State aid - United Kingdom

Aid C 66/2002 (ex N 534/2002) - Gibraltar government corporation tax reform

Invitation to submit comments pursuant to Article 88(2) of the EC Treaty

(2002/C 300/02)

(Text with EEA relevance)

By means of the letter dated 16 October 2002, reproduced in the authentic language on the pages following this summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty concerning the abovementioned aid.

Interested parties may submit their comments within one month of the date of publication of this summary and the following letter, to: European Commission Directorate-General for Competition

State Aid Registry

B - 1049 Brussels Fax (32-2) 296 12 42

These comments will be communicated to the United Kingdom. Confidential treatment of the identity of the interested party submitting the comments may be requested in writing, stating the reasons for the request.

SUMMARY

Description

The proposed reform is set out in the following draft Gibraltar legislation:

- the Companies (Payroll Tax) Ordinance,

- the Companies (Annual Registration Fee) Ordinance,

- the Rates Ordinance,

- the Companies (Taxation of Designated Activities) Ordinance.

In addition, the Companies Taxation and Concessions Ordinance (the exempt company legislation) and the Income Tax (Qualifying Companies) Regulations (the qualifying company legislation) will be repealed. The income tax ordinance will be amended to repeal or duly amend all provisions which charge companies to income tax.

The essential feature of the reform is the abolition of taxation of company profits. The general system of taxation will become a payroll tax, a business property occupation tax and an annual company registration fee. In addition, the financial services and utilities sectors will be subject to top-up or penalty taxation on their profits.

Companies will be subject to a payroll tax of GBP 3000 per employee per annum and a business property occupation tax (BPOT) in addition to property rates at 100 % of the liability to property rates. The total liability for tax (payroll + BPOT) will be capped at 15 % of profits or GBP 500000, whichever is the lower. If a company makes no profit, it will have no tax liability.

In addition to the payroll and property taxes, financial services companies will be charged a top-up tax at a rate of 8 % of profits from financial service activities. Total taxation (payroll + BPOT + top-up) will be capped at 15 % of profit or GBP 500000 as under the "general" system. In addition to the payroll tax and BPOT, utility companies (telecoms, water, sewage, electricity, petroleum) will be charged a top-up tax at the rate of 35 % of profits from the provision of utilities services. The payroll tax and BPOT are deducted from the liability for top-up tax so that utilities are taxed at a flat rate of 35 % of profits. Capital gains are not treated as profit.

Assessment

The reform appears to constitute aid as it appears to fulfil the four relevant criteria.

First, the measure must afford the beneficiaries an advantage that reduces the costs they normally bear in the course of their business. According to point 9 of the Commission notice on the application of the State aid rules to measures relating to direct business taxation(1) ("the notice"), the tax advantage may be granted through different types of reduction in the company's burden and, in particular, through a reduction in the amount of tax.

The requirement to make a profit before any payroll/property tax is incurred would apear to depart from the logic of a payroll tax system and may give an advantage to Gibraltar companies that make no profit by relieving them of the payroll tax and BPOT that they would otherwise have to pay.

The caps on the liability for payroll tax and BPOT will confer an advantage on those Gibraltar companies that benefit from them by limiting their tax liability. The 15 % cap is most likely to apply to labour intensive companies or those with low profitability. The GBP 500000 cap will tend to apply to large companies.

The whole of the Gibraltar economy (except utility companies) seems to be granted an advantage compared with companies in the UK as a whole. The main rate of corporation tax in the UK is 30 % of profits, whilst under the reform, the maximum rate of taxation is 15 %. In addition, capital gains are not included in any calculation of profit in Gibraltar.

Second, the advantage must be granted by the State or through State resources. The grant of a tax reduction involves a loss of tax revenue which, according to point 10 of the notice, is equivalent to the use of state resources in the form of fiscal expenditure.

Third, the measure must affect competition and trade between Member States. This criterion seems to be fulfilled by the reform to the extent that Gibraltar is an open, market economy and that enterprises in Gibraltar are able, actually or potentially, to trade with companies located in other Member States.

Finally, the measure must be specific or selective in that it favours "certain undertakings or the production of certain goods". To the extent that only certain companies will benefit from the limitations on the applicability of the payroll tax and BPOT, the reform would appear to be selective within Gibraltar. The reform is also regionally selective in that it applies only in Gibraltar and not to the UK as a whole.

For these reasons, the reform seems to constitute operating aid and does not appear to fall within any of the exceptions laid down in Article 87(2) and (3) of the EC Treaty. Therefore, in the context of its preliminary assessment under Article 6 of Council Regulation (EC) N° 659/1999 laying down detailed rules for the application of Article 93 (now Article 88) of the EC Treaty(2), the Commission has doubts as regards the compatibility of the reform.

TEXT OF THE LETTER

"The Commission wishes to inform the United Kingdom that, having examined the information supplied by your authorities on the measure referred to above, it has decided to initiate the procedure laid down in Article 88(2) of the EC Treaty.

PROCEDURE

(1) By letter dated 12 August 2002, registered on 19 August, the United Kingdom notified pursuant to Article 88(3) EC the Gibraltar government corporation tax reform (hereinafter the reform).

BACKGROUND

(2) Gibraltar forms part of the European Union by virtue of Article 299(4) EC. The Act of Accession to the European Communities of the United Kingdom does not provide any exclusion as to the applicability to Gibraltar of the relevant provisions on State aid.

(3) According to the practice which has been established under the Gibraltar Constitution Order 1969 and the Despatch of the Foreign and Commonwealth Office dated 23 May 1969, the Gibraltar Government is competent to draft and propose to the legislature and to enforce within Gibraltar legislation in respect of company taxation matters. The United Kingdom has explained that the Gibraltar Government is also required to generate sufficient revenue through taxation to finance its expenditure autonomously.

DETAILED DESCRIPTION OF THE MEASURE

Objective the reform

(4) The stated aim of the reform is to adopt a new general corporate tax scheme that does not involve any element of State aid, to provide legal certainty for companies active in Gibraltar and to ensure sufficient revenue for the Gibraltar Government from company taxation. The reform is also intended to deliver compliance with the EU Code of conduct for business taxation and with the OECD Report on harmful tax competition. An essential element of the reform is the general abolition of taxation on company profits, with the exception of top-up taxes on utilities and financial services activities. The reform proposals are based on the complete elimination of all discrimination between resident and non-resident, or domestic and non-domestic economic activity, i.e. the elimination of so-called ring-fencing provisions. The exempt and qualifying companies legislation will be abolished.

(5) The general tax system to be introduced under the reform will be a payroll tax, a business property occupation tax and a registration fee, applicable to all Gibraltar companies. The Gibraltar Government estimates that its current very limited but essential income from corporate taxes of GBP 13,7 million (about EUR 22 million), representing 9,25 % of total Government revenue, will be largely maintained under the new system based on these three general taxes applicable to all Gibraltar companies. This compares with personal income tax of GBP 53,6 million (about EUR 85 million) representing 36,3 % of revenue. Income from top-up taxes on financial services and utilities activities will be limited, but will likely make up any shortfall in corporate tax revenue under the general system.

Implementation

(6) The reform will be implemented through:

- the Companies (Payroll Tax) Ordinance,

- the Companies (Annual Registration Fee) Ordinance,

- the Rates Ordinance,

- the Companies (Taxation of Designated Activities) Ordinance.

(7) The legislation will be implemented by the Gibraltar Government after it is passed by Gibraltar's parliament (the House of Assembly). As part of the reform, the Companies Taxation and Concessions Ordinance (the exempt company legislation) and the Income Tax (Qualifying Companies) Regulations (the qualifying company legislation) will be repealed with immediate effect. The income tax ordinance will be amended to repeal or duly amend all provisions which charge companies to income tax.

(8) The rules will be administered by the Gibraltar Commissioner for Income Tax. All companies in Gibraltar will be required to file public accounts with the Companies Registry in accordance with the fourth and seventh EC Company Law Directives. All companies in Gibraltar with a tax liability will be required to file tax accounts with the Commissioner and stringent measures will also be introduced in order to ensure compliance with such obligations. For the first time in Gibraltar, a tribunal to deal specifically with company taxation matters (to be called the Companies Taxation of Designated Activities Tribunal) will be set up whose purpose will be to exercise such powers relating to appeals and other matters arising from the operation of the new legislation. Such powers will include the power to require a company to make available for inspection by the Tribunal all such books, accounts, employment records or other documents which, in the opinion of the Tribunal, contain or may contain information relating to the subject matter of the proceedings.

Payroll tax

(9) Profits-based taxation will be replaced by a general payroll tax pursuant to which all Gibraltar companies will be liable in the amount of GBP 3000 per employee each year. Liability to payroll tax together with business property occupation tax will be capped at 15 % of profits or GBP 500000, whichever is the lower. Thus, companies will only pay payroll tax if they make profit, but in an amount not exceeding 15 % of profits and not exceeding GBP500000 in any event.

(10) The vast majority of companies in Gibraltar will be subject to the payroll tax only. According to Gibraltar Government estimates, not more than 10 of the current companies in Gibraltar will accrue an estimated payroll tax liability of in excess of 15 % of profits and, as a result of the cap, pay tax at a rate corresponding to 15 % of profits. Every 'employer' in Gibraltar will be required to pay payroll tax for the total number of its full-time and part-time 'employees' who are 'employed in Gibraltar'. The central terms used will be defined as follows:

- 'employer' is any company incorporated or registered under any law in force in Gibraltar paying emoluments on its own account or making payments to any person in respect of service or services provided by an individual who is deemed to be an employee,

- 'employee' is any individual to whom emoluments are paid or are payable including directors other than directors who exercise no function other than that of a director and part-time and casual labour,

- 'employed in Gibraltar' means any employee employed in Gibraltar who works in or from Gibraltar or is based in Gibraltar.

(11) The Gibraltar Government will introduce detailed anti-avoidance rules intended to eliminate all possibility for abuse. This will include introducing the concept of 'deemed employee' and rules targeted at employees who may be carrying out an activity outside Gibraltar. The combined effect of the meaning of the terms 'employees' and 'employed in Gibraltar' will be to cover, essentially, all employees physically present in Gibraltar.

(12) According to the United Kingdom, of a total of 14000 employees in Gibraltar, 10100 are employed by the private sector. At first sight, it would seem that a payroll tax charge of GBP 3000 per annum on each private sector employee would yield tax revenue of approximately GBP 30 million. This figure, which excludes any estimate of top-up tax, business property occupation tax and registration fees, is more than double the current corporation tax yield of about GBP 14 million.

Business Property Occupation Tax

(13) All companies occupying property in Gibraltar for business purposes will pay a business property occupation tax at a rate equivalent to a percentage of their liability to the general rates charged on property in Gibraltar (currently expected to be a rate of 100 %).

Registration fee

(14) The Gibraltar Government will replace the fees currently paid by companies in Gibraltar (of an amount of approximately GBP 40 per annum) with a registration fee applicable to all Gibraltar companies of GBP 150 per annum for companies not intended to generate income and of GBP 300 per annum for companies intended to generate income.

Taxation of designated activities ('top-up' or 'penalty taxes')

(15) Certain designated activities, namely financial services and utilities, will be subject to an additional top-up or penalty tax on profits generated by such activities. The respective top-up taxes will apply only to profits that can be allocated to such designated activity. The United Kingdom estimates that of approximately 29000 companies in Gibraltar, 179 will be liable to the top-up tax on financial services activities, whilst 23 will be liable to the top-up tax on utilities activities.

(16) The definition of 'financial services' company includes, inter alia:

- credit institution,

- moneylender,

- investment firm, dealer, broker, adviser or manager,

- life assurance and collective investment scheme intermediary,

- collective investment scheme operator or trustee,

- insurance broker, agent or manager,

- professional trustee,

- company manager,

- bureau de change,

- auditor.

The definition of financial services also includes companies that advise or provide services in respect of finance, law, tax or accounting.

(17) The definition of 'utilities' activities encompasses the provision of services, equipment or premises for:

- telecommunications (voice telephony, fax communications, data communications and transmissions, callback and call through services),

- electricity (generation, distribution and supply),

- water (production, import/export, supply of either potable or salt water),

- sewage (provision, operation, management, maintenance, repair, replacement, modification, renovation, replacement, renewal of sewers and disposal/treatment of sewage),

- petroleum (collection, production, import/export, treatment improvement, pumping, storage, distribution and supply of fuel oil).

(18) Financial services companies will, in addition to the payroll and property taxes, be charged a top-up tax on profits from financial services activities at the rate of 8 % of profit (calculated in accordance with internationally accepted accounting standards). Financial services companies will have their annual liability to payroll tax, business property occupation tax and top-up tax capped, in aggregate, at 15 % of profit or GBP 500000, whichever is the lower.

(19) Utility companies, in addition to the payroll and property taxes, will be charged a top-up tax on profits from utility activities at the rate of 35 % of profit (calculated in accordance with internationally accepted accounting standards). Such companies will be permitted to deduct payroll tax and business property occupation tax from their liability to top-up tax, and will thus always pay a tax equal to 35 % of profits.

(20) Liability to the top-up taxes will be determined on the basis of the relevant activities. The same rules will apply to financial services and to utilities activities. Accordingly, for 'hybrid' companies:

- a company engaged in a utilities activity and in a general activity will have the profits it derives from its utilities activity taxed at 35 %,

- a company engaged in a financial services activity and in a general activity will have the profits it derives from its financial services activity taxed at 8 %,

- a company engaged in a utilities activity and in a financial services activity will have the profits it derives from its utilities activity taxed at 35 % and the profits from its financial services activity taxed at 8 %.

(21) The same distinction will be made in respect of unearned profits, notably, any profits made by a hybrid company from any rents, royalties, premiums, any other profits arising from real property in Gibraltar, dividends, interests or discounts. Such unearned profits will be taxed at the 8 % or 35 % top-up rate to the proportion which the profits and gains from the financial services or utilities activities bears to the whole of the trading profits or gains made by the company.

Other features of the reform

(22) Under the Rates Ordinance, certain premises are exempt. These exempt premises include courts of justice, churches, cemeteries, public gardens, uninhabitable military defences, civil defence premises, lighthouses and the Gibraltar Museum. Also exempt from rates are 'all premises on the Upper Rock of Gibraltar within the area of land coloured red on the plan deposited in the offices of the government'. Such premises will consequently be exempt from the additional rate, the business property occupation tax. The Gibraltar authorities may also reduce or remit the payment of any general rate where it 'is in the interests of the development of Gibraltar'.

(23) Both the Companies (Payroll Tax) Ordinance and the Companies (Taxation of Designated Activities) Ordinance lay down rules for the calculation of profits or gains. These rules are necessary for the application of the cap of 15 % of profits on the liability for payroll tax and for the purposes of determining the liability to the top-up tax on financial services and activities. Profits are computed in accordance with accounting standards in the United Kingdom as modified for use in Gibraltar by the Gibraltar Society of Chartered and Certified Accountancy Bodies.

(24) Certain classes of income are exempt for the purposes of determining profits. These include:

- any interest received by any chargeable company in respect of any loan made by it to any person for the purpose of financing investment in development projects designed to promote the economic and social development of Gibraltar, where the terms and conditions of such loan have been approved for this purpose, in writing, by the Gibraltar authorities,

- the interest payable on any loan charged on the Consolidated Fund (i.e. Gibraltar Government finances) from the date and to the extent specified by an approval granted by the Gibraltar authorities.

(25) For the purposes of determining profits, capital gains and capital losses are excluded.

(26) For the purposes of determining profits, the following capital allowances, inter alia, are deductible:

- in respect of entertainment centres, mills, factories and other premises, 4 % per annum,

- in respect of plant and machinery, up to GBP 30000 for the first year in which the expenditure is made (up to GBP 50000 for computer equipment), and 331/3 % of the remainder in subsequent years.

ASSESSMENT OF THE SCHEME

(27) In order to be considered to be State aid within the meaning of Article 87(1) EC, a measure must satisfy the four following criteria. First, the measure must afford the beneficiaries an advantage that reduces the costs they normally bear in the course of their business. Second, the advantage must be granted by the State or through State resources. Third, the measure must affect competition and trade between Member States. Finally, the measure must be specific or selective in that it favours certain undertakings or the production of certain goods.

Advantage

(28) According to point 9 of the Commission notice on the application of the State aid rules to measures relating to direct business taxation(3) (hereinafter 'the notice'), the tax advantage may be granted through different types of reduction in the company's burden.

(29) The United Kingdom states that an essential element of the reform is the general abolition of taxation on company profits, with the exception of top-up taxes on financial services and utilities. The general system of company taxation in Gibraltar will be a payroll tax, a business property occupation tax and a registration fee. This general system is the starting point of the Commission's analysis.

(30) The Commission observes that under both the payroll tax and the business property occupation tax (hereinafter BPOT), the operative event for incurring a liability for the tax is profit. The payroll and the occupation of business premises therefore become secondary factors in determining whether a company is liable for company taxation. In this respect, the Commission would draw parallels with, for example, social security systems or conventional business property rating systems. Under such systems, the social security contributions and business property rates must normally be paid regardless of the degree of profitability of the enterprise: they are unavoidable business expenses. Under the Gibraltar system, companies which make no profits have no liability for payroll tax or BPOT. Within the logic of taxes on payroll and business property taxes, this would seem to confer an advantage on unprofitable companies compared with profitable enterprises.

(31) Under a pure payroll tax system, the greater the number of employees, the greater the liability for tax. Similarly, under a pure business property taxation system, the larger the rateable value of the business premises, the larger the tax liability. However, the Gibraltar system limits the combined liability for payroll tax and BPOT to 15 % of profits or GBP 500000, whichever is the smaller. The operation of the caps would appear to confer an advantage on those enterprises to which they apply compared with the generality of companies in Gibraltar by reducing the amount of payroll tax and BPOT they are liable to pay. The 15 % cap would appear to be likely to favour labour intensive companies or those with low profitability, whilst the GBP 500000 cap would appear likely to favour large or highly profitable enterprises.

(32) The exemption from rates of certain properties on the Upper Rock of Gibraltar would appear to confer an advantage on enterprises occupying such premises by removing the liability to both normal business rates and the BPOT. The same would appear to apply in respect of companies whose rates are reduced or remitted in the interests of the development of Gibraltar.

(33) The two provisions exempting interest on certain loans from the calculation of profits for the purposes of the 15 % cap and the top-up taxes (loans financing investment in the development of Gibraltar and loans to the Consolidated Fund would appear to confer an advantage on certain enterprises. To the extent that companies making such loans benefit from the 15 % cap or incur top-up taxes, the exemptions would appear to reduce their tax liability.

(34) Finally, the Commission notes that several features of the notified scheme, which will be analysed under 'regional specificity' in paragraphs 45-51 below, will result in a lower tax burden for companies in Gibraltar when compared with other companies in the United Kingdom. Such differences are also capable of constituting an advantage for companies in Gibraltar.

State resources

(35) The grant of a tax reduction involves a loss of tax revenue which, according to point 10 of the notice, is equivalent to the use of State resources in the form of fiscal expenditure. As confirmed by the Court of Justice, this principle also applies to aid granted by regional or local bodies of Member States(4). To the extent that the advantages outlined in paragraphs 28-34 above reduce the tax burden on the individual companies concerned, they are granted through State resources, that is the resources of the Government of Gibraltar.

Impact on competition and trade between Member States

(36) Gibraltar is an open, market economy. Many of the companies established in Gibraltar (and the groups to which they belong) are likely to be active in sectors where there is trade between Member States. The Court of Justice has repeatedly ruled that when aid granted by the State strengthens the position of an undertaking vis-à-vis other undertakings competing in intra-Community trade, the latter must be regarded as affected by that aid. For that purpose, it is not necessary for the recipient undertaking itself to export its products. Where a Member State grants aid to an undertaking, domestic production may for that reason be maintained or increased with the result that undertakings established in other Member States have less chance of exporting their products to the market in that Member State. Similarly, where a Member State grants aid to undertakings operating in the service and distribution industries, it is not necessary for the recipient undertakings themselves to carry on their business outside the Member State for the aid to have an effect on Community trade, especially in the case of undertakings established close to the frontier between two Member States. The relatively small amount of aid, or the relatively small size of the undertaking which receives it, does not as such exclude the possibility that intra-Community trade might be affected(5). Therefore to the extent that Gibraltar companies benefiting from the advantages described in paragraphs 28-34 operate in sectors where intra-Community trade takes place, it would appear that the aid affects trade between Member States and that there would be distortion, or the threat of distortion, of competition.

Material selectivity

(37) All the advantages described in paragraphs 28-33 appear to be materially selective in so far as only certain companies benefit from them.

(38) In a system of payroll and business property taxes, the requirement to make a profit before incurring a tax liability would appear self-evidently to grant an advantage to those companies that make no profit. In addition to enterprises in difficulty, in any particular year such companies might include, for example, enterprises operating in cyclical business environments, enterprises in the initial stage of their business and companies where profits are eliminated through additional payments to shareholder-employees or to other employees.

(39) Similarly, the 15 % and GBP 500000 caps on the liability to payroll tax and BPOT, although generally applicable, seem to be de facto selective in that their very nature would seem to restrict their applicability to a narrow group of companies. By their own admission, the United Kingdom and Gibraltar estimate that only 10 companies out of some 29000 in Gibraltar will benefit from the 15 % cap. As mentioned in paragraph 31 above, labour intensive businesses or companies with low profitability seem likely to benefit from the 15 % cap whilst large and highly profitable companies seem likely to benefit from the GBP 500000 cap. It should also be noted that the caps do not apply to the utilities sector.

(40) The United Kingdom states that the 15 % cap is intended to prevent the payroll tax from becoming regressive in nature. However, within the system that Gibraltar has chosen (where labour is the factor of production bearing the principal burden of company taxation), this 15 % cap itself appears to introduce an element of regressivity: beyond a certain amount of tax, measured relative to profits, liability for tax ceases even if the taxable event, the payroll, would otherwise generate a further tax liability.

(41) The United Kingdom argues that the GBP 500000 cap is not selective since all companies have the potential to make sufficiently large profits to benefit. Whilst theoretically true, it is manifestly self-evident that in a competitive market economy large companies are most likely to benefit. Small companies are unlikely to have the human, capital and other resources to generate profits on this scale.

(42) The exemption from business rates and BPOT for certain premises on the Upper Rock is very restricted in its application and therefore seems clearly selective.

(43) The exemptions of interest on loans for the development of Gibraltar and to the Consolidated Fund are measures with a very narrow scope and require the discretionary approval of the Gibraltar authorities. They therefore seem clearly selective.

(44) Finally, at this stage, none of these selective features seems to be justified by the nature or general scheme of the system. On the contrary, they appear to represent considerable deviations from the system of payroll and business property taxes and might result in imposing different levels of profit taxation on different kinds of undertakings in different sectors.

Regional specificity

(45) In addition, the Commission notes that there could also be a second possible aspect of specificity in that the reform applies only to companies subject to taxation in Gibraltar.

(46) Under the United Kingdom corporation tax regime the maximum rate of corporation tax is 30 %. In contrast, under the reform, the maximum rate of corporation tax for all Gibraltar companies except utility companies is 15 %.

(47) The differences between on the one hand, the United Kingdom corporation tax regime and the company taxation regime in Gibraltar as envisaged by the reform on the other hand, have the consequence that companies operating in the United Kingdom will be taxed at a maximum rate of 30 % of profits whereas companies (other than utility companies) operating in Gibraltar will be taxed at a maximum rate of 15 % of profits. This difference in tax treatment would appear to represent an advantage to companies other than utility companies established in Gibraltar compared with companies established in the United Kingdom.

(48) Further advantages may arise to companies in Gibraltar through other differences in the tax regime. The Commission notes that under the reform, capital gains are excluded from any calculation of profit. In contrast, capital gains are generally chargeable to corporation tax in the United Kingdom.

(49) Similarly, the differences in capital allowance may give rise to advantages. In contrast to the 331/3 % allowance for capital expenditure on plant and machinery, United Kingdom regime provides for an allowance of 25 % of the declining balance and has no generally applicable first year allowances.

(50) In the absence of a specific company taxation regime in Gibraltar, companies in Gibraltar would be subject to the standard United Kingdom tax regime and would pay higher rates of company taxation.

(51) This lower effective rate of taxation will strengthen the position of companies in Gibraltar and the position of the groups of companies to which enterprises in Gibraltar might belong. Gibraltar companies are able to operate, actually or potentially, in sectors where intra-Community trade takes place and to this extent it would seem that the notified scheme might affect trade between Member States and distort, or threaten to distort, competition.

Conclusions on the existence of State aid

(52) Having established, in paragraphs 28-33 above that various elements of the reform grant an advantage to certain undertakings compared with others in Gibraltar, that this advantage is financed through State resources and is likely to have an impact on intra-Community trade, the Commission concludes, at this stage, that the reform is likely to constitute State aid within the meaning of Article 87(1) EC. In accordance with the view taken in previous Commission decisions(6), the possible existence of regional selectivity contributes to these conclusions.

COMPATIBILITY

(53) As the measure appears to constitute State aid, it is therefore necessary to determine if such aid is compatible with the common market under the exceptions laid down in Article 87(2) and (3) EC.

(54) It appears that none of the exceptions under Article 87(2) EC can be applied in this case, as the reform is not aimed at the objectives listed in these provisions.

(55) Under Article 87(3)(a), an aid is considered compatible with the common market when it is designed to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment. Such areas are defined by the United Kingdom's regional aid map(7). Since Gibraltar is not such an area, this provision does not apply.

(56) As regards the exceptions laid in Article 87(3)(b) and (d), the aid in question is not intended to promote the execution of an important project of common European interest nor to remedy to a serious disturbance in the economy of the United Kingdom, nor is it intended to promote culture or heritage conservation.

(57) Lastly, it is necessary to examine if the aid can qualify for the exception laid down in Article 87(3)(c) which states that may be considered compatible an aid to facilitate the development of certain economic activities or of certain economic areas where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(58) The elements of the reform identified as giving rise to an advantage and the reform as a whole when compared with the system of company taxation in the United Kingdom relieve the enterprises concerned of charges that would normally be borne by their budgets in the normal course of their business. This relief appears not to be linked either to investment or to job creation and therefore, at this stage, seems to constitute operating aid, the benefits of which will cease as soon as it is withdrawn. According to the constant practice of the Commission, such aid cannot be considered to facilitate the development of certain economic activities or of certain economic areas. In addition, Gibraltar is not included in the regional aid map for the United Kingdom for the period 2000 to 2006, as approved by the Commission under State aid N 265/00(8).

(59) Since the reform, as aid, does not appear to qualify for any of the exceptions provided for in the Treaty, in the context of its preliminary assessment as provided by Article 6 of Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 (now Article 88) of the EC Treaty(9), the Commission has doubts about its compatibility with the common market.

CONCLUSION

(60) In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 88(2) of the EC Treaty, requests the United Kingdom to submit its comments and to provide all such information as may help to assess the measure, within one month of the date of receipt of this letter. This should include:

(a) a breakdown of the expected revenue from each separate element of the reform - payroll tax, BPOT, registration fee for companies with income, registration fee for companies without income, top-up tax on financial services, top up tax on utilities;

(b) an explanation of the relationship between the number of employees in the private sector (approximately 10000) and the expected revenue from the payroll tax;

(c) an estimate of the loss of revenue from the application of the 15 % of profits cap on the liability for payroll tax, BPOT and where appropriate, financial services top-up taxation;

(d) an estimate of the loss of revenue from the application of the GBP 500000 cap on the liability for payroll tax, BPOT and where appropriate, financial services top-up taxation and an estimate of the number of companies to benefit;

(e) an explanation of the extent to which the definitions 'chargeable corporate employer' in the Companies (Payroll Tax) Ordinance, 'chargeable company' in the Companies (Taxation of Designated Activities) Ordinance and 'company' in all four Ordinances referred to in paragraph 6 above will ensure that all business activities in Gibraltar, including those of companies not registered in Gibraltar, fall within the scope of the new tax regime;

(f) 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).

The Commission requests the United Kingdom authorities to forward a copy of this letter to the potential recipients of the aid measure immediately.

(61) The Commission wishes to remind the United Kingdom that Article 88(3) of the EC Treaty has suspensory effect, and would draw attention to Article 14 of Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient."

(1) OJ C 384, 10.12.1998, p. 3.

(2) OJ L 83, 27.3.1999, p. 1.

(3) OJ C 384, 10.12.1998, p. 3.

(4) See case 284/84 Germany v Commission [1987] ECR 4013, point 17.

(5) See cases 730/79 Philip Morris v Commission [1980] ECR 2671, 142/87 Belgium v Commission [1990] ECR I-959, joined cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994] ECR I-4103, paragraphs 40-42, and case C-310/99 Italy v Commission not yet reported, paragraphs 84-86.

(6) See, for example, Commission Decisions 2002/C 127/07 - Adaptation of the national tax system to the specific characteristics of the autonomous region of the Azores (OJ C 127, 29.5.2002, p. 16); 2001/C 309/04 - Åland Islands captive insurance (OJ C 309, 6.11.2001, p. 4); 2002/C 26/04 - Gibraltar qualifying companies (OJ C 26, 30.1.2002, p. 9); 93/337/EEC - Tax concessions for investment in the Basque country (OJ L 134, 3.6.1993, p. 25).

(7) OJ C 272, 23.9.2000, p. 43.

(8) Commission approval letter No SG(2000) D/106293 of 17 August 2000.

(9) OJ L 83, 27.3.1999, p. 1.