified the Commission of the proposed tax reform, the Commission, by letter of 16 October 2002,
informed the United Kingdom of its decision to initiate the procedure laid down in Article 88(2) EC (‘the decision to initiate
the formal procedure’) and invited interested parties to submit comments (OJ 2002 C 300, p. 2).

14      That decision refers to paragraph 9 of the Commission notice on the application of the State aid rules to measures relating
to direct business taxation (OJ 1998 C 384, p. 3; ‘the notice relating to State aid in the field of taxation’). In paragraphs
29 to 33 and 37 to 44 of the decision the Commission lists four elements of the proposed tax reform which it regards as conferring
materially selective advantages, namely, the requirement to make a profit which confers advantages on companies that make
no profit, the various tax caps conferring advantages on those companies to which they apply, exemption from tax for undertakings
based in certain areas of Gibraltar and, lastly, exemption of interest received in respect of loans granted for certain purposes.
Offshore companies are not mentioned as enjoying a selective advantage.

15      In paragraph 60(f) of the decision to initiate the formal procedure, the Commission requests the United Kingdom to provide
the following information:

‘an estimate of the number, size and type of activity of:

–        companies that will make no profit and consequently escape liability for payroll tax and BPOT,

–        profit-making companies with no employees (i.e. zero assessable employee units),

–        profit-making companies with less than one employee (excluding those with zero).’

16      The Commission received comments from the United Kingdom, the Confederación Española de Organizaciones Empresariales (Spanish
Confederation of Business Organisations), the Ålands Landskapsstyrelse (Åland Executive (Finland)), the Kingdom of Spain and
the Government of Gibraltar.

17      The Kingdom of Spain stated in point 3 of its comments submitted to the Commission on 3 January 2003:

‘...

In addition to these comments endorsing the objections raised by the Commission, which are sufficient on their own fundamentally
to call into question the validity of the reform proposed by the United Kingdom on behalf of the Gibraltar Government, we
consider it essential that the assessment of the compatibility of the scheme should take due account of the real economic
and tax context of the jurisdiction proposing it.

The proposed tax reform comprises some highly peculiar features, such as the following:

...

(c)      For the 28 800 companies not liable to the top-up taxes referred to in (a) above, the proposed tax system is not in fact an
overall corporation tax on business profits but a combination of various individual taxes (payroll tax, business property
occupation tax, registration fee) subject to ceilings which render the tax liability extremely small or non-existent (it is
not for nothing that the proposal is referred to in Gibraltar as “zero rate tax”).

Bearing in mind that most of the 28 800 companies registered can be regarded as letterbox or asset management companies, provided
that these companies generated profits they would be liable to GBP 3 000 per employee per year. Since most of them will have
only one employee (an accountant or auditor), usually part-time, they would pay only a maximum of GBP 3 000 per year in tax
if they do not occupy property (which is usually the case), because they would not then have to pay the [BPOT];

...

(d)      Offshore companies would remain outside the scope of two of the new taxes: around 8 000 companies without any physical presence
in Gibraltar would thus be exempt;

...

This is a tax reform which comprises a wide range of peculiarities and leaves intact the tax situation of businesses with
no staff or premises in Gibraltar.

...’

18      The Commission forwarded those observations to the United Kingdom, which sent its own comments to the Commission by letter
of 13 February 2003 but did not adopt a position on the Kingdom of Spain’s arguments concerning the tax treatment of offshore
companies.

19      In recital 163 of the contested decision, the Commission concluded that ‘[the proposed tax reform] constitutes a scheme of
State aid within the meaning of Article 87(1) of the EC Treaty. None of the derogations provided for in Article 87(2) or Article
87(3) apply. Therefore the United Kingdom is not authorised to implement the reform.’

20      According to the Commission, as is apparent from recitals 98 to 152 of the contested decision, the proposed tax reform is
both regionally and materially selective. It is regionally selective since it provides for a system of corporate taxation
under which companies in Gibraltar are taxed, in general, at a lower rate than those in the United Kingdom (recital 127 of
the contested decision).

21      The Commission finds that certain aspects of the proposed tax reform are materially selective. Thus, the following are selective
from that viewpoint: first, the requirement to make a profit before incurring liability to payroll tax and BPOT, since that
requirement favours companies which make no profit (recitals 128 to 133 of the contested decision), and second, the cap limiting
liability to payroll tax and BPOT to 15% of profits, since that cap favours companies which, for the tax year in question,
have profits that are low in relation to the number of employees and occupation of business property (recitals 134 to 141
of the contested decision). Third and lastly, imposition of a payroll tax and BPOT is also materially selective, since both
taxes inherently favour offshore companies which have no real physical presence in Gibraltar and which as a consequence do
not incur corporate tax (recitals 142 to 144 and 147 to 151 of the contested decision).

22      Article 1 of the operative part of the contested decision provides:

‘The proposals notified by the United Kingdom for the reform of the system of corporate taxation in Gibraltar constitute a
scheme of State aid that is incompatible with the common market.

Those proposals may accordingly not be implemented.’

IV –  **The proceedings at first instance and the judgment under appeal**

23      By applications lodged at the Court Registry on 9 June 2004, the Government of Gibraltar, in Case T-211/04, and the United
Kingdom, in Case T‐215/04, each brought an action for annulment of the contested decision.

24      Those applicants essentially put forward three identical pleas in law in each of the cases. The first and second pleas relate
to errors of law and assessment regarding, respectively, application of the criterion of regional selectivity and the criterion
of material selectivity. The third plea relates to breach of essential procedural requirements in the context of investigation
of the third aspect of the proposed tax reform, concerning offshore companies. The latter plea subdivides into two parts,
of which the first, concerning breach of the right to a fair hearing, is put forward by both the United Kingdom and the Government
of Gibraltar, and the second, concerning an error in the statement of reasons, is put forward only by the Government of Gibraltar.

25      By orders of the President of the Third Chamber of the General Court of 14 December 2004 and 15 February 2005, leave was granted
to the United Kingdom to intervene in support of the form of order sought by the Government of Gibraltar in Case T‐211/04,
and to the Kingdom of Spain to intervene in support of the form of order sought by the Commission in Case T‐215/04.

26      The General Court upheld the applicants’ first plea relating to regional selectivity and also the second plea relating to
material selectivity. As a result, the Court did not examine the third plea alleging breach of essential procedural requirements.

V –  **Procedure before the Court of Justice and forms of order sought**

27      By order of the President of the Court of 26 June 2009, Cases C‐106/09 P and C‐107/09 P were joined for the purposes of the
written and oral procedure and of the judgment.

28      By order of the President of the Court of 25 September 2009, Ireland was granted leave to intervene in the present cases in
support of the forms of order sought by the United Kingdom and the Government of Gibraltar.

29      In its appeal, the Commission claims that the Court should:

–        primarily:

–        set aside the judgment under appeal;

–        dismiss the applications for annulment lodged by the Government of Gibraltar and by the United Kingdom; and

–        order the Government of Gibraltar and the United Kingdom to pay the costs;

–        in the alternative:

–        refer the cases back to the General Court for reconsideration; and

–        reserve the costs of the proceedings at first instance and on appeal.

30      In its appeal, the Kingdom of Spain claims that the Court should:

–        set aside the judgment under appeal;

–        declare the contested decision to be lawful; and

–        order the respondents to pay the costs.

31      The Government of Gibraltar contends that the Court should:

–        dismiss the appeals brought by the Commission and the Kingdom of Spain; and

–        order the Commission and the Kingdom of Spain to pay the costs of the Government of Gibraltar.

32      The United Kingdom contends that the Court should:

–        dismiss the appeals brought by the Commission and the Kingdom of Spain; and

–        order the Commission and the Kingdom of Spain to pay the costs.

33      Ireland contends that the Court should:

–        dismiss the appeal brought by the Commission; and

–        order the Commission to pay the costs.

VI –  **The appeals**

34      The Commission puts forward a single ground of appeal, alleging infringement of Article 87(1) EC. That ground, relating to
the General Court’s conclusions with regard to material selectivity of the proposed tax reform, is divided into six parts.
The Kingdom of Spain puts forward 11 grounds of appeal, which may be divided into 3 groups, relating, first, to the regional
selectivity of that proposal and to the status of Gibraltar (the first 7 grounds and the 9th ground), secondly, to material
selectivity (the 8th ground) and, lastly, to the proceedings before the General Court (the 10th and 11th grounds).

35      It is appropriate to examine first of all the grounds of appeal relating to material selectivity, that is to say, the single
ground put forward by the Commission and the eighth ground put forward by the Kingdom of Spain.

A –  *The Commission’s single ground of appeal and the eighth ground of appeal of the Kingdom of Spain*

1.     Grounds of the judgment under appeal

36      Before examining the contested decision, the General Court sets out in paragraphs 143 to 146 of the judgment under appeal
the analytical framework to be observed by the Commission when considering whether a scheme of tax aid is selective. In that
regard, the General Court considers that classification by the Commission of a tax measure as selective necessarily means
that it begins by identifying the ‘normal’ regime under the tax system. In relation to this ‘normal’ tax regime, the Commission
must, secondly, assess and determine whether any advantage granted by the tax measure at issue is selective, by demonstrating
that the measure derogates from that ‘normal’ regime. In a third stage it is necessary to assess whether, in the event of
such derogations, the measure leading to differentiation between undertakings may none the less not be ‘selective’, when the
differentiation arises from the nature or general scheme of the system of charges of which it forms part.

37      The General Court states that the Commission cannot omit those first two stages of the review of the selectivity of the measure
in question, as otherwise the Commission would be assuming the role of the Member State with regard to determining that State’s
tax system and the ‘normal’ regime under that system. With regard to determining the tax system at issue, the General Court
considers that, as European Union law currently stands, direct taxation falls within the competence of the Member States.
Thus it is solely the latter, and infra-State bodies having fiscal autonomy, that have competence to devise the systems of
corporate taxation which they consider the best suited to the needs of their economies.

38      In paragraph 148 of the judgment under appeal, the Court recalls that in the contested decision ‘the Commission concluded
that three aspects of the tax system introduced by the [proposed tax reform] confer selective advantages on the companies
benefiting therefrom and may therefore constitute State aid, namely (i) the requirement that a company must make a profit
before it becomes liable to payroll tax and BPOT, (ii) the cap limiting liability to payroll tax and BPOT to 15% of profits
and (iii) the inherent nature of the payroll tax and BPOT’.

39      Next the Court examines the contested decision in the light of the analytical framework set out in paragraphs 143 to 146 of
the judgment under appeal.

40      In that regard, the Court finds, in paragraph 170 of the judgment under appeal, that, in the light of the explanations provided
by the Government of Gibraltar and the United Kingdom, according to which the elements of the proposed tax reform together
constitute a tax system in its own right which should be treated as being the ‘normal’ tax regime, ‘the Commission could not
forgo performance of its duty, as described in paragraph 143 [of the judgment under appeal], to begin by identifying the ...
“normal” regime under the notified tax system and, if necessary, to challenge the Gibraltar authorities’ description of that
regime’. The Court holds, in paragraphs 171 to 174 of the judgment under appeal, that the Commission failed to follow the
stages of that analytical framework and thereby, in the light of the competence of States in tax matters, went beyond the
limits of its review.

41      Furthermore, the Court also states, in paragraph 175 of the judgment under appeal, that, ‘apart from the Commission’s failure
... to observe the analytical framework relating to the determination of selectivity, neither the considerations set out in
the contested decision ... nor the arguments put forward by the Commission and the Kingdom of Spain in the course of the ... proceedings
are sufficient to call into question the validity of the definition of the ... “normal” regime under the notified tax system’.

42      In this connection, the Court holds, first, in paragraphs 176 to 178 of the judgment under appeal, that the Commission has
not succeeded in demonstrating that the condition for tax liability, namely that a company must make a profit, and the capping
of tax at 15% of profits are to be regarded as derogations and that the tax regime must therefore be regarded as selective.

43      Second, the Court finds, in paragraphs 179 to 181 of the judgment under appeal, that neither the fact that the Commission
considers that tax system to be ‘hybrid’ nor the fact that an undertaking which does not have a ‘physical presence’ in Gibraltar
is not liable to payroll tax and BPOT is sufficient to demonstrate that the tax regime in question is selective.

44      Third, according to paragraphs 182 to 184 of the judgment under appeal, the Commission’s comments regarding the various criteria
adopted under the regime at issue in order to determine an undertaking’s tax liability are too vague to cast doubt on the
Gibraltar authorities’ definition of what constitutes the ‘normal’ regime under the proposed tax reform.

45      The Court concludes, in paragraph 185 of the judgment under appeal, that none of the aspects of the proposed tax reform identified
by the Commission can be considered to confer a selective advantage for the purposes of Article 87(1) EC, since the Commission
has not demonstrated to the requisite legal standard that they constitute derogations from the ‘normal’ tax regime.

46      Lastly, the Court states, in paragraph 186 of the judgment under appeal, ‘that the comparison of the alleged effects of the
tax system introduced by the [proposed tax] reform with the effects of the tax system preceding it, as drawn by the Commission
in Table 1 and recital 150 of the contested decision, cannot be accepted in this instance for the purposes of applying Article
87(1) EC’.

2.     Arguments of the parties

47      In its appeal, the Commission puts forward a single ground of appeal, alleging infringement of Article 87(1) EC and based
on the General Court’s examination of material selectivity. This ground is divided into six parts.

48      In the first part of this ground of appeal the Commission claims that the General Court erred in assessing the relationship
between Article 87(1) EC and the scope of the competence of the Member States in tax matters. The Commission considers in
that respect that the powers of Member States with regard to tax matters are subject to the constraints imposed by European
Union law, in particular by Article 87(1) EC, and that the mere fact that a national rule falls within the area of tax law
does not mean that it does not have to comply with Article 87 EC, since that article defines State measures not by reference
to their causes or aims but in relation to their effects.

49      In the second part of its single ground of appeal the Commission claims that the General Court erroneously held that the Commission
was obliged first to identify the ‘normal’ regime under the tax system contained in the proposed reform and then to demonstrate
that the measures in question derogated from that regime. Such an approach disregards the possibility that a Member State
may introduce a tax system which is inherently discriminatory by its very structure. Through judicious selection of the criteria
to be applied in its allegedly ‘normal’ system of taxation, Gibraltar produced to a large extent the effects of a scheme which
manifestly incorporates State aid for certain categories of undertaking.

50      In the third part of its single ground of appeal the Commission claims that the General Court infringed the principles relating
to the interpretation of the concept of State aid, according to which national measures must be assessed on the basis of their
effects and not in the light of the objective pursued or a certain regulatory technique.

51      In the fourth part of this ground of appeal the Commission maintains that the approach adopted by the Court leads to the outcome
that all the features of a tax system, no matter how much they favour certain beneficiaries, are automatically part of that
system, not a derogation, and therefore escape the application of State aid rules.

52      In the fifth part of this ground of appeal the Commission complains that the Court wrongly held that the Commission had failed
both to identify the ‘normal’ tax regime and to demonstrate that specific features of the proposed tax reform constituted
derogations from that system. In fact, the Commission clearly and consistently identified the notified tax system as being
based on the taxation of labour and of the occupation of business property. Also the Commission notes that the ground on which
the Court annulled the contested decision is based not on a lack of reasoning but on an error of law.

53      In the sixth part of its single ground of appeal the Commission claims that the Court failed to assess the three elements
of selectivity identified in the contested decision, by not examining the Commission’s findings concerning the concrete effects
of the proposed tax reform, namely that it produces different taxation levels for different sectors of the Gibraltar economy
and confers a selective advantage on offshore undertakings, which have no employees and occupy no property in Gibraltar.

54      Even though the Court did reproduce the relevant parts of the contested decision in paragraphs 156 to 162 of the judgment
under appeal, it did not take any position on the selective aspects of the proposed tax reform thus identified. The Court
failed to acknowledge, in paragraph 186 of the judgment under appeal, the relevance of the comparison of the proposed tax
reform with the previous tax system. It should be pointed out that the Commission had noted, referring to the previous system,
that the scheme examined in the contested decision sought to perpetuate the previous situation, producing the same effects
although using a different technique. Thus the Court’s approach gives decisive weight to fiscal technique over an assessment
in the light of a measure’s effects.

55      The Kingdom of Spain claims, in its eighth ground of appeal, that the General Court was wrong to hold that the criterion of
material selectivity was not satisfied. The vast majority of undertakings established in Gibraltar (28 798 of the 29 000 companies)
may end up with a zero rate of taxation. Consequently, the regime classified by the Court as being general is in fact a special
regime creating ‘de facto selectivity’.

56      In its response to the Commission’s appeal, the Kingdom of Spain supports the ground of appeal put forward by the Commission.
It states that the real objective pursued by the proposed tax reform is to continue to attract foreign capital the holders
of which are seeking to avoid the normal tax systems to which they would be subject in their country of origin. Moreover,
since the analysis of a corporate tax is an exercise requiring a complex economic assessment, the Court was wrong to replace
the Commission’s economic assessment with its own assessment with regard to the selective elements identified by the Commission
in the contested decision.

57      The Government of Gibraltar and the United Kingdom maintain, first of all, that the Court was right to reject the approach
taken by the Commission in the contested decision. That approach is incorrect and is opposite to the approach normally taken
by the Commission, as contained in particular in the notice relating to State aid in the field of taxation. That new approach
would lead to the removal of the fiscal sovereignty enjoyed by Member States under the EC Treaty and under the consistent
case-law of the Court of Justice and would open the door to harmonisation of direct taxation by the Commission.

58      As regards the first part of the Commission’s single ground of appeal, the Government of Gibraltar and the United Kingdom
consider that it challenges Member States’ competence in tax matters and is based on a misreading of the judgment under appeal
in that the Court did not disregard the limitation of the fiscal sovereignty of Member States by European Union law.

59      They submit likewise that, in its argument in support of the second part of the single ground of appeal the Commission challenges
the fiscal sovereignty of Member States. The mere fact that a tax regime creates an advantage for some companies is not sufficient
in itself for that regime to be regarded as selective, since it is necessary first of all to identify the normal regime. That
is corroborated by the notice relating to State aid in the field of taxation, which is binding on the Commission in accordance
with the principle of the protection of legitimate expectations.

60      In the third part of its single ground of appeal the Commission also misreads the judgment under appeal in claiming that the
Court held that the Commission should take into account the objectives claimed by the national or regional authorities rather
than examine the actual content of the rules at issue.

61      The Commission’s argument, in the fourth part of its single ground of appeal, that a ‘normal’ tax system may not apply more
than one tax criterion is also irreconcilable with the fiscal sovereignty of Member States. Member States should be free to
adopt the taxes that they consider most appropriate for their needs and to choose whatever basis of assessment they wish,
including in their tax rules the normal and necessary provisions concerning the ability of taxpayers to pay that are a common
feature of taxes. The fact that a tax regime meets more than one objective is completely legitimate.

62      Also, the argument underlying the fifth part of the Commission’s single ground of appeal is incorrect. There is nothing inconsistent
in a tax system based on the use of more than one basis of assessment that also includes provisions about tax payers’ ability
to pay. Moreover, the Commission’s assertion that it performed a three-step analysis is incorrect.

63      Lastly, with regard to the sixth part of the single ground of appeal, the Government of Gibraltar and the United Kingdom maintain
that the Commission’s argument that the tax system is to be regarded as selective since the ‘offshore’ economy is not taxed
is incorrect. In every tax system, companies that do not have a tax base as defined by the national tax system do not pay
tax under that system. Thus, the Commission’s argument amounts to imposing on Member States, despite their fiscal sovereignty,
the Commission’s view as to which basis of assessment is appropriate. The mere fact that different companies may pay different
amounts of tax is not sufficient to establish that the proposed tax reform is selective.

64      With regard to the eighth ground of appeal put forward by the Kingdom of Spain, concerning the material selectivity of the
proposed tax reform, the Government of Gibraltar and the United Kingdom submit, first of all, that the mere fact that some
companies do not pay tax is not sufficient to conclude that their tax treatment is selective and to consider that those companies
receive State aid. Moreover, determining the elements that constitute the tax base is a matter that falls within the fiscal
sovereignty of Member States. The tax authorities are in particular not obliged to use either revenue or profit as a basis
of assessment. Also, the Government of Gibraltar and the United Kingdom submit that the three-step assessment of a tax measure,
as provided for in the notice relating to State aid in the field of taxation and adopted by the Court in the judgment under
appeal, is necessary in order to identify the selective advantages procured by that measure. Lastly, as regards the Kingdom
of Spain’s statement that 28 798 of the 29 000 companies established in Gibraltar may, as a result of the proposed tax reform,
end up with a ‘zero rate’ of taxation, the United Kingdom doubts whether those figures are accurate. The Government of Gibraltar,
without taking a specific position on the Kingdom of Spain’s statement, contends that it is difficult to estimate how many
companies would remain established in Gibraltar when the proposed tax reform is introduced, and points out in its response
that, currently, out of the 24 000 companies registered in Gibraltar, around 3 000 are ‘exempt’ companies under the former
tax regime, approximately 260 are utility or financial services companies and 18 000 are inactive companies holding assets.

65      Ireland, intervening in support of the form of order sought by the United Kingdom in Case C-106/09 P, submits that the Commission’s
appeal should be declared inadmissible to the extent that it goes beyond the scope of both the contested decision and the
judgment under appeal. Ireland considers that, in the first part of its single ground of appeal, the Commission seeks to impose
on Member States the burden of proof as regards demonstrating that the nature and structure of their tax systems are compliant
with European Union law. Moreover, it observes that the Commission seeks to base its arguments in this regard on the principle
of non‐discrimination, whereas the rules on State aid do not find their origin in that principle but in the concept of fair
competition in the common market. With regard to the other parts of the Commission’s single ground of appeal, Ireland contends
that the Commission is bound, in accordance with the principles of legal certainty and legitimate expectations, by its notice
relating to State aid in the field of taxation. To regard a tax system as being inherently discriminatory by reason of its
effects, without being able to identify a normal rate of tax, would conflict with established case-law and the fiscal sovereignty
of the Member States. Moreover, it is not sufficient, in particular, to classify a tax system as ‘hybrid’ and conclude from
this that undertakings treated favourably under that system are in receipt of State aid.

3.     Findings of the Court

66      Contrary to what Ireland contends, the Commission’s single ground of appeal is admissible since, in accordance with Article
113 of the Rules of Procedure of the Court of Justice, it seeks to set aside the judgment under appeal without seeking to
change the subject-matter of the proceedings before the General Court. To that end, the Commission complains that the General
Court infringed Article 87 EC in that it wrongly held that none of the three elements identified in the contested decision
as being selective confers selective advantages.

67      It is necessary to reject from the outset the Commission’s complaint, contained in the second part of its single ground of
appeal, by which it alleges that the General Court wrongly relied on the notice relating to State aid in the field of taxation,
the content of which it misconstrued.

68      Having regard to the reference, in paragraphs 143 and 146 of the judgment under appeal, to that notice, suffice it to state
that the General Court did not draw any factual or legal conclusion from it, as is apparent from the use of the words ‘[a]s
the Commission itself states’ and ‘[f]urthermore’ in those paragraphs, but relied, in order to substantiate its approach as
set out in paragraphs 143 to 146 of the judgment under appeal, on the case-law of the Court of Justice and the allocation
of competence in tax matters between the European Union and the Member States.

69      In those circumstances, the Commission’s complaint against that reference to the notice relating to State aid in the field
of taxation is ineffective (see, to that effect, Case C-182/99 P *Salzgitter* v *Commission* [2003] ECR I-10761, paragraphs 54 and 55), and so it is unnecessary to consider the content and scope of that notice at this
stage.

70      In order to examine the Commission’s single ground of appeal and the Kingdom of Spain’s eighth ground of appeal it is appropriate
to recall the case-law of the Court of Justice relating to the concept of selective advantage in tax matters.

71      According to settled case-law, the definition of aid is more general than that of a subsidy, given that it includes not only
positive benefits, such as subsidies themselves, but also State measures which, in various forms, mitigate the charges which
are normally included in the budget of an undertaking and which thus, without being subsidies in the strict sense of the word,
are similar in character and have the same effect (see Case C-143/99 *Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke* [2001] ECR I-8365, paragraph 38, and Joined Cases C‐78/08 to C-80/08 *Paint Graphos and Others* [2011] ECR I‐0000, paragraph 45 and the case-law cited).

72      Consequently, a measure by which the public authorities grant certain undertakings favourable tax treatment which, although
not involving the transfer of State resources, places the recipients in a more favourable financial position than other taxpayers
amounts to State aid within the meaning of Article 87(1) EC (see Case C-387/92 *Banco Exterior de España* [1994] ECR I-877, paragraph 14, and *Paint Graphos and Others*, paragraph 46 and the case-law cited).

73      On the other hand, advantages resulting from a general measure applicable without distinction to all economic operators do
not constitute State aid within the meaning of Article 87 EC (see, to that effect, Case C‐156/98 *Germany* v *Commission* [2000] ECR I‐6857, paragraph 22, and Joined Cases C‐393/04 and C‐41/05 *Air Liquide Industries Belgium* [2006] ECR I‐5293, paragraph 32 and the case-law cited).

74      It is therefore necessary to determine whether the proposed tax reform is selective, selectivity being a constituent factor
in the concept of State aid (see Case C‐88/03 *Portugal* v *Commission* [2006] ECR I‐7115, paragraph 54).

75      As regards appraisal of the condition of selectivity, it is clear from settled case-law that Article 87(1) EC requires assessment
of whether, under a particular legal regime, a national measure is such as to favour ‘certain undertakings or the production
of certain goods’ in comparison with others which, in the light of the objective pursued by that regime, are in a comparable
factual and legal situation (*Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke*, paragraph 41, and Case C‐487/06 P *British Aggregates* v *Commission* [2008] ECR I‐10515, paragraph 82 and the case-law cited).

76      In the light of that case-law, it should be considered whether the General Court infringed Article 87(1) EC, as interpreted
by the Court of Justice, in ruling that none of the three elements identified in the contested decision confers selective
advantages.

 (a) The requirement to make a profit and the capping of tax

77      The General Court concluded with regard to the first two selective elements of the measure at issue that were identified in
the contested decision, namely the fact that payroll tax and BPOT are payable only where the taxable person makes a profit
and that the amount of tax is capped in respect of both those bases of assessment at 15% of the profits, that the Commission
had not succeeded in demonstrating that those elements confer selective advantages.

78      That conclusion of the General Court is not vitiated by an error of law.

79      As was noted in paragraph 73 above, only selective advantages, and not advantages resulting from a general measure applicable
without distinction to all economic operators, fall within the concept of State aid.

80      The requirement to make a profit and the capping of taxation of profits are per se general measures applicable without distinction
to all economic operators and are therefore not liable to confer selective advantages.

81      The Commission’s contention that the profit criterion is alien to the inherent logic of a system of taxation founded on the
payroll tax and BPOT does not mean that that criterion, which is in itself neutral, becomes selective.

82      The General Court committed no error in law in ruling that the requirement to make a profit and the capping of tax at 15%
of profits do not confer selective advantages.

83      The advantages alleged by the Commission resulting from measures applicable without distinction to all economic operators,
namely the requirement to make a profit, which would benefit unprofitable operators, and those resulting from the capping
of tax, which would benefit very profitable operators, do not mean that the tax regime under consideration can be regarded
as entailing selective effects. Those effects are not such that they favour ‘certain undertakings’ or ‘the production of certain
goods’ within the meaning of Article 87(1) EC, but are merely the consequence of the random event that the undertaking in
question is unprofitable or very profitable during the period of assessment.

84      It follows from the foregoing that the complaints against the General Court’s conclusion that the Commission did not succeed
in demonstrating that the first two elements identified in the contested decision, namely the requirement to make a profit
and the capping of tax at 15% of profits, confer selective advantages must be rejected.

 (b) Advantages accruing to offshore companies

85      The General Court concluded, in paragraph 185 of the judgment under appeal, that there are no selective advantages for offshore
companies. It found that the Commission, having failed to observe the analytical framework relating to the determination of
the tax measure’s selectivity, as outlined in paragraphs 143 to 146 of the judgment under appeal and referred to in paragraphs
36 and 37 above, did not succeed in demonstrating that offshore companies, which by their nature have no physical presence
in Gibraltar, enjoy selective advantages.

86      That reasoning is vitiated by an error of law.

87      First, it is appropriate to recall that the Court has consistently held that Article 87(1) EC does not distinguish between
measures of State intervention by reference to their causes or their aims but defines them in relation to their effects, and
thus independently of the techniques used (see *British Aggregates* v *Commission*, paragraphs 85 and 89 and the case-law cited, and Case C‐279/08 P *Commission* v *Netherlands* [2011] ECR I‐0000, paragraph 51).

88      The General Court’s approach, based solely on a regard for the regulatory technique used by the proposed tax reform, does
not allow the effects of the tax measure in question to be considered and excludes from the outset any possibility that the
fact that no tax liability is incurred by offshore companies may be classified as a ‘selective advantage’. That approach is
therefore at variance with the case-law cited in paragraph 87 above.

89      Secondly, the General Court’s approach also disregards the case-law cited in paragraph 71 above, according to which the existence
of a selective advantage for an undertaking entails mitigation of the charges which are normally included in its budget.

90      The Court admittedly held in paragraph 56 of *Portugal* v *Commission* that the determination of the reference framework has a particular importance in the case of tax measures, since the very
existence of an advantage may be established only when compared with ‘normal’ taxation.

91      However, contrary to the General Court’s reasoning and the proposition put forward by the Government of Gibraltar and the
United Kingdom, that case-law does not make the classification of a tax system as ‘selective’ conditional upon that system
being designed in such a way that undertakings which might enjoy a selective advantage are, in general, liable to the same
tax burden as other undertakings but benefit from derogating provisions, so that the selective advantage may be identified
as being the difference between the normal tax burden and that borne by those former undertakings.

92      Such an interpretation of the selectivity criterion would require, contrary to the case-law cited in paragraph 87 above, that
in order for a tax system to be classifiable as ‘selective’ it must be designed in accordance with a certain regulatory technique;
the consequence of this would be that national tax rules fall from the outset outside the scope of control of State aid merely
because they were adopted under a different regulatory technique although they produce the same effects in law and/or in fact.

93      Those considerations apply particularly with regard to a tax system which, as in the present case, instead of laying down
general rules applying to all undertakings from which a derogation is made for certain undertakings, achieves the same result
by adjusting and combining the tax rules in such a way that their very application results in a different tax burden for different
undertakings.

94      Thirdly, the General Court was wrong in criticising the Commission, in paragraphs 184 to 186 of the judgment under appeal,
for not demonstrating the existence of a selective advantage for offshore companies, having failed to identify in the contested
decision a reference framework for establishing the existence of a selective advantage.

95      It should be noted in that respect that, contrary to what the General Court held with regard to recitals 143, 144 and 150
of the contested decision, it is apparent from those recitals that the Commission examined the existence of selective advantages
for offshore companies in the light of the tax regime at issue, which formally applies to all undertakings. It is thus apparent
that the contested decision identifies that regime as a reference framework in relation to which offshore companies are, in
fact, favoured.

96      Lastly, the Commission, contrary to what the General Court held, did demonstrate to the requisite legal standard in the contested
decision that offshore companies enjoy, in the light of that reference framework, selective advantages within the meaning
of the case-law cited in paragraph 75 above.

97      It is true that, in the absence of European Union rules governing the matter, it falls within the competence of the Member
States, or of infra‐State bodies having fiscal autonomy, to designate bases of assessment and to spread the tax burden across
the different factors of production and economic sectors, as the General Court held in paragraph 146 of the judgment under
appeal.

98      However, the General Court failed to assess the regime at issue as a whole and did not take into account the factors on which
the Commission based its assessment of the regime at issue in the contested decision.

99      In that respect, it is necessary to recall the permanent features of the regime at issue as described in paragraphs 21 to
25 of the judgment under appeal.

100    The features of that regime are, first, a combination of the payroll tax and BPOT as the sole bases of assessment, together
with the requirement to make a profit, the tax on which is capped at 15%, and second, the absence of a generally applicable
basis of assessment providing for the taxation of all companies covered by that regime.

101    In view of the features of that regime, outlined in the preceding paragraph, it is apparent that the regime at issue, by combining
those bases, even though they are founded on criteria that are in themselves of a general nature, in practice discriminates
between companies which are in a comparable situation with regard to the objective of the proposed tax reform, namely to introduce
a general system of taxation for all companies established in Gibraltar.

102    Combining those bases of assessment not only results in taxation according to the number of employees and the size of the
business premises occupied, but also, due to the absence of other bases of assessment, excludes from the outset any taxation
of offshore companies, since they have no employees and also do not occupy business property.

103    Admittedly, according to the case-law cited in paragraph 73 above, a different tax burden resulting from the application of
a ‘general’ tax regime is not sufficient on its own to establish the selectivity of taxation for the purposes of Article 87(1)
EC.

104    Thus, the criteria forming the basis of assessment which are adopted by a tax system must also, in order to be capable of
being recognised as conferring selective advantages, be such as to characterise the recipient undertakings, by virtue of the
properties which are specific to them, as a privileged category, thus permitting such a regime to be described as favouring
‘certain’ undertakings or the production of ‘certain’ goods within the meaning of Article 87(1) EC.

105    That is specifically the case here.

106    In that regard, it should be observed that the fact that offshore companies are not taxed is not a random consequence of the
regime at issue, but the inevitable consequence of the fact that the bases of assessment are specifically designed so that
offshore companies, which by their nature have no employees and do not occupy business premises, have no tax base under the
bases of assessment adopted in the proposed tax reform.

107    Thus, the fact that offshore companies, which constitute a group of companies with regard to the bases of assessment adopted
in the proposed tax reform, avoid taxation precisely on account of the specific features characteristic of that group gives
reason to conclude that those companies enjoy selective advantages.

108    It follows from all the foregoing that the General Court erred in law in finding that the proposed tax reform does not confer
selective advantages, for the purposes of Article 87(1) EC, on offshore companies.

109    Consequently, the Commission’s single ground of appeal and the eighth ground of appeal of the Kingdom of Spain are well founded
on this point, and so the judgment under appeal must be set aside on that basis.

110    It follows that there is no longer any need to examine the Kingdom of Spain’s first seven grounds of appeal or its ninth ground
of appeal, relating to regional selectivity and to the status of Gibraltar. Nor is it necessary to examine the Kingdom of
Spain’s 10th and 11th grounds of appeal, relating to the proceedings before the General Court.

VII –  **The actions before the General Court**

111    As provided in the second sentence of the first paragraph of Article 61 of the Statute of the Court of Justice of the European
Union, the Court of Justice, when it quashes the decision of the General Court, may give final judgment in the matter where
the state of the proceedings so permits.

112    In the circumstances, the Court considers that the actions for annulment of the contested decision brought by the applicants
at first instance are ready for judgment and that final judgment should be given on them.

113    It is appropriate, therefore, to consider the actions brought before the General Court by the Government of Gibraltar and
the United Kingdom.

114    The applicants at first instance essentially put forward three pleas in law. The first plea and the second plea, which subdivides
into three parts, allege errors concerning application of the criteria of regional and material selectivity respectively.
The third plea alleges breach of essential procedural requirements in the context of the Commission’s investigation with regard
to offshore companies. That plea is subdivided into two parts, of which the first, concerning breach of the rights of the
defence, is put forward both by the Government of Gibraltar and by the United Kingdom and the second, concerning an error
in the statement of reasons, is put forward solely by the Government of Gibraltar.

115    It is appropriate to deal first with the three parts of the second plea, concerning material selectivity, and the second part
of the Government of Gibraltar’s third plea, also concerning a matter relating to material selectivity. The first part of
the third plea, relating to the rights of defence, must be examined second. Lastly, a ruling must be given on the first plea,
relating to regional selectivity.

 A – *The second plea of the Government of Gibraltar and the United Kingdom, and the second part of the Government of Gibraltar’s
third plea*

116    The second plea put forward by the applicants at first instance, relating to material selectivity, comprises three parts.
By the first part, the applicants complain that the Commission departed from its decision‐making practice and from the notice
relating to State aid in the field of taxation. By the second part, which is the only part on which the General Court gave
a ruling in the judgment under appeal, the applicants claim that none of the three elements identified in the contested decision
confers selective advantages. Lastly, the third part seeks to demonstrate that that decision disregarded the fact that any
selective advantages are, in any event, justified by the nature and general scheme of the tax system at issue. By the second
part of its third plea, the Government of Gibraltar alleges an error in the statement of reasons for the contested decision.

 1. The second part of the second plea

117    With regard to the complaints raised in the second part of the second plea, relating to the classification of the three elements
identified in the contested decision, it is apparent from the considerations set out in paragraphs 86 to 110 above that the
Commission does not infringe Article 87(1) EC in finding, in the contested decision, that the tax regime at issue confers
selective advantages.

118    Although it is clear from paragraphs 77 to 84 above that the General Court did not err in law in concluding that the first
two elements identified in the contested decision, namely the requirement to make a profit and the capping of tax at 15% of
profits, do not confer selective advantages, the fact remains that the Commission was correct in finding, as regards the third
element identified in the contested decision, concerning the tax treatment of offshore companies, that such companies do enjoy
such advantages.

119    While, according to the contested decision, the tax regime at issue confers selective advantages, that conclusion is justified
to a sufficient legal standard by the existence of selective advantages for offshore companies, without it being necessary
in addition that the other two elements identified in that decision as being selective also confer selective advantages (see,
to that effect, Case C-66/02 *Italy* v *Commission* [2005] ECR I‐10901, paragraph 98). Consequently, the second part of the second plea is ineffective.

120    The second part of the second plea put forward by the Government of Gibraltar and the United Kingdom at first instance against
the contested decision must therefore be rejected.

 2. The second part of the third plea, put forward by the Government of Gibraltar

121    It is necessary to reject from the outset the second part of the Government of Gibraltar’s third plea, which alleges an error
in the reasoning in that the Commission did not state which companies constitute the ‘large offshore sector’ referred to by
recital 143 of the contested decision, failing to identify an individual company, a number of individual companies or an economic
sector that would allegedly benefit from the proposed tax reform.

122    In that connection, it is sufficient to note that the Court of Justice has consistently held that the Commission may, in the
case of an aid scheme, confine itself to examining the general characteristics of the scheme in question, without being required
to examine each particular case in which it applies, in order to determine whether that scheme comprises aid elements (Joined
Cases C‐71/09 P, C‐73/09 P and C‐76/09 P *Comitato ‘Venezia vuole vivere’ and Others* v *Commission* [2011] ECR I‐0000, paragraph 130 and the case-law cited).

 3. The first part of the second plea

 (a) Arguments of the parties

123    By the first part of their second plea, the applicants at first instance complain that in the contested decision the Commission
departed from the notice relating to State aid in the field of taxation. The Government of Gibraltar also claims that the
decision is not consistent with the Commission’s decision-making practice.

124    As regards the purport of the notice relating to State aid in the field of taxation, the applicants submit that it is clear
from paragraph 13 of that notice that Member States have the power to decide on the economic policy which they consider most
appropriate and, in particular, to spread the tax burden as they see fit across the different factors of production. Moreover,
according to paragraphs 9 and 16 of the notice, it is necessary for the Commission to establish that a tax measure provides,
in favour of certain undertakings in the Member States, an exception to the application of the tax system, which means that
the common system applicable, from which a derogation is then made, must first be determined. Lastly, according to paragraph
14 of the notice, the fact that some firms or some sectors benefit more than others from a particular tax measure does not
mean that the measure is caught by the State aid rules.

125    The approach taken by the Commission in the contested decision with regard to the advantages enjoyed by offshore companies
is inconsistent with the guidance contained in that notice. By departing from the notice, the Commission infringed the principle
of the protection of legitimate expectations.

126    In support of the complaint, raised solely by the Government of Gibraltar, that the Commission introduced a new material selectivity
principle which was not consistent with its previous decision-making practice, the Government of Gibraltar lists several Commission
decisions.

127    The Commission contends that the applicants at first instance misread the notice relating to State aid in the field of taxation.
It also contends that it has not derogated from its decision-making practice and that the approach taken in the contested
decision is consistent with the case-law of the Court of Justice.

 (b) Findings of the Court

128    With regard, first, to the complaint that, in the contested decision, the Commission departed from the notice relating to
State aid in the field of taxation, it should be observed that that notice, which, being an internal measure adopted by the
administration, cannot be regarded as a rule of law, nevertheless forms rules of practice from which the administration may
not depart in an individual case without giving reasons which are compatible with the principle of equal treatment (see, with
regard to the guidelines on State aid, the judgment of 9 June 2011 in Joined Cases C‐465/09 P to C‐470/09 P *Diputación Foral de Vizcaya and Others* v *Commission*, paragraph 120 and the case-law cited).

129    Thus, it is necessary to consider whether the Commission did in fact depart from that notice, so far as the investigation
of the selectivity of the scheme at issue was concerned.

130    In that regard, it should be stated first of all that, contrary to what the applicants at first instance claim, paragraph
13 of that notice cannot be construed as exempting the power of Member States to spread the tax burden across the different
factors of production from all scrutiny under the rules on State aid. Paragraph 13 merely explains that ‘[t]ax measures which
are open to all economic agents’ do not constitute State aid, whilst, in the present case, the tax advantages enjoyed by offshore
companies are not in fact open to all economic agents, as is clear from paragraph 102 above.

131    Also, as regards paragraphs 9 and 16 of the notice relating to State aid in the field of taxation, it should be pointed out
that, contrary to what the applicants at first instance claim, it does not follow from those paragraphs that the existence
of an advantage can be shown only by establishing a derogation from a normal tax regime.

132    Paragraph 9 only gives examples of selective advantages which are common. Paragraph 16 explains that advantages resulting
from an apparently general measure may none the less be recognised as being selective. This finding is supported by paragraph
13 of the notice, which is the first paragraph to address the distinction between State aid and general measures and which
clearly states that the latter must be ‘effectively open to all firms on an equal access basis, and [that] they may not de
facto be reduced in scope’.

133    Lastly, the argument put forward by the applicants at first instance that the Commission departed from the notice relating
to State aid in the field of taxation is not supported by paragraph 14 of that notice either. It is already clear from the
words ‘does not necessarily mean that they are caught by the competition rules governing State aid’ that that paragraph is
not intended to exclude certain measures categorically from application of the rules on State aid.

134    Therefore, the complaint that, in the contested decision, the Commission departed from the notice relating to State aid in
the field of taxation must be rejected.

135    Secondly, the Government of Gibraltar’s complaint that, in the contested decision, the Commission departed from its decision-making
practice must be rejected.

136    In that regard, it is sufficient to observe that, according to case-law, the question whether a measure constitutes State
aid must be assessed solely in the context of Article 87(1) EC and not in the light of an alleged earlier decision-making
practice of the Commission (see, to that effect, the judgment of 21 July 2011 in Case C‐459/10 P *Freistaat Sachsen and Land Sachsen-Anhalt* v *Commission*, paragraph 50).

137    In the light of the foregoing, the first part of the second plea must be rejected.

 4. The third part of the second plea

 (a) Arguments of the parties

138    By the third part of their second plea, the applicants at first instance claim in essence that the Commission infringed Article
87(1) EC by not considering that the selective advantage for offshore companies was justified by the nature and general scheme
of the system.

139    According to those parties, the features of the proposed tax reform are the result of a necessarily small tax administration
in Gibraltar and of Gibraltar’s small tax base which imposes limitations that are unavoidable and inherent in the functioning
and effectiveness of Gibraltar’s tax system.

140    The use of employment and business property occupation as bases of assessment is the logical choice in the light of Gibraltar’s
specific circumstances since such a tax regime will create a simple, easily‐verified tax which is cheap to collect and which
is similar to other taxes which the small Gibraltar tax administration has experience in collecting. The Government of Gibraltar
also argues that as a consequence of the proposed tax reform all trading companies will be taxed. The fact that non-trading
companies, which merely hold assets, will not be taxed corresponds to the norm for tax systems.

141    According to the Commission, supported by the Kingdom of Spain, the selective advantages enjoyed by offshore companies cannot
be justified by the nature or general scheme of the proposed tax reform, since that reform consists, by its very nature, in
the creation of a system which, de facto, introduces different rates of taxation for different types of undertakings.

142    Although the proposed tax reform may represent a reasonable strategic choice by the Government of Gibraltar, it is none the
less selective. Furthermore, the applicants at first instance do not explain to what extent it is necessary, in order to avoid
the over-taxation of many small undertakings, to tax some of those undertakings and not others, without taking into account
the ability of such undertakings to pay tax. Nor can the argument that the Government of Gibraltar needed to have a simple
tax that could be verified effectively justify a large number of companies in Gibraltar being exempt from tax.

 (b) Findings of the Court

143    In assessing the third part of the second plea put forward by the applicants at first instance, it is important to note that
the contested decision does not deal with the question whether the advantage enjoyed by offshore companies might be justified
by the nature and general scheme of the tax system.

144    Thus, it must be considered whether the Commission should have adopted a position, in the contested decision, on whether the
selective advantage enjoyed by offshore companies might be justified by the nature and general scheme of the tax system.

145    According to well-established case-law, the concept of State aid does not refer to State measures which differentiate between
undertakings and which are, therefore, prima facie selective where that differentiation arises from the nature or the general
scheme of the system of which they form part (see, to that effect, inter alia, *Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke*, paragraph 42; *Portugal* v *Commission*, paragraph 52; and *British Aggregates* v *Commission*, paragraph 83).

146    It is for the Member State which has introduced such a differentiation between undertakings in relation to charges to show
that it is actually justified by the nature and general scheme of the system in question (Case C‐159/01 *Netherlands* v *Commission* [2004] ECR I‐4461, paragraph 43, and *Commission* v *Netherlands*, paragraph 77).

147    A Member State which seeks to be allowed to grant aid by way of derogation from the Treaty rules has a duty to collaborate
with the Commission. In pursuance of that duty, it must in particular provide all the information necessary to enable the
Commission to verify that the conditions for the derogation sought are fulfilled (see Case C‐364/90 *Italy* v *Commission* [1993] ECR I‐2097, paragraph 20, and Case C‐372/97 *Italy* v *Commission* [2004] ECR I‐3679, paragraph 81).

148    Lastly, it should be noted that the Commission is required, in the interests of sound administration of the rules relating
to State aid, to conduct a diligent and impartial examination of the evidence at its disposal (see, inter alia, Case C‐367/95
P *Commission* v *Sytraval and Brink’s France* [1998] ECR I‐1719, paragraph 62).

149    It should be pointed out in that regard, first, that the United Kingdom did not, either in the notification of the proposed
tax reform or at the stage of its formal investigation, adduce any justification for the selective advantages enjoyed by offshore
companies. It is common ground that when the proposed tax reform was formally investigated the United Kingdom did not adopt
a position on the Kingdom of Spain’s arguments concerning those advantages.

150    Secondly, nor did the applicants at first instance claim in their actions before the General Court that the Commission had
at its disposal evidence on the basis of which it should have examined, in the contested decision, possible justification
for the selective advantage enjoyed by offshore companies.

151    Hence, it must be concluded that there was no reason for the Commission to examine whether the selective advantages enjoyed
by offshore companies might be justified by the nature and general scheme of the tax system, so the Commission cannot be criticised
for not having addressed that point in the contested decision.

152    In those circumstances, it is necessary to reject the argument put forward by the applicants at first instance that the Commission
infringed Article 87(1) EC by not considering that the selective advantage for offshore companies was justified by the nature
and general scheme of the system.

153    Accordingly, the third part of the second plea must be rejected.

154    In the light of all of the foregoing, the whole of the second plea and also the second part of the third plea, put forward
by the Government of Gibraltar, must be rejected.

 B*– The United Kingdom’s third plea and the first part of the Government of Gibraltar’s third plea, alleging breach of the
rights of the defence*

155    The United Kingdom and the Government of Gibraltar, the former in its third plea, and the latter in the first part of its
third plea, raised before the General Court against the contested decision, claim a breach of their rights of defence.

 1. Arguments of the parties

156    The Government of Gibraltar and the United Kingdom claim that the Commission infringed their rights of defence in that it
raised for the first time in the contested decision the issue of material selectivity from the viewpoint of the allegedly
favourable treatment of offshore companies, that issue being different in nature from those examined during the preliminary
assessment made in the decision to initiate the formal procedure.

157    In carrying out an investigation of State aid, the Commission must take account of the legitimate expectations which the parties
concerned may entertain as a result of what was said in the decision to initiate the formal procedure, meaning that it will
not base its final decision on considerations in regard to which, in the light of those indications, the parties concerned
would not have considered that they must express a view. In that regard, the applicants at first instance refer inter alia
to Case T‐6/99 *ESF Elbe-Stahlwerke Feralpi* v *Commission* [2001] ECR II‐1523, paragraph 126, and to Case T‐176/01 *Ferriere Nord* v *Commission* [2004] ECR II‐3931, paragraph 88.

158    Neither the question addressed to the United Kingdom in paragraph 60(f) of that decision, concerning companies that make no
profit or have no employees, nor the fact that the Kingdom of Spain referred to the offshore sector in its observations lodged
following the decision to initiate the formal procedure gave the Government of Gibraltar or the United Kingdom reason to suppose
that the Commission would also examine material selectivity from the viewpoint of the treatment of offshore companies.

159    First, that question was not related to the detailed analysis of the proposed tax reform contained in paragraphs 2 to 59 of
the decision to initiate the formal procedure. Secondly, the Kingdom of Spain’s observations were of a purely formal nature
and the Commission at no time intimated that it regarded that factor as relevant for its investigation.

160    If the Commission had duly drawn their attention to the aspect of the tax treatment of offshore companies, the outcome of
the investigation procedure could have been different.

161    The Commission, supported by the Kingdom of Spain, considers that the rights of defence of the Government of Gibraltar and
of the United Kingdom were not infringed.

162    Its principal submission is that the question of the selective nature of the taxation of offshore companies was raised both
in paragraph 60(f) of the decision to initiate the formal procedure and by the Kingdom of Spain in its observations in connection
with the formal investigation procedure, upon which the Government of Gibraltar and the United Kingdom had the opportunity
to express their views.

163    The Commission’s alternative submission is that the outcome of the procedure would not have been different even if the rights
of defence of the Government of Gibraltar and of the United Kingdom had been infringed.

 2. Findings of the Court

164    It is appropriate to consider first of all whether the United Kingdom’s rights of defence were infringed.

165    According to established case-law, observance of the rights of the defence, during the formal investigation procedure under
Article 88(2) EC, requires the Member State concerned to be placed in a position in which it may effectively make known its
views on the truth and relevance of the facts and circumstances alleged and on the documents obtained by the Commission to
support its claim that there has been infringement of European Union law (see, to that effect, Case 40/85 *Belgium* v *Commission* [1986] ECR 2321, paragraph 28, and Case 234/84 *Belgium* v *Commission* [1986] ECR 2263, paragraph 27), as well as on the observations submitted by interested third parties in accordance with Article
88(2) EC. In so far as the Member State has not been afforded the opportunity to comment on those observations, the Commission
may not use them in its decision against that State (see Case C‐301/87 *France* v *Commission* [1990] ECR I‐307, paragraph 30; Case C‐142/87 *Belgium* v *Commission* [1990] ECR I‐959, paragraph 47; and Case C‐288/96 *Germany* v *Commission* [2000] ECR I‐8237, paragraph 100).

166    In that regard, it is common ground in the present case that the United Kingdom did have the opportunity to make known its
views on the truth and relevance of the facts and circumstances alleged and on the observations submitted by interested third
parties, such as, here, those of the Kingdom of Spain, and so the obligations under the case-law cited in the preceding paragraph
were met.

167    In so far as the United Kingdom contends that it was not able to make known its views effectively since, first, the preliminary
assessment included in the decision to initiate the formal procedure did not contain any considerations with regard to offshore
companies and, secondly, the Commission did not, in its discussions with the Government of Gibraltar and the United Kingdom
during the formal investigation procedure, state that it considered that offshore companies enjoyed selective advantages,
its arguments cannot succeed.

168    With regard, first, to the fact that the preliminary assessment did not contain any considerations with regard to offshore
companies, it should be noted that it is true that the Commission is required to express its doubts clearly as to the compatibility
of the aid when it initiates a formal investigation procedure, in order to allow the Member State and other parties concerned
to respond as fully as possible (judgment of 8 May 2008 in Case C‐49/05 P *Ferriere Nord* v *Commission*, paragraph 92).

169    However, the mere fact that the preliminary assessment of the proposed tax reform notified did not contain any considerations
with regard to offshore companies cannot constitute a factor capable of giving rise to a legitimate expectation on the part
of the United Kingdom that the Commission would limit its investigation solely to the aspects considered in those preliminary
assessments. Similarly, nor does that fact mean that the Commission failed to meet its obligation to express its doubts clearly.

170    First of all, paragraph 60(f) of the decision to initiate the formal procedure contained questions relating specifically to
that sector even though the word ‘offshore’ was not used.

171    Consequently, the United Kingdom was given sufficient warning, in the actual decision to initiate the procedure, that the
detailed investigation during the formal procedure for investigation of the proposed tax reform might also relate to sectors
which escape taxation by having no employees and not requiring the occupation of property.

172    Also, the assessment which is included, in accordance with Article 6(1) of Regulation No 659/1999, in the decision to initiate
the formal procedure is, as the wording of that provision makes clear, only a ‘preliminary assessment’, marking the start
of the formal investigation procedure and above all affording interested parties the opportunity to put forward their views
effectively.

173    In order, inter alia, to ensure the effectiveness of that opportunity, the Commission cannot be prevented, in its final decision,
at the end of the formal investigation procedure, from supplementing its ‘preliminary’ assessment by adopting the point of
view expressed by those interested parties.

174    In those circumstances, the conclusion must be drawn that the mere fact that the preliminary assessment of the proposed tax
reform notified did not contain specific considerations concerning offshore companies does not lead to a breach of the United
Kingdom’s rights of defence.

175    Secondly, contrary to the United Kingdom’s contention, the Kingdom of Spain’s observations during the formal investigation
procedure do not only contain purely factual arguments, but seek specifically to demonstrate that the proposed tax reform
notified is also selective because it favours offshore companies enjoying total tax exemption.

176    The Commission submitted those observations to the United Kingdom, which set out its comments in its letter of 13 February
2003 but did not adopt a position with regard to offshore companies.

177    The United Kingdom, in contending that it was not able to put forward its views effectively because the Commission had not
intimated that it attached importance to the Kingdom of Spain’s observations, adopts a line of argument which amounts to obliging
the Commission to adopt a position, during the formal investigation procedure, on the comments received by the interested
parties.

178    The existence of such an obligation is not apparent from Regulation No 659/1999. Article 6(2) of that regulation only requires
the Commission to submit to the Member State concerned the comments received during the formal procedure, a requirement which
the Commission fully complied with in the present case.

179    In the light of the above, the United Kingdom’s third plea, alleging infringement of its rights of defence, must be rejected,
and there is no need to consider whether, had it not been for the irregularity alleged, the outcome of the procedure might
have been different, which is a condition to be met in order for an infringement of the rights of the defence to result in
annulment of the contested decision (see *France* v *Commission*, paragraph 31; Case C-142/87 *Belgium* v *Commission*, paragraph 48; and Case C-288/96 *Germany* v *Commission*, paragraph 101).

180    With regard to the rights of defence of the Government of Gibraltar, it should be noted first of all that the latter had the
opportunity to submit comments to the Commission, and that it took that opportunity. Since the Government of Gibraltar puts
forward in essence the same arguments as the United Kingdom, it is sufficient to note that the latter’s rights of defence
have not been infringed and so the same applies with regard to those of the Government of Gibraltar. The procedural rights
of the Government of Gibraltar are, in any event, less extensive than those of the United Kingdom as the Member State concerned
in the formal investigation procedure, in accordance with Article 88(2) EC.

181    In that regard, it is clear from the case-law of the Court that interested parties other than the Member State concerned,
such as in the present case the Government of Gibraltar, have, in the procedure for reviewing State aid, only the opportunity
to send to the Commission all information intended for the guidance of the latter with regard to its future action and they
cannot themselves seek to engage in an adversarial debate with the Commission in the same way as is offered to that Member
State (see *Commission* v *Sytraval and Brink’s France*, paragraph 59, and Joined Cases C‐74/00 P and C‐75/00 P *Falck and Acciaierie di Bolzano* v *Commission* [2002] ECR I‐7869, paragraphs 80 and 82).

182    In the light of all of the foregoing, the United Kingdom’s third plea and the first part of the Government of Gibraltar’s
third plea must be rejected as unfounded.

 C*– The first plea, relating to regional selectivity*

183    The applicants at first instance claim, in their first plea, that the contested decision infringed Article 87(1) EC in that
it concluded that the proposed tax reform was regionally selective.

184    In that regard, it is clear from paragraphs 86 to 108 above that the proposed tax reform is materially selective in that it
confers selective advantages on offshore companies.

185    That finding is sufficient in itself to substantiate the operative part of the contested decision, which states that the proposed
tax reform constitutes a scheme of State aid within the meaning of Article 87(1) EC which the United Kingdom is not authorised
to implement.

186    In those circumstances, as the applicants’ first plea, relating to regional selectivity, does not call into question the existence
of material selective advantages, it cannot form grounds for even partial annulment of the contested decision (see, by analogy,
the order of the President of the Court in Case C‐159/98 P(R) *Netherlands Antilles* v *Council* [1998] ECR I‐4147, paragraph 111).

187    Thus, the conclusion must be drawn that the first plea, even supposing it were founded, cannot result in annulment of the
contested decision and is therefore ineffective.

188    In the light of all the foregoing, the actions brought by the Government of Gibraltar and the United Kingdom must be dismissed
in their entirety.

VIII –  **Costs**

189    Under the first paragraph of Article 122 of the Rules of Procedure, where the appeal is well founded and the Court itself
gives final judgment in the case, the Court shall make a decision as to costs. Article 69 of the Rules of Procedure, applicable
to appeal proceedings by virtue of Article 118 thereof, provides in paragraph 2 that the unsuccessful party is to be ordered
to pay the costs if they have been applied for in the successful party’s pleadings. The first subparagraph of Article 69(4)
provides that the Member States which intervene in the proceedings are to bear their own costs.

190    Since the appeals of the Commission and of the Kingdom of Spain have been upheld and the actions of the Government of Gibraltar
and of the United Kingdom against the contested decision have been dismissed, the Government of Gibraltar and the United Kingdom
must be ordered, in accordance with the forms of order sought by the Commission and the Kingdom of Spain, to bear, in addition
to their own costs, the costs incurred by the Commission and the Kingdom of Spain on appeal and by the Commission at first
instance.

191    The Kingdom of Spain and Ireland as interveners before the General Court and the Court of Justice, respectively, must each
bear their own costs.

On those grounds, the Court (Grand Chamber) hereby:

1.      **Sets aside the judgment of the Court of First Instance of the European Communities of 18 December 2008 in Joined Cases T-211/04
and T‐215/04 *Government of Gibraltar and United Kingdom* v *Commission*;**

2.      **Dismisses the action brought by the Government of Gibraltar and the action brought by the United Kingdom of Great Britain
and Northern Ireland;**

3.      **Orders the Government of Gibraltar and the United Kingdom of Great Britain and Northern Ireland to bear, in addition to their
own costs, the costs incurred by the European Commission and the Kingdom of Spain on appeal and by the European Commission
at first instance;**

4.      **Orders the Kingdom of Spain and Ireland as interveners before the Court of First Instance of the European Communities and
before the Court of Justice of the European Union, respectively, to bear their own costs.**

[Signatures]

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[\*](#Footref*) Language of the case: English.