OPINION OF ADVOCATE GENERAL

JÄÄSKINEN

delivered on 7 April 2011 ( )

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

European Commission (C-106/09 P),

Kingdom of Spain (C-107/09 P)

v

Government of Gibraltar and United Kingdom

(Appeals – Scheme of State aid – Reform of Gibraltar corporate tax – Powers of the Member States in the field of direct taxation – Concept of advantage – Regional and material selectivity – Tax haven – Offshore companies)

I – Introduction

1. By their appeals, the European Commission 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. ( ) In that decision, the Commission took the view that the reform in question constituted an aid scheme incompatible with the common market.

2. The existence of an advantage, and of regional and material selectivity, for the purposes of Article 87(1) EC, is the core problem in the present appeals. First, it is necessary to ascertain whether a territory within the meaning of Article 299(4) EC, ( ) which does not form part of the territory of a Member State, may be used as a reference framework for the application of Article 87(1) EC. More specifically, the present case calls for an examination of the applicability to Gibraltar of the existing case-law relating to regional selectivity.

3. Second, the Court is invited to make a choice that has wider effects regarding the methodology to be used in relation to indirect measures liable to constitute State aid. It is necessary to determine what method will enable the material selectivity of an indirect measure adopted in the context of national tax rules to be appraised whilst at the same time respecting the allocation of powers between the Member States and the European Union in the field of direct taxation.

4. The Commission proposes that the Court establish a new concept of an ‘inherently discriminatory’ tax system ( ) and adopt a method of analysis departing from that set out in its Notice on the application of the State aid rules to measures relating to direct business taxation ( ) (‘the ad hoc method’).

5. The measure which, on the basis of that concept, is liable to be classified here as a selective advantage is a tax measure which applies to more than 99% of Gibraltar undertakings. ( )

6. The main issue in this case is therefore material selectivity and clarification of the concept of State aid in relation to the phenomenon of harmful tax competition.

7. In my analysis, I propose to examine regional selectivity and material selectivity successively, but I shall depart from the order in which the appellants set out their grounds of appeal.

II – The events giving rise to the dispute and the judgment under appeal

A – The Government of Gibraltar’s corporate tax reform

8. 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 reform of corporate tax which the Government of Gibraltar planned to introduce. ( )

9. The system of taxation that would be introduced by the tax reform and would apply to all companies established in Gibraltar consists of a payroll tax, a business property occupation tax (‘BPOT’) and a registration fee:

– payroll tax: all Gibraltar companies will be subject to a payroll tax of GBP 3 000 per year for every employee employed in Gibraltar;

– 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.

10. 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.

11. Certain activities, namely financial services and utilities’ activities, will be subject to a top-up tax on profits generated by them.

12. The overall taxation of financial service companies (payroll tax, BPOT and the top-up tax on profits from financial services activities at a rate of between 4% and 6% of profits) will be capped at 15% of profits. Utility companies will be charged a top-up tax on profits from their activities at the rate of 35% of profits. Such companies will be permitted to deduct payroll tax and BPOT from their liability to top-up tax. ( )

B – The contested decision

13. After examining the notification under the procedure provided for in Article 88(2) EC, the Commission took the view that the Gibraltar corporate tax reform, as notified by the United Kingdom, constituted a State aid scheme that was incompatible with the common market and therefore could not be implemented.

14. The Commission stated, in essence, in recitals 98 to 152 of the contested decision, that the reform is both regionally and materially selective. First, since the reform provides for a system of corporate taxation under which Gibraltar companies are taxed, in general, at a lower rate than those in the United Kingdom, the reform confers, in the Commission’s opinion, a selective advantage on enterprises in Gibraltar.

15. Second, the following aspects of the tax reform concerning the payroll tax and the BPOT are materially selective, according to the Commission: (i) the condition that a profit must be made before tax is levied favours companies which make no profit; (ii) the cap limiting tax liability to 15% of profits favours companies which, for the tax year in question, have profits that are low in relation to their number of employees and occupation of business property; (iii) the payroll tax and the BPOT inherently favour companies which have no real physical presence in Gibraltar and, as a result, do not incur corporate tax.

16. Finally, the Commission concluded that the grant of the tax exemptions and reductions mentioned above involved a loss of tax revenue equivalent to the use of State resources in the form of fiscal expenditure. The measures in question were thus classified as an advantage granted by the State through State resources.

C – Procedure before the General Court leading to the judgment under appeal

17. By applications lodged at the Registry of the General Court on 9 June 2004, the Government of Gibraltar, the applicant in Case T-211/04, and the United Kingdom, the applicant in Case T‑215/04, brought actions for annulment of the contested decision. By order of the President of the Third Chamber of the General Court of 14 December 2004, the Kingdom of Spain was granted leave to intervene in support of the forms of order sought by the Commission. By order of 18 December 2006, the cases were joined for the purposes of the oral procedure.

18. The General Court upheld two of the three pleas put forward by the applicants at first instance, concerning regional and material selectivity, respectively, and it therefore considered it unnecessary to examine the third plea, alleging breach of essential procedural requirements. Consequently, it annulled the contested decision.

III – The appeals

A – Procedure before the Court of Justice

19. By order of the President of the Court of Justice 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. By order of the President of the Court of 25 September 2009 in Joined Cases C‑106/09 P and C‑107/09 P, Ireland was granted leave to intervene in the present cases in support of the United Kingdom and the Government of Gibraltar.

20. In its appeal, the Commission puts forward a single ground of appeal in six parts concerning the General Court’s examination of material selectivity and alleging infringement of Article 87(1) EC. The Kingdom of Spain in its appeal puts forward 11 grounds of appeal relating to the General Court’s examination of both regional and material selectivity. Its grounds of appeal also allege procedural irregularities.

21. In their responses to the appeals brought by the Commission and the Kingdom of Spain, the Government of Gibraltar and the United Kingdom contend that the appeals should be dismissed. Ireland intervened in support of the United Kingdom in Case C‑106/09 P only.

22. The Commission, the Government of Gibraltar, the United Kingdom Government, Ireland and the Spanish Government presented oral argument at the hearing on 16 November 2010.

B – Preliminary observations on procedural aspects of the appeals – the consequences of a partial setting aside of the judgment under appeal

23. In its appeal, the Commission criticises only the part of the General Court’s judgment concerning material selectivity. According to the Commission, the contested decision found the reform to be selective from both a regional and a material point of view. Annulment thereof can therefore be appropriate only if the judgment criticising it duly established that both those conclusions were erroneous. Consequently, in the event of the Court of Justice allowing the Commission’s appeal, the annulment of the contested decision will cease to be justified and the judgment must be set aside.

24. As to those submissions, I am of the opinion that the allowing of the Commission’s appeal cannot be sufficient to set aside the judgment under appeal in its entirety. On the contrary, if the part of the judgment under appeal relating to material selectivity were set aside, the operative part of that judgment would remain unchanged, this sufficing to justify annulment of the contested decision inasmuch as the legal solution contained in it concerning regional selectivity was erroneous.

25. In the case of a territory within the meaning of Article 299(4) EC or local or regional authorities, the analysis of regional selectivity in the contested decision is an element of the appraisal of the existence of State aid within the meaning of Article 87 EC. In order to deal fully with the aspect concerning regional selectivity, the Commission would therefore have to adopt a new decision concerning the legality of the scheme in question in the light of Article 87 EC.

26. Moreover, if the General Court’s reasoning concerning material selectivity were rejected by the Court of Justice, the result would be the setting aside of the corresponding grounds of the judgment under appeal and not confirmation of the operative part of the contested decision. First, the General Court did not dispose of the third plea raised before it at first instance by the applicants and, second, it was not able to examine the Commission’s conclusions concerning the compatibility of the measures in question with the common market in a situation where the geographical frame of reference was different from that used in the contested decision (namely Gibraltar, rather than the United Kingdom and Gibraltar taken together).

27. In view of the foregoing considerations, it seems to me that the Court of Justice may either dismiss both appeals in their entirety or uphold the appeals and at the same time refer the cases back to the General Court for examination of the third plea raised at first instance. In any event, I consider that the state of the proceedings does not permit the Court of Justice to give a final decision on all aspects of the proceedings.

IV – Regional selectivity ( )

A – The admissibility of the Kingdom of Spain’s appeal

28. In its pleadings, the Government of Gibraltar contends that the arguments put forward by the Kingdom of Spain and the Commission concerning regional selectivity are essentially no more than a repetition of the arguments put to the General Court.

29. In that regard, I would observe that the Kingdom of Spain was an intervener before the General Court, whereas the Commission was defending the contested decision. In principle, the framework of the dispute before the General Court was defined not by their pleadings but rather by the pleas put forward in the applications submitted by the Government of Gibraltar and the United Kingdom Government.

30. According to settled case-law, it is clear from Article 56 of the Statute of the Court of Justice of the European Union that interveners before the General Court are regarded as parties before it. Therefore, the fourth paragraph of Article 40 of the Statute of the Court of Justice does not prevent an intervener from using arguments which differ from those of the party which he supports, provided that his aim is to support the form of order sought by that party. ( )

31. I would observe that, if the Kingdom of Spain had brought its appeal in these proceedings without having first intervened before the General Court, it would have been subject to no other restriction than that relating to the subject-matter of the dispute, as defined by the applicants before the General Court. The position would be the same if the Kingdom of Spain had not brought an appeal against the judgment under appeal, but had merely submitted observations supporting the Commission. An intervener who has the right to submit a response under Article 115 of the Rules of Procedure must, in the absence of any express limitation, be able to raise pleas relating to any point of law on which the judgment under appeal is based. ( ) In view of the foregoing, the procedural position of a privileged party, such as a Member State, which was an intervener before the General Court necessarily means that the substantive scope of the appeal brought by such a party can be limited only by the subject-matter of the dispute and not by the scope of the observations submitted by it to the General Court.

32. Furthermore, it follows from Article 225 EC, the first paragraph of Article 58 of the Statute of the Court of Justice and Article 112(1)(c) of the Rules of Procedure of the Court of Justice that an appeal must indicate precisely the contested elements of the judgment which the appellant seeks to have set aside and also the legal arguments specifically advanced in support of the appeal. An appeal which confines itself to reproducing the pleas in law and arguments already submitted to the General Court, amounting in reality to no more than a request for a re-examination of the application submitted to that Court – which falls outside the jurisdiction of the Court of Justice – does not fulfil that requirement. ( )

33. However, provided that the appellant challenges the interpretation or application of European Union law by the General Court, the points of law examined at first instance may be discussed again in the course of an appeal. Otherwise, an appeal would be deprived of part of it purpose. ( )

34. Consequently, the line of argument as to the inadmissibility of the Kingdom of Spain’s appeal must be rejected in its entirety.

35. In addition, the Kingdom of Spain is criticised for alleging an infringement of Articles 5 EC and 307 EC belatedly, namely at the stage of its reply. Indeed, in taking a position on the responses of the Government of Gibraltar and the United Kingdom, the Kingdom of Spain asserts in its reply that the General Court’s approach is tantamount to granting Gibraltar fiscal sovereignty despite its status as a ‘non-self-governing territory’, which would be contrary to Article 5 EC and Article 307 EC.

36. It is true that the Court of Justice as a rule rejects any plea put forward for the first time at the reply stage, except in any of the following three special situations: where it is apparent that the plea in question in fact merely amplifies a plea put forward at an earlier stage, ( ) or that the plea is a matter of public interest which must be raised of the Court’s own motion, ( ) or that it is based on a new matter which has come to light in the course of the proceedings. ( )

37. Here, the reference to infringement of Articles 5 EC and 307 EC could be regarded as amplifying the first ground of appeal put forward by the Kingdom of Spain at an earlier stage in the appeal and being closely linked with it. However, as this issue is not expressly linked by the Spanish Government to that ground of appeal, it is not incumbent on this Court to establish such a link in the stead of the appellant. Consequently, I propose that it be considered inadmissible.

B – The scope of the Court of Justice’s review on appeal of the General Court’s appraisal of national law

38. In view of the relevance of the issue raised in the context of the Kingdom of Spain’s sixth ground of appeal, I propose examining it at an early stage. This Court must, for that purpose, give its view on the status to be attributed to the matters of national law which were examined by the General Court in this instance.

39. It must be emphasised at the outset that the question raised concerns a direct action. ( )

40. I note that in its very early case-law the Court of Justice held that it was not required to rule on provisions of national law and, therefore, it was not empowered to examine the ground of complaint that, in adopting its decision, the High Authority infringed principles or provisions of national constitutional law. ( )

41. However, it is incontestable that, in the exercise of its jurisdiction, the General Court is called upon in direct actions to rely on a particular view or interpretation, which I shall term ‘interpretative reconstruction’, of provisions of the domestic law of the Member State concerned. In that regard, I think that three cases must be distinguished.

42. First, the General Court may be called upon to apply and interpret the domestic law of a Member State directly. Such a situation may arise through a reference to national law contained in a provision of European Union law or through an arbitration clause. ( ) In such a case, the General Court applies national law in the same way as a court of competent jurisdiction. A provision of national law is therefore equivalent, for the General Court, to a legal norm which attaches certain consequences to the legally relevant facts. It is incumbent, therefore, on the General Court to draw legal inferences therefrom ( ) despite the apparent difficulties concerning verification of the content of the national law.

43. The second situation concerns the indirect application of national law by the General Court. In such circumstances, it applies the rules of national law as legal norms but does not act as a court of competent jurisdiction regarding their interpretation. Such a case may be illustrated by the classification, by the General Court, of a legal relationship that is covered by a concept that is not an autonomous concept of European Union law, such as marriage or a contract. ( ) There may also fall into this category situations in which the General Court is required to dispose of a preliminary issue either of a procedural nature or going to the substance, concerning, for example, the status of lawyer of a party’s representative within the meaning of the Statute of the Court of Justice ( ) or the existence of a valid transfer of ownership of an undertaking.

44. It is thus apparent that, in certain cases where national law is applied by the General Court, the Court of Justice will be called on, in an appeal, to review the terms of the national provisions as a question of law and not as a question of fact.

45. Third, the General Court may be called upon to rely on a provision of national law in order to establish a given factual situation. The application of the provisions of European Union law concerning State aid provides numerous instances of this, in particular with regard to the concepts of advantage and selectivity. In such circumstances, an analysis of the national law is therefore required in order to establish a factual situation that is taken into account in applying European Union law. ( )

46. In the present proceedings, it should be stressed that the question of Gibraltar’s status as governed by European Union law indubitably constitutes a question of law amenable to review by the Court of Justice.

47. As is apparent from the file, Gibraltar’s status is also governed, at national level, by the constitutional provisions that were examined by the General Court. ( ) The General Court’s reasoning concerning Gibraltar’s status at the political and administrative levels constitutes an interpretative reconstruction of national law intended to establish Gibraltar’s factual situation in the light of the criteria laid down by the Azores judgment. ( ) The General Court does not therefore, in the exercise of its judicial functions, apply the constitutional provisions concerning Gibraltar’s status as legal norms. On the contrary, it relies on those provisions in order to appraise Gibraltar’s situation in the light of European Union law.

48. Consequently, in order to preserve the structural balance between national law and European Union law, I propose that the Court of Justice take the view that, in this case, where the General Court undertook an interpretative reconstruction of national legal provisions, including those of a constitutional nature, to enable it to apply the Azores judgment, we are dealing, for the purposes of this appeal, with factual findings made by the General Court, which would be amenable to review by this Court only if the clear sense were distorted.

C – The unique status of Gibraltar

49. It is common ground that Gibraltar ( ) is a European territory for whose external relations a Member State is responsible within the meaning of Article 299(4) EC and to which the provisions of the EC Treaty apply. ( ) The Act concerning the conditions of accession of the Kingdom of Denmark, Ireland and the United Kingdom of Great Britain and Northern Ireland and the adjustments to the Treaties provides, however, that certain parts of the Treaty are not to apply to Gibraltar. ( )

50. Under Declaration No 55 annexed to the Treaty of Lisbon, the Treaties are to apply to Gibraltar as a European territory for whose external relations a Member State is responsible. That does not imply changes in the respective positions of the Member States concerned.

51. As the Court of Justice has concisely stated, ( ) Gibraltar was ceded by the King of Spain to the British Crown by the Treaty of Utrecht concluded between the King of Spain and the Queen of Great Britain on 13 July 1713, which was one of the treaties bringing the War of Spanish Succession to an end. The last sentence of Article X of that treaty made it clear that if the British Crown ever intended to give, sell, or otherwise dispose of ownership of the town of Gibraltar, it would be required to grant preference to the Spanish Crown in priority to any other interested party.

52. The Court of Justice has also stated that Gibraltar is currently a British Crown Colony and does not form part of the United Kingdom. Executive authority is vested in a Governor, appointed by the Queen, and, for certain domestic matters, in a Chief Minister and Ministers who are elected locally. The latter are responsible to the House of Assembly, elections for which are held every five years. The House of Assembly has the right to make laws in defined domestic matters. The Governor, however, has power to refuse to assent to legislation. The United Kingdom Parliament and the Queen in Council also retain power to legislate for Gibraltar. Gibraltar has its own courts. There is, however, the possibility of appealing against judgments of Gibraltar’s highest court to the Judicial Committee of the Privy Council. ( )

53. Finally, it is important to mention United Nations Resolution No 1514 and the right to self-determination claimed by the Gibraltar authorities. ( ) At an extraordinary session held on 4 August 2004, the Parliament of Gibraltar unanimously passed a motion proclaiming the ‘inalienable right to self-determination’ of the people of Gibraltar. A new constitution, the ‘Gibraltar Constitution Order’, ( ) entered into force after being approved by a referendum, ( ) and granted Gibraltar very considerable autonomy whilst at the same time reaffirming British sovereignty over that territory. ( )

D – The applicability of the State aid rules to the territories referred to in Article 299(4) EC

54. First of all, it must be borne in mind that the regional selectivity of a tax measure is appraised in relation to the normal tax rate, that is to say the tax rate in force in the geographical area constituting the reference zone. The difficulty confronting the General Court in this instance was to determine whether it was appropriate to consider, as the Commission had, that the United Kingdom and Gibraltar formed a unit, or whether it should be accepted that Gibraltar was the appropriate reference framework.

55. To my mind, this question concerns the autonomous interpretation of European Union law. Primary law has granted Gibraltar a special status in the legal order of the European Union. The legal effects of that status with regard to application of European Union law on State aid do not therefore depend on Gibraltar’s status as defined in international law and, still less, its status under United Kingdom constitutional law but derive solely from an interpretation of the Treaty. Admittedly, international law and the constitutional law of a Member State may define the elements constituting the legal circumstances to which European Union law applies. However, those elements do not affect the fact that the legal questions on which the Court of Justice is called upon to adjudicate in the present appeals are of an exclusively Community nature.

56. In the Azores judgment, ( ) the fundamental question was whether the tax reductions at issue could be regarded as a measure of general application in the Azores or whether it was, rather, a selective measure that was at issue, conferring an advantage solely on operators established in the Azores, as compared with those operating in Portugal.

57. As proposed by Advocate General Geelhoed, the region must be autonomous in an institutional, procedural and economic sense in order for it to be possible to consider that the measure is not of a selective nature. ( ) Indeed, in the Azores judgment, the Court took the view that in order for a decision to be capable of being regarded as having been adopted in the exercise of sufficiently autonomous powers, it must have been taken by a regional or local authority which has, from a constitutional point of view, a political and administrative status separate from that of the central government. Next, it must have been adopted without the central government being able to intervene directly as regards its content. Finally, the financial consequences of a reduction of the national tax rate for undertakings in the region must not be offset by aid or subsidies from other regions or central government. ( ) The Court reiterated those principles, with certain clarifications, in the UGT-Rioja case. With regard to the third condition, it stated in particular that it was a question of ‘economic and financial autonomy’. ( )

58. The importance of the Azores judgment lies incontestably in the fact that, even though it did not concern a federal State having a symmetrical distribution of fiscal powers, the Court did not hold that the reference framework necessarily had to correspond to the totality of the territory of a Member State. ( ) By contrast, the Court conceded that the reference framework for tax rules of a regional authority could correspond to its own territory where that entity was sufficiently autonomous from the central government of the Member State concerned.

59. In view of its status under Article 299(4) EC, the Treaty provisions, and in particular those concerning State aid, apply to Gibraltar. Also, the accession of the United Kingdom to the European Communities was possible without the existence of a tax system common to that Member State and Gibraltar, which belongs to a category of territories having a special relationship with the European Union.

60. In the light of the foregoing considerations, I do not think that an interpretation conforming with the purpose of the Treaty could possibly require the United Kingdom to apply its own tax system to the territory of Gibraltar. On the other hand, since the Treaties do not contain any derogation concerning the application of the State aid rules in the territory in question, I think it is logical that the conditions concerning regional selectivity should be appraised in accordance with the same principles as those applicable to other infra-State bodies ( ) having their own taxation powers. That interpretation is in my view the only one that upholds the effectiveness of Article 299(4) EC, read in conjunction with the principle that the State aid rules of the European Union apply to Gibraltar.

61. Moreover, the fact that the Court of Justice has never before had to consider the case of a territory for whose relations a Member State is responsible is not, contrary to the Kingdom of Spain’s contentions, sufficient to exclude the applicability of the Azores case-law in relation to Gibraltar from the outset.

62. Consequently, it must be concluded that the General Court was entitled to apply that case-law to the case of Gibraltar and that that approach did not, of itself, amount to an infringement of any of the criteria inherent in the concept of State aid for the purposes of Article 87(1) EC. I shall bear those general observations in mind when analysing the Kingdom of Spain’s various grounds of appeal.

E – The Kingdom of Spain’s first ground of appeal, alleging disregard of Gibraltar’s status

1. Arguments

63. By its first ground of appeal, the Kingdom of Spain submits that the General Court infringed Article 299(4) EC in that it disregarded the legal status of Gibraltar under international law, failing to take into account Article 74 of the United Nations Charter, and under European Union law, and in that it converted Gibraltar into a new Member State of the European Union for the purposes of taxation. It alleges that the General Court’s approach could lead to Gibraltar adopting harmful tax measures without any effective review.

2. Admissibility

64. The Government of Gibraltar considers that the Kingdom of Spain’s argument that the General Court should have referred to Article 74 of the United Nations Charter is inadmissible. In view of the considerations set out in points 35 and 36 of this Opinion, I propose that this part of the first ground of appeal be declared admissible.

3. Substance

65. I consider that the fundamental and only relevant point, with regard to the response to the Kingdom of Spain’s appeal, is to ascertain whether the General Court took a correct view of Gibraltar’s status under European Union law.

66. In that regard, it need merely be pointed out that, in paragraphs 5 to 10 of the judgment under appeal, the General Court summarised Gibraltar’s status in terms similar to those used by the Court of Justice in Spain v United Kingdom. In paragraph 10 of the judgment under appeal, it also rightly noted Gibraltar’s situation in the light of Article 299(4) EC.

67. As regards paragraphs 98 to 100 of the judgment under appeal, which analyse national law, as I stated above the Court of Justice’s review is limited to any distortion of the clear sense of the facts; however, such distortion has not been alleged and, in any event, on reading the relevant paragraphs is shown to be ruled out.

68. I would also observe that the General Court’s reasoning, which includes a reminder of the terms of Article 73 of the United Nations Charter, forms part of an examination whether Gibraltar met the second condition laid down by the Azores judgment, namely that of legislative autonomy.

69. In that context, it need merely be pointed out that the Court of Justice has emphasised on numerous occasions that Community powers must be exercised in conformity with international law, ( ) the most noteworthy example of that case-law being the judgment in Racke. ( ) It was therefore proper for the General Court to refer to the United Nations Charter in its analysis of the application of the Azores conditions to Gibraltar. It does not, however, follow that the General Court was required to extend its analysis to the other provisions of that Charter, such as Article 74, which moreover seems to me to deal with matters which, first, were not covered by the contested decision and, second, did not appear in the applications lodged with the General Court.

70. Indeed, with regard to the question whether the tax reform in question was devised without the central government of the United Kingdom being able to intervene directly as regards its content, the issue of observance of good-neighbourliness, referred to in Article 74 of the Charter, seems to me to be distinct from the analysis carried out by the General Court in paragraphs 90 to 100 of the judgment under appeal. Consequently, if the Kingdom of Spain’s argument is to be construed as alleging that the judgment under appeal is defective in its reasoning, that argument cannot prosper.

71. Finally, there is nothing in any paragraph of the judgment under appeal to indicate that the General Court equated Gibraltar to a new Member State. In particular, the Court’s reasoning concerning regional selectivity, where, after examining Gibraltar’s situation in the light of the Azores criteria, it held, in paragraph 115 of that judgment, that the reference framework was exclusively Gibraltar, cannot be interpreted to that effect.

72. In so doing, it merely applied the case-law of the Court of Justice according to which, in appraising the selectivity of a measure, the reference framework need not necessarily be defined in terms of the limits of the territory of the Member State concerned. ( )

73. In view of all the foregoing considerations, I propose that the Kingdom of Spain’s first ground of appeal be rejected as unfounded.

F – The Kingdom of Spain’s fourth ground of appeal, alleging disregard of the requirement that State aid must be granted by a State or through State resources

1. Arguments

74. By its fourth ground of appeal, the Kingdom of Spain argues that the geographical reference framework for the purposes of Article 87(1) EC must necessarily be the territory of Gibraltar and also that of the United Kingdom or the Kingdom of Spain. Aid for the purposes of that article involves, in its view, advantages granted directly or indirectly through the resources of a Member State. However, Gibraltar is not a Member State but merely a territory not forming part of any Member State, in accordance with Article 299(4) EC.

2. Assessment

75. As I have already established above, the only interpretation consonant with the spirit of Article 299(4) EC, read in conjunction with the principle that the State aid rules apply to Gibraltar, is that in this instance it is necessary to apply the principles laid down in the case-law concerning regions and territories having their own taxation powers.

76. Consequently, I propose that the Kingdom of Spain’s fourth ground of appeal be rejected as unfounded.

G – The Kingdom of Spain’s fifth ground of appeal, alleging breach of the principle of non-discrimination

1. Arguments

77. By its fifth ground of appeal, the Kingdom of Spain contends that the General Court infringed the principle of non-discrimination by applying the Azores judgment to the present instance, where the situation is, however, entirely different. First, the Court applied to Gibraltar, which has the status of a colony, the criteria laid down in the Azores judgment which the Court of Justice devised for a region of a Member State. Second, the Azores case related only to a reduction of the corporate tax rate, not to the introduction of a complete corporate tax system.

2. Admissibility

78. The Government of Gibraltar submits that the fifth ground of appeal should be regarded as a new plea in law and should therefore be declared inadmissible.

79. According to Article 113(2) of the Rules of Procedure of the Court of Justice, the subject-matter of the proceedings before the General Court may not be changed in the appeal. The Court of Justice’s jurisdiction in an appeal is indeed confined to review of the findings of law on the pleas argued before the General Court. A party cannot therefore put forward for the first time before the Court of Justice a plea in law which it has not raised before the General Court since that would effectively allow him to bring before the Court, whose jurisdiction in appeals is limited, a case of wider ambit than that which came before the General Court. ( )

80. However, I would observe that a restrictive interpretation of the case-law is liable to deprive a privileged party, such as a Member State, of the opportunity to put to the Court of Justice pleas distinct from those raised before the General Court. Since the latter were directed against the contested decision, it seems to me natural that they should evolve at the appeal stage, when they are directed against a judgment delivered in response to the originating applications. I consider that the pleas that may be put forward by a Member State against a judgment of the General Court should not be limited merely because that State took part in the proceedings at first instance, albeit only as an intervener.

81. While Gibraltar therefore seeks to criticise the Kingdom of Spain for changing the terms of the dispute, that complaint cannot prosper since no change to the dispute can result from an allegation that the principle of non-discrimination has been breached in relation to application of the Azores case-law. The latter, on the contrary, lies at the heart of the General Court’s reasoning, and therefore I propose that the fifth ground of appeal be held admissible.

3. Substance

82. First, I would point out that the principle of equal treatment and non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way unless such treatment is objectively justified. ( )

83. Here, the Kingdom of Spain asks whether, in view of the differences between the status of the Azores and that of Gibraltar, it was legally justified to apply the Azores case-law directly to Gibraltar.

84. In that regard, it should be observed at the outset that, in so far as the General Court referred to that case-law, it did not compare those territories with each other. I consider consequently that the question raised by the Kingdom of Spain is irrelevant to the application of the State aid provisions.

85. On the contrary, inasmuch as the solution adopted by the Court of Justice in the Azores judgment constitutes a framework for the interpretation of Article 87(1) EC, capable of being applied to various territories and entities, it is essential first to define the scope of European Union law in cases of that kind.

86. Thus, so far as concerns territories and regions with special links to certain Member States on account of shared history or recent developments in regional autonomy, I consider that two-stage reasoning should be applied.

87. First, it is necessary to examine whether the EC Treaty applies to such a territory. If so, and regardless of whether an infra-State body, an autonomous territory or a territory outside the territory of a Member State is at issue, the second stage consists in identifying the appropriate reference framework in the light of the Azores case-law.

88. That is why I consider that the General Court, after establishing the status of Gibraltar under the EC Treaty, rightfully applied the criteria laid down by the Court of Justice in the Azores judgment and did not thereby run the risk of breaching the principle of non-discrimination.

89. Finally, any difference as regards the extent of the tax reforms liable to be implemented in the Azores and in Gibraltar does not in my opinion have any impact in this regard.

90. Consequently, I propose that the fifth ground of appeal be rejected as unfounded.

H – The Kingdom of Spain’s sixth ground of appeal, alleging infringement of the conditions laid down in the Azores judgment

1. Arguments

91. By its sixth ground of appeal, the Kingdom of Spain submits that the General Court infringed Article 87(1) EC in that it wrongly held that the conditions laid down in the Azores judgment were satisfied in concluding that there was no regional selectivity. It criticises paragraphs 76 to 117 of the judgment under appeal.

2. Assessment

92. As I stated earlier, I propose that the Court limit its review of the General Court’s reasoning relating to the interpretation of national law to solely any distortion of the clear sense of the matters of national law in its assessment of the Azores conditions.

93. By virtue of the Azores case-law, in order that a decision taken by a regional or local authority can be regarded as having been adopted in the exercise of sufficiently autonomous powers, the three criteria of institutional, procedural and economic and financial autonomy must be fulfilled. ( )

94. First, so far as concerns institutional autonomy, the General Court merely found, in paragraph 89 of the judgment under appeal, that ‘the principal parties’ acknowledge that the Gibraltar authorities have, from a constitutional point of view, a separate status. However, the Kingdom of Spain calls into question the existence of any such consensus by referring to ‘agreement between all the parties’ and submits that, for its part, it never subscribed to any thesis of political and administrative autonomy for Gibraltar.

95. In that regard, I would point out that the consensus referred to in paragraph 89 of the judgment under appeal relates to the ‘principal parties’. The Kingdom of Spain took part in the proceedings before the General Court as an intervener, which means that it cannot be taken into account for the purposes of that consensus. Paragraph 89 of the judgment is not therefore vitiated by any distortion, since it is based on the existence of a convergence of the principal parties’ views, a point which, moreover, is not contested by the other parties to the appeal before the Court of Justice.

96. Moreover, I must draw attention to the contradictory nature of the Kingdom of Spain’s appeal, in so far as it maintains in its fourth ground of appeal that Gibraltar does not form part of the United Kingdom whilst at the same time contending, in its sixth ground of appeal, that Gibraltar does not have a political and administrative status separate from that of the United Kingdom Government.

97. Second, with regard to procedural autonomy, the General Court, after referring to the relevant provisions of the Constitution of Gibraltar, concluded that the powers granted to the Governor by sections 33 and 34 of that Constitution, which had never been exercised in matters of taxation, did not demonstrate that the United Kingdom Government was able to intervene directly as regards the content of the tax reform.

98. In that connection, I would point out that Article 225 EC, the first paragraph of Article 58 of the Statute of the Court of Justice of the European Union and Article 112(1)(c) of the Rules of Procedure of the Court of Justice require, in particular, that where an appellant alleges distortion by the General Court, he must indicate precisely the evidence whose sense is alleged to have been distorted by that Court and show the errors of appraisal which, in his view, led to that distortion. ( ) Such distortion exists where, without recourse to new evidence, the assessment of the existing evidence is manifestly incorrect. ( )

99. In the light of the Kingdom of Spain’s arguments, which are intended essentially to put in issue the meaning of the national provisions concerned, and in particular to draw attention to the hypothetical existence of a power of intervention on the part of the United Kingdom, no alteration by the General Court of the precise meaning of the Constitution of Gibraltar can be perceived.

100. With regard, finally, to economic and financial autonomy, I would observe that it is clear from the case-law that, in order for the third condition of the Azores case-law not to be fulfilled, there must be offsetting, namely a causal relationship between a tax measure adopted by the authorities responsible for it and the amounts assumed by the State. ( ) Consequently, the General Court was right, in paragraph 106 of the judgment under appeal, to rely on such an interpretation of the Azores judgment.

101. Furthermore, in its ground of appeal, the Kingdom of Spain does not put forward any argument to demonstrate distortion of the clear sense of the evidence which was examined by the General Court in paragraphs 108 to 113 of the judgment under appeal and on which it based its conclusion that, in the absence of evidence to the contrary adduced by the Commission, Gibraltar receives no financial support from the United Kingdom in order to offset the financial consequences of the tax reform.

102. In view of the foregoing, I propose that the sixth ground of appeal be rejected as unfounded in its entirety.

I – The Kingdom of Spain’s seventh and ninth grounds of appeal, concerning the alleged existence of a fourth Azores condition

1. Arguments

103. By its seventh ground of appeal, the Kingdom of Spain claims that the General Court misinterpreted the Azores judgment by failing to apply what the Kingdom of Spain considers to be a fourth condition. According to the Kingdom of Spain, autonomy should be subject to certain minimum requirements in order to avoid the existence at regional level of completely different tax systems that jeopardise the common market.

104. By its ninth ground of appeal, the Kingdom of Spain claims that the judgment under appeal fails to state reasons, in that it rejected the existence of such a fourth condition by stating simply, in paragraph 88, that that condition is not supported by the Azores judgment.

2. Assessment

105. By its seventh ground of appeal, the Kingdom of Spain endeavours to demonstrate an error of law allegedly committed by the General Court in paragraph 88 of the judgment under appeal. The Kingdom of Spain seeks to derive from paragraph 47 of the Azores judgment a fourth condition, supplementing the three conditions laid down by the Court of Justice in that judgment.

106. In UGT-Rioja, the Court of Justice rejected the existence of a fourth condition, in that case as a precondition for application of the three criteria laid down in the Azores judgment. ( ) The Court held that ‘the only conditions which must be satisfied in order for the territory falling within the competence of an infra-State body to be the relevant framework in order to assess whether a decision adopted by that body is selective in nature are the conditions of institutional autonomy, procedural autonomy and economic and financial autonomy as set out in paragraph 67 of Portugal v Commission’.

107. It must be concluded from this that the fourth condition which the Kingdom of Spain believes it can derive from the Azores judgment has never been posed by the Court of Justice. Consequently, I propose that the seventh ground of appeal be rejected as unfounded.

108. In view of that answer, it is unnecessary to examine the ninth ground of appeal.

J – The Kingdom of Spain’s second and third grounds of appeal

109. These grounds of appeal being similar, I propose to consider them together.

1. Arguments

110. In its second ground of appeal, the Kingdom of Spain contends that the General Court, in finding that no comparison can be made between the tax regime applicable to companies established in Gibraltar and that applicable to companies established in the United Kingdom, renders Article 87(1) EC devoid of substance. The interpretation of that provision should take account of the fact that Gibraltar is considered to be a ‘tax haven’ by the Organisation for Economic Co-operation and Development (OECD) and an ‘offshore financial centre’ by the International Monetary Fund (IMF).

111. By its third ground of appeal, the Kingdom of Spain contends that the General Court should have interpreted Article 87 EC in the light of the European Central Bank (ECB) Guideline of 16 July 2004. It claims that it is apparent from that document, constituting binding European Union law, that Gibraltar is an ‘offshore financial centre’. In its reply, the Kingdom of Spain argues in particular that the United Kingdom belongs to the European System of Central Banks (ESCB) and that Article 5 of the ESCB Statute is the legal basis for the ECB Guideline mentioned above.

2. Assessment

112. By these two grounds of appeal, the Kingdom of Spain in essence criticises the General Court for failing, in its assessment of the Gibraltar tax reform in the light of Article 87(1) EC, to take account of aspects relating to the classification of Gibraltar by international financial organisations and institutions.

113. Accordingly, those grounds of appeal can be construed as alleging defective reasoning in the judgment under appeal, which is a question of law that is amenable, as such, to judicial review on appeal. ( )

114. However, without there being any need to examine the second and third grounds of appeal as regards defective reasoning, it must be pointed out that these grounds of appeal are irrelevant since, even if they were well founded, they would not enable the judgment under appeal to be set aside.

115. In an appeal, the Court’s task is limited to examining whether the General Court erred in law in the exercise of its power of review. The only issue therefore is whether the General Court could properly hold that the intended tax reform in Gibraltar complied with the State aid rules and, consequently, whether it could properly annul the contested decision. International studies in the field of action to combat harmful tax measures cannot invalidate the conclusion reached by the General Court.

116. Therefore, the second and third grounds of appeal must be rejected as irrelevant.

V – Direct taxation and State aid ( )

A – Preliminary remarks concerning the structure of the Commission’s appeal

117. The Commission relies in its appeal on a single ground, to the effect that the General Court infringed Article 87(1) EC. Even though the Commission has divided its ground of appeal into six parts, it seems to me that it is mainly challenging three elements of the General Court’s reasoning.

118. The first aspect, covered by the first part of the ground of appeal, concerns the General Court’s assessment of the relationship between the Community State aid rules and the Member States’ powers in the field of direct taxation. The second aspect, which is addressed by the second to fifth parts, essentially concerns the allegedly incorrect assessment of the criterion of selectivity. Finally, the sixth part of the Commission’s sole ground of appeal deals with a third aspect, intimately linked with the second, namely an alleged lack of reasoning so far as concerns examination of the three elements of selectivity noted in the contested decision.

119. Consequently, I propose analysing the appeal in relation to those three main allegations made by the Commission.

120. I would emphasise at the outset that, in its appeal, the Commission is inviting the Court of Justice to abandon a system that has been operating up to the present time relating to the application of Article 87(1) EC to indirect support measures liable to constitute State aid for the purposes of that provision, such as tax exemptions or other forms of indirect support.

121. An assessment of such measures involves a comparison between, on the one hand, the situation of the undertakings concerned in the event of application of those measures and, on the other, a reference criterion, that is to say an objective standard such as the tax regime applicable under the general law or the private investor test. The assessment of fiscal support measures is based on a comparison between the factual situation of those who benefit from the mechanisms adopted by the Member States in the exercise of their fiscal powers and the legally prescribed fiscal regime applicable in the same reference territory.

B – The concept of harmful tax competition

122. The globalisation of economic activity, trade and investment and the proliferation of undertakings that operate beyond national borders are phenomena which represent serious challenges for taxation and tax systems. Many entities liable to tax today cross borders in order to establish themselves in States which offer better overall conditions. Among such conditions, taxation plays a very important role, even though it is difficult in practice to determine its real impact precisely. ( )

123. A large number of fiscally sovereign territories and of States use tax and non-tax incentives to attract financial activities and other services. Those territories generally offer foreign investors an environment in which zero or minimal taxation is frequently accompanied by a relaxation of regulatory or administrative constraints. ( ) Those jurisdictions are generally classified as tax havens and are one of the crucial aspects of the concept of harmful tax rules. ( )

124. According to one definition in the legal literature, ‘tax competition’ involves an overall lowering of the tax burden in order to improve country’s economy by increasing the competitiveness of domestic business and/or attracting foreign investment. ( ) That concept plays an important role both at the level of international economic relations and within the common market of the European Union.

125. The Commission concedes that some degree of tax competition within the European Union may be inevitable and may contribute to lower tax pressure. ( ) As far as direct taxation is concerned, it emphasises that, provided that they respect Community rules, Member States are free to choose the tax systems that they consider most appropriate and according to their preferences. ( )

126. The European Union therefore adopts measures to control tax competition, in so far as it is liable to distort economic and industrial competition. The aim is not to eliminate all tax competition but rather to contain it. ( )

127. As regards direct taxation in particular, after making several attempts to harmonise the taxation of undertakings ( ) – which were unsuccessful in view of the Member States’ fear of losing some of their tax revenue – the Commission decided to adopt a new approach by proposing what is generally called a ‘tax package’, ( ) comprising a set of measures designed to combat harmful tax competition in the European Union.

128. Those measures included the code of conduct, whose purpose was to improve transparency in the tax sector through the introduction of a system for the Member States to share information with each other. ( )

129. In the debate on harmful tax policy, academic writers have complained of a lack of clarity regarding the identification of a level playing field, in the sphere of international taxation. ( ) It is settled, however, that there is no question of applying the same rate and the same tax base in all countries, because, in particular, small States experience difficulties peculiar to them, arising from the size of their tax jurisdictions. ( )

130. As regards action to combat harmful taxation, it may appear, in view of the foregoing, that the Commission has had recourse to the only instrument left available to it, namely Article 87(1) EC. ( ) The question that then arises is whether that provision is an instrument suited to that purpose and, if so, what limits should be applied to its use in light of the allocation of powers in the field of direct taxation.

131. As is apparent from its preamble, the code of conduct is a political commitment and does not affect the Member States’ rights and obligations or the respective spheres of competence of the Member States and the Community resulting from the Treaty. The harmful practices covered by the code are measures which affect, or may affect, in a significant way, the location of business activity in the Community. Tax measures which provide for a significantly lower level of effective taxation, including zero taxation, than those levels which generally apply in the Member State in question are also regarded as harmful and, therefore, covered by the code.

132. The code is thus concerned with competition between the Member States involving mutually competitive efforts to attract foreign investment or capital through taxation. The intention of the code is therefore to combat State measures designed not to protect domestic undertakings or capital but to favour foreign undertakings or capital. This means that the code is designed to apply to reverse discrimination, that is to say discrimination unfavourable to the residents of the Member States. ( )

133. On the other hand, the State aid regime is designed to protect competition between undertakings from distortions of competition or intra-Community trade that are generated by the Member States through the grant of measures favouring certain undertakings or goods at the expense of others. In addition, it is intended to protect the internal market against segmentation through State aid while at the same time making certain that there is no unjustified discrimination against foreign nationals or non-residents or forms of protectionism favouring domestic undertakings or capital. ( )

134. It follows that harmful institutional or tax competition between Member States clearly does not fall within the mechanism for controlling State aid established by the Treaty, ( ) even though there are cases where measures are liable to amount both to harmful tax competition and to State aid incompatible with the common market. However, the legitimate objective of combating harmful tax competition cannot justify distortion of the European Union’s legal framework established in the area of competition law applicable to State aid, or even the adoption of ad hoc solutions conflicting with the rule of law as enshrined in Article 2 TEU.

135. It is in the light of those preliminary matters that the Commission’s appeal should be examined.

VI – The powers of the Member States in the field of direct taxation and their relationship with the State aid rules ( )

A – Arguments relating to the first part of the Commission’s sole ground of appeal

136. In the first part of its sole ground of appeal, the Commission submits that the General Court erred in assessing the relationship between Article 87(1) EC and 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 provision defines State measures not by reference to their causes or aims but in relation to their effects. The Kingdom of Spain endorses the Commission’s analysis, but only to the extent to which it concerns the powers of the United Kingdom as a Member State in matters of direct taxation.

B – General observations

137. Even though, under the allocation of powers that is provided for in the Treaty, direct taxation is a matter exclusively for the Member States, it is undisputed that in the exercise of their powers the Member States must comply with the Treaty. Thus, under settled case-law, although direct taxation falls within their competence, the Member States must none the less exercise that competence consistently with European Union law. ( )

138. Moreover, the fact that a measure liable to constitute State aid for the purposes of Article 87(1) EC has been adopted in the exercise of an exclusive competence of the Member States, which seems to me to be frequently the case, cannot in itself affect application of the State aid rules.

139. However, in the sphere of direct taxation the Member States enjoy a high degree of legislative, regulatory and administrative sovereignty. The power of taxation remains a domestic right of governments, which may choose the tax systems most suited to their preferences, provided they comply with European Union law.

140. It is settled that the provisions of European Union law that relate to State aid seek only to remedy distortions of competition deriving from the wish of a Member State to grant, in derogation from its general policy guidelines, a particular advantage to certain undertakings or goods. Consequently, if the tax system is of a general character, it falls outside the application of Article 87(1) EC. ( ) In so far as the measures adopted by the Member State concern the entire tax system, they constitute adjustments to general fiscal policy and not State aid. ( )

141. The same principle applies to harmful tax measures, provided that they do not fulfil the criterion of selective advantage: the only instrument available against them is the abovementioned code of conduct. ( ) Indeed, a substantial proportion of harmful tax measures comprise general tax measures to which, according to the majority of academic writers, Article 87(1) EC does not apply. ( )

142. Tax exemptions or other forms of indirect support granted on a sectoral or regional basis, on the other hand, constitute State aid. ( ) Thus, a measure that does not apply to all operators cannot in principle be regarded as a general measure of economic policy. ( )

143. I would point out in that connection that it has been observed in the legal literature that, through the concept of selectivity, Article 87 EC has opened the way to true harmonisation of tax rules, even though that is not its aim. ( ) Application of the principles governing State aid to national tax policy is regarded as leading to regulation of competition between tax systems, States being subject to an indirect obligation of fiscal neutrality. ( )

144. Nevertheless, I consider that it is impossible to achieve fiscal neutrality in the strict economic sense in the field of direct taxation. ( ) I incline rather to the view that each tax system is based on a degree of selectivity depending on the objectives pursued by the national legislature. Thus, the essential question is whether there is an advantage, within the meaning of European Union law, which might derive from a configuration created within the domestic tax system. ( )

145. Consequently, it is essential to preserve the distinction between tax measures constituting State aid and those corresponding to the normal configuration with which the national legislature wished to endow its tax system, a configuration which may give rise to differential treatment necessary for the pursuit of general public-interest objectives set by the State in the exercise of its sovereign rights. ( )

C – The General Court’s reasoning concerning the Member States’ powers in the field of direct taxation

146. In paragraph 146 of the judgment under appeal, the General Court correctly cited the case-law according to which direct taxation falls within the competence of the Member States, whilst at the same time emphasising that the application of the State aid rules is without prejudice to the power of States to decide on their economic policy and, therefore, on the tax system and the common or ‘normal’ regime under it. It then considered whether the Commission observed those principles in its assessment of the measure’s selectivity.

147. The citation in paragraph 146 of the judgment under appeal supports the General Court’s reasoning to the effect that the Commission should have carried out a three-stage analysis to enable it to classify a tax measure as selective. In particular, as is apparent from paragraph 145 of the judgment under appeal, the Court wished to emphasise that the omission of the first two stages would result in the Commission overstepping its powers, since it would assume the role of the Member State with regard to determination of its tax system. Moreover, such an approach, according to the General Court, would make it impossible for the Member State to justify the differentiations in question on the basis of the nature and of the general scheme of the tax system notified.

148. Viewed from that standpoint and regardless of whether the General Court’s methodology constitutes a legally correct reference framework that it was entitled to impose on the Commission, the finding concerning the existence of the Member States’ taxation powers is admittedly incomplete but it does not constitute an error of law in the light of the case-law mentioned in points 137 to 145 above.

149. Consequently, I propose that the first part of the Commission’s sole ground of appeal be rejected as unfounded.

VII – Discussion of the method for identifying the selective nature of fiscal support liable to constitute State aid

A – Aspects of the Commission’s contested decision

150. According to statements made by the Commission at the hearing, the new tax system in Gibraltar comprises a combination of a payroll tax and a tax on the occupation of business premises, subject to a ceiling of 15% of profits, and two types of top-up tax for certain types of companies. The Commission submits that the system, presented as being a single system, is in fact a combination of different and mutually incompatible tax regimes, so that it is impossible to pinpoint a reference regime and identify a special regime. The Commission states that, on the contrary, the regime which is presented as being a tax system differentiates itself between categories of companies, with the result that there are advantages for certain companies, in particular offshore companies.

151. The Commission criticises the judgment under appeal for taking a formal approach – inspired by the 1998 Notice – which is remote from economic reality, whilst, according to the case-law of the Court of Justice, State measures should be judged on the basis of their effects.

152. Having regard to the contested decision, I should like to draw the Court’s attention to an aspect which seems to me to be fundamental for the purpose of dealing with this case and which is intimately linked with the Commission’s rejection of the derogation-based method set out in the 1998 Notice.

153. The Commission’s assessment of the reform of the Gibraltar tax system is based first of all on an analysis of the regime’s regional and material selectivity. On the other hand, the existence of an advantage is inferred, in recital 153 of the decision, from indications concerning the selective nature of the reform. The Commission examines Gibraltar’s tax system as a whole, finding that it is inherently discriminatory, which is equivalent in the Commission’s view to the existence of a selective advantage and, therefore, to the existence of State aid.

154. However, regardless of the issue of what the reference framework should be in this instance, such a methodological choice seems to me to be erroneous for reasons associated with the structure of the assessment of an indirect measure liable to constitute State aid under Article 87(1) EC. The reasoning for this approach is based on the factors explained above.

B – The fundamental role of identification of the advantage in examining the meaning of selectivity in the case of indirect measures

155. According to the case-law of the Court of Justice, for a measure to be categorised as State aid within the meaning of the Treaty, each of the four cumulative conditions laid down in Article 87(1) EC must be fulfilled. ( ) The provision thus covers aid granted by a State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States. The concept of aid, within the meaning of that provision, is more general than that of subsidy because it embraces not only positive benefits, such as subsidies themselves, but also measures which, in various forms, relieve the charges that are normally borne from the budget of an undertaking in comparison with an undertaking in a comparable situation. ( )

156. In order to determine whether such an advantage constitutes aid for the purposes of Article 87 EC, it is necessary to establish whether the recipient undertaking receives an economic advantage which it would not have obtained under normal market conditions. ( ) In view of the specific nature of tax measures, it has been suggested in the legal literature that State aid should be found to exist where the tax authorities or the government lose or waive tax revenue. ( )

157. In that regard, I firmly take the view that, in the context of the Commission’s appeal, the key concept is that of advantage.

158. I am of the opinion that a measure liable to constitute State aid which is awarded in an indirect form, such as a tax measure, cannot be defined without a reference framework. ( ) The opposite approach would lead to confusion between the concept of selectivity and that of advantage, because in my view the selectivity of a measure involves an unequal distribution of the advantages as between undertakings which are in a comparable situation. Examination of the criterion of selectivity is distinct from examination of the criterion of advantage. ( )

159. In the present instance, if the structure of the tax system which ultimately leads to non-taxation of offshore companies in Gibraltar were to be regarded as amounting to a measure constituting State aid, a question would remain outstanding: how to quantify the amount of the supposed aid without having first identified the common legal regime, or indeed the general reference framework. Thus, in particular, the ceilings of 15% and 35% do not disclose the amount of aid since the Gibraltar tax system lacks any reference provisions that make it possible to understand how offshore companies should have been taxed.

160. A measure liable to be regarded as fiscal aid must correspond to a fiscal cost. ( ) The Commission must be in a position to identify the value of the tax actually or potentially ‘lost’ which represents the amount of the supposed aid. The only means available to the Commission of estimating the ‘lost’ value is to refer to a general regime applicable in the reference framework being examined.

161. In that regard, I would draw attention to the case-law according to which even an advantage granted by means of an additional potential burden for the State is liable to amount to State aid. ( ) That is true in most cases of guarantees which are generally associated with a loan or other financial obligation entered into by a borrower with a lender. ( ) Thanks to the State guarantee, the borrower can enjoy a lower rate or offer less security. In order to determine whether aid exists, it is necessary to evaluate the availability to a recipient undertaking of a loan on the capital markets in the absence of that guarantee. ( ) A mere statement by a representative of the public authorities may, however, have a considerable impact in that the undertaking regains the confidence of the financial markets so as to be able to have access to new credit facilities. ( )

162. In the case of measures of a fiscal nature, it would be wrong to consider that a fiscal decision will automatically result in an advantage for the undertaking concerned. That is why it is necessary for the Commission to have an overall view of the system that is ‘normally’ applicable.

163. The starting point of an analysis of tax measures must therefore be a factual comparison, seeking to ascertain what the situation would be if the measure liable to constitute State aid were not adopted.

164. In its judgment in Belgium and Forum 187, ( ) the Court of Justice held that in order to decide whether a method of assessment of taxable income such as that laid down under the regime for coordination centres conferred an advantage on the latter, it was necessary to compare that regime with the ordinary tax system based on the difference between profits and outgoings of an undertaking carrying on its activities in conditions of free competition.

165. It is therefore necessary to start by asking whether a person should have been taxed and, if so, whether the absence of taxation constitutes an advantage. The next issue is whether the other undertakings in a comparable situation enjoy the same advantage. If that is not the case, there is probably a selective advantage. The advantage can therefore be identified only by means of that factual comparison.

166. For example, if, in a given tax jurisdiction, the setting of a tax threshold gives rise to non-taxation of half of the undertakings, while the other half pay a tax amounting to 10% of their profits, undertakings in the first category can hardly be regarded as enjoying an advantage. If a Member State chooses not to tax certain property, factors or activities, that does not entail that an advantage exists, since the advantage would amount to exemption from a non-existent or inapplicable tax. ( )

167. Another example might be a measure of economic policy, applicable to all undertakings, granting accelerated amortisation for investments made during calendar years A and B. Such a measure involves an advantage, whilst its selectivity is uncertain at first sight. Undertakings that have not chosen to invest in the course of the reference period do not benefit from it. Accordingly, the measure seems to me to be economically selective, but its selectivity is justified by the inherent logic of the tax system, so that the existence of aid may be ruled out. On the other hand, if the measure continues to apply during year C in a particular sector, in that case there is State aid.

168. Moreover, it is beyond dispute that certain sectors or certain types of undertaking may require separate tax treatment by reason of their nature or their purpose. Good examples would seem to me to be non-profit-making organisations or cooperatives. ( )

169. As I have indicated above, the approach followed by the Commission in the contested decision does not appear to me to be well founded. Ireland rightly pointed out at the hearing that it seems to be an ad hoc approach which the Commission justifies on the ground that Gibraltar is small. I do not consider that such a criterion can be a proper basis for the analysis required of the Commission when examining tax measures liable to come within the scope of Article 87(1) EC. If the Court were to opt for the approach proposed by the Commission, that would be tantamount to introducing into Article 87(1) EC an additional criterion linked to the size of the tax jurisdiction in which the contested measure originates.

170. To accept the Commission’s proposition based on a notion of an inherently discriminatory system would also lead to the methodology for examining measures granted in an indirect form being abandoned in an isolated case which, in my opinion, is not covered by the State aid regime but falls rather within the problem of harmful tax competition. I am not unaware that Gibraltar has been identified by the OECD as a tax haven. The Court of Justice is therefore called upon to decide whether it is prepared to depart from the traditional analysis of the concept of State aid in an indirect form in order to stigmatise Gibraltar’s tax regime. ( )

171. Whilst I fully share the Commission’s wish to strengthen the fight against harmful taxation within the European Union, I am of the opinion that an innovative interpretation of Article 87(1) EC cannot be used for such a purpose. The creation of an ad hoc method is designed to enable the Commission to combat bad fiscal and economic practices, without that being connected to the State aid rules in the strict sense. ( )

172. Finally, I also consider it essential to emphasise that, even though the tax system at issue results in offshore undertakings not being taxed, companies whose activity in Gibraltar requires neither the employment of staff nor the occupation of premises in Gibraltar are in exactly the same situation. For example, holding companies, which appear to constitute, from a quantitative point of view, the most important category of Gibraltar undertakings, ( ) are in the same fiscal situation, since the latter does not depend on whether the securities or personal or real property belonging to those companies are located in Gibraltar or outside its territory. The system is not therefore selective in the sense that its effects differ according to the place where business is carried on. Moreover, a similar exclusion of offshore activities might be achieved through a system of corporate taxation which included within the tax base only criteria relating to energy consumption or the generation of waste.

173. In the case of Gibraltar, the taxation system has adopted as a general approach almost zero taxation, whilst accepting that entities which use local factors of production such as labour or premises are more highly taxed. Paradoxically, such a system, to my mind, essentially displays disadvantages, so that it might be characterised as constituting an ‘anti-State-aid’ system.

174. On the other hand, as I have already stated, there is hardly any doubt in my view that the Gibraltar legislature has sought to equip itself with a system of unfair tax competition vis-à-vis the Member States. ( )

175. Inasmuch as European Union law does not have any default tax system, the reference framework must remain the national reference framework or the one identified in accordance with the Azores case-law. Consequently, if the Court of Justice considers that Gibraltar may in itself constitute an appropriate reference framework, it is appropriate to adhere to the traditional analysis of an advantage and selectivity.

C – Material selectivity in the field of direct taxation

176. Article 87(1) EC prohibits State aid ‘favouring certain undertakings or the production of certain goods’, that is to say, selective aid. The condition of selectivity is a constituent factor in the concept of State aid. ( ) Despite the copious case-law on this subject, the concept of selectivity is difficult to tie down, in particular with regard to tax measures.

177. The concept of selectivity is examined from a material standpoint, in the case of measures applicable to certain sectors of the economy or certain forms of undertaking, ( ) or from a regional (geographical) standpoint. ( ) Material selectivity may cover both tax measures limited to undertakings characterised by certain types of activity (sectoral selectivity) and those applicable on the basis of predefined situations in which undertakings are liable to find themselves (horizontal selectivity), for example in the case of tax incentives or measures designed to favour a particular kind of labour force. ( )

178. Given the diversity of tax measures, it is becoming more and more complex to trace a dividing line between general measures and selective measures. ( ) Consequently, determination of the reference framework, difficult though it may be, is fundamental in ascertaining whether the regime in question is ‘abnormal’ and therefore ‘selective’.

179. It is clear from the case-law that the question whether the selectivity condition is satisfied must be assessed on a case-by-case basis, in order to ascertain whether or not, in the light of its nature, scope, method of implementation and effects, the measure in question involves advantages accruing exclusively to certain undertakings or certain sectors. ( )

180. The selectivity of the advantage afforded by the measure in question is capable of being justified, in a later stage, by the nature of the system provided that the measure is, first, granted on the basis of objective conditions (internal consistency of the measure with the logic of the system) and, second, compatible with the nature of the regime (external consistency of the measure). ( ) The Court has consistently held that the definition of State aid does not include national measures introducing a differentiation between undertakings when that differentiation arises from the nature and structure of the system of charges of which they form part. Where that is the case, the measure in question cannot in principle be considered to be selective, even though it gives an advantage to the undertakings which are able to avail themselves of it. ( )

181. It is therefore necessary to examine the selectivity of the advantage conferred by the measure in question in two successive stages.

182. In connection with examination of the selectivity condition in tax matters, the criterion adopted since Advocate General Darmon delivered his Opinion in Sloman Neptun has been that of ‘derogation’ from the general taxation system. ( ) According to Advocate General Darmon, ‘the only fundamental precondition for the application of Article 92(1) is that the measure should constitute a derogation, by virtue of its actual nature, from the scheme of the general system in which it is set’.

183. That methodology was taken up in the 1998 Commission Notice, which is also inspired by the approach taken by the OECD. ( ) According to the 1998 Notice, the main criterion in applying Article 86(1) EC to a tax measure is that the measure provides in favour of certain undertakings in the Member State an exception to the application of the tax system. ( )

184. That derogation-based approach has been criticised in the legal literature since neither the Commission nor the Court of Justice has succeeded in determining precisely what is covered by the term ‘derogation from the norm’ or what constitutes the ‘norm’ or ‘a general system’. ( ) Writers have also emphasised the difficulty in determining a ‘normal’ tax rate in order to establish the rate which may be regarded as departing from the norm. ( )

185. Also, it is apparent from an analysis of the case-law that several solutions have been proposed by Advocates General. Apart from a derogation-based approach, the idea has been put forward that a measure should be regarded as general when it derives from the internal logic of the tax regime ( ) or where it is intended to achieve equality between economic operators. ( )

186. Among the approaches proposed by academic writers, it has been suggested in particular that a measure is general as long as any undertaking, in any sector, is eligible to benefit from it. Under this approach it is necessary to carry out a two–stage test, the first stage comprising identification of the targets of the measure (‘revealed potential targets’), and the second being intended to identify the scope of the measure (‘revealed potential scope’). It would be at the second stage that it would be possible to identify the reasons underlying the measure proposed by the Member State. ( )

187. According to another suggestion, an analysis in three successive stages would involve, first, seeking to ascertain whether the measure is capable of applying to all undertakings that are in a comparable factual and legal situation, second, verifying whether certain undertakings enjoy more favourable treatment (discrimination) and, finally, ascertaining that the measure can be justified by the nature or structure of the tax regime. ( )

188. I accept that the criterion of derogation, which is principally used to determine the advantage, may prove to be uncertain when it comes to ascertaining which rule is being derogated from. ( ) However, it is indeed within a tax system defined by the reference framework, which in most cases is the national taxation system, that a possible sub-system, and, consequently, exceptions or derogations, must be looked for.

189. Notwithstanding the criticisms mentioned above, the derogation-based approach seems to me to be the one most consonant with the allocation of powers between the Member States and the Commission. Whilst accepting that Member States retain competence to organise their tax regimes, it seems to me to be justified to take the view that the authority which the Commission derives from Article 87(1) EC must be circumscribed so as to apply only to measures that amount to a derogation from the generally applicable system.

190. Furthermore, I am of the opinion that the justification for the approach of seeking to identify, initially, a general regime and, subsequently, a derogation from that regime stems from the logic underlying the concept of State aid, which requires the existence of an advantage to be established before it is considered whether there is a selective advantage.

VIII – The method used to establish the selectivity of the tax reform – analysis of the grounds of appeal

A – The method enabling identification of the ‘general’ tax system of a Member State ( )

1. The Commission’s arguments in the second and third parts of its sole ground of appeal

191. By the second part of its sole ground of appeal, the Commission, supported by the Kingdom of Spain, contends that the General Court erroneously held that the Commission was obliged first to identify the common or ‘normal’ tax regime and then to demonstrate that the measures in question derogated from that system. Such an approach, in the Commission’s view, disregards the possibility that a Member State or an autonomous territory of a Member State may establish 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, it maintains, reproduced to a large extent the effects of a scheme which manifestly incorporates State aid for certain categories of undertaking. ( )

192. According to the Commission, nothing in European Union law requires the approach laid down by the General Court to be followed. Moreover, the Commission rejects the view that the 1998 Notice is binding. In response to Ireland’s statement in intervention, the Commission also observes that the 1998 Notice did not envisage an exceptional case similar to that of Gibraltar’s tax regime and that the 1998 Notice cannot in any event derogate from Article 87 EC. The exceptional nature of the present case calls for an innovative approach in order to avoid a flaw in the control of State aid, although such an approach must be confined to particularly clear cases of selectivity.

193. By the third part of its sole ground of appeal, the Commission, supported by the Kingdom of Spain, contends that the General Court infringed the principle whereby the national measures must be assessed on the basis of their effects and not according to the objective pursued. ( ) The Commission states that the General Court took the view that the Commission is required to take as the starting point for its analysis what the Member State or autonomous territory asserts to be the common or ‘normal’ regime. ( ) In the Commission’s view, the General Court was wrong to consider that the inherent logic of a tax system and the common or ‘normal’ regime under that tax system can be identified by reference to the objectives allegedly pursued by the national or local authorities.

194. In response to Ireland’s submissions, the Commission contends that there is no reason for concern that Member States might no longer be able to pursue legitimate ends through their tax systems, since the approach advocated by the Commission applies only to exceptional cases, without however further defining the limits of such ‘exceptional cases’.

2. Assessment

195. I would observe at the outset that, in paragraphs 143 to 146 of the judgment under appeal, the General Court made a reference, free from any distortion of their sense, to the terms of the 1998 Notice, from which it is apparent that, in order for the Commission to classify a tax measure as selective, it must begin by identifying and examining the common regime, in order to be able, at a second stage, to assess and determine whether the advantage granted is selective. The Court then correctly set out, in paragraph 144 of the judgment under appeal, the case-law under which the selectivity of a measure can be justified by the nature or the general scheme of the tax system of which it is part.

196. It was by reference to those principles that the General Court, in paragraph 170 of the judgment under appeal, criticised the Commission, in the light of the details put forward by the Government of Gibraltar and the United Kingdom, for not correctly discharging its duty to analyse the tax system in question in relation to Article 87 EC.

197. In that regard, first, since I accept the necessity for and legality of the derogation-based approach involving a comparative analysis in relation to indirect support measures liable to constitute State aid, and having regard to the foregoing reasoning, I propose that this Court hold that the General Court was right to criticise the Commission for not taking the approach advocated in the 1998 Notice.

198. I would observe that, in this instance, the General Court’s reasoning is based more on the issue of the allocation of powers between the Member States and the Commission in the area of taxation than on the status of the 1998 Notice alone.

199. In any event, it is clear from the case-law that, in adopting rules of conduct and announcing by publishing them that they will apply to the cases to which they relate, the Commission imposes a limit on the exercise of its discretion and cannot depart from those rules under pain of being found, where appropriate, to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations. ( ) The Community judicature has made it clear on numerous occasions that the Commission is bound by its notices on matters of competition law, for example, in relation to fines. ( )

200. It is apparent from that case-law, in the specific area of State aid, that the Commission is bound by the guidelines and notices that it issues, to the extent that they do not depart from the rules in the Treaty. ( ) It follows that the Commission cannot be definitively bound by its notices.

201. The issue of the inherently discriminatory character of the Gibraltar tax regime was touched on by implication by the Commission in the contested decision. It was not until the hearing that the Commission expounded its views on the matter.

202. In my view, to accept such an approach would be tantamount to triggering a methodological revolution in the application of the rules relating to State aid for the purposes of Article 87(1) EC. According to that approach, the existence of an advantage would be assessed no longer on the basis of a comparison between the measure and the generally applicable tax regime, but by virtue of a comparison between the tax regime as it exists and another – hypothetical and non-existent – system. Such an approach would require the construction of a fiscal comparator for the European Union in order to be able to assess the allegedly discriminatory effect of the choices made regarding the tax base (or tax rates) in the field of corporate taxation. However, no such common criterion exists and the application of the legal framework for State aid does not justify the de facto adoption of a tax harmonisation measure of that kind. ( )

203. The argument that that approach would apply only in exceptional cases cannot be accepted. The legal methodology applicable up to the present time is directly based on the scheme of Article 87(1) EC and is in conformity with the objectives of European Union competition law. It cannot be abandoned merely because it does not lead to the result desired by the Commission in an individual case.

204. As regards the error of law alleged in the third part of the Commission’s sole ground of appeal, it is not in dispute that, according to settled case-law, the objective pursued by State intervention is not sufficient to exclude it outright from classification as ‘aid’ for the purposes of Article 87 EC. Article 87(1) EC does not draw any distinction based on the causes or aims of State intervention, but defines it in relation to its effects. ( )

205. However, on reading the judgment under appeal, I am of the opinion that the Commission’s contentions in the third part of its sole ground of appeal are based on an incorrect reading of paragraphs 145, 146 and 171 to 174 of that judgment.

206. Paragraph 145 of the judgment forms part of the General Court’s reasoning as to why it was incumbent on the Commission to apply the three stages of the derogation-based approach when examining the selective nature of the regime at issue. The Court stated that, by confining itself to the third stage of the approach referred to above, the Commission risked depriving the Member State concerned of the possibility of justifying the differentiations within the tax regime, since the Commission would not first either have identified the common or ‘normal’ regime or have established that the differentiations in question constitute derogations. Nor are there any grounds for concluding that the General Court has required the Commission to adopt a predefined position without being able to exercise its rights of analysis under the Treaty.

207. In view of the foregoing, I propose that the second and third parts of the Commission’s sole ground of appeal be rejected as unfounded.

B – The nature of the examination of a tax regime carried out by the Commission ( )

1. Arguments put forward in the fourth part of the Commission’s sole ground of appeal

208. In the fourth part of its sole ground of appeal, the Commission, supported by the Kingdom of Spain, complains that the General Court was wrong to hold that the inherent logic of a tax system and the common or ‘normal’ regime under that tax system may result from the application of different criteria or rules to different taxpayers. In its view, such an approach would lead to the outcome that any specific feature of the system, no matter how much it favours certain beneficiaries, is automatically part of the system, not a derogation, and therefore escapes the application of the State aid rules. ( )

209. Moreover, the Commission denies having raised the issue of the burden of proof. It alleges that the General Court erred in law not by finding that the Commission had not discharged the burden of proof attaching to it but by excluding at the outset the possibility that the ‘normal’ tax regime of a regional or local authority can be regarded as falling within the concept of State aid.

2. Assessment of the fourth part of the sole ground of appeal

210. By this fourth part, the Commission takes exception to paragraphs 175 to 183 of the judgment under appeal. In paragraph 175, the General Court emphasised that neither the considerations set out in the contested decision nor the arguments put forward by the Commission and by the Kingdom of Spain sufficed to call into question the validity of the definition of the common or ‘normal’ regime under the notified tax system.

211. It is clear from paragraph 187 of the judgment under appeal that the present issue is connected with the burden of proof. In that regard, it should be borne in mind that, in principle, the General Court alone has jurisdiction to find and evaluate the facts. It is also for the General Court alone to assess the value which should be attached to the evidence produced to it, provided that the evidence which it has accepted in support of those facts has been properly obtained and the general principles of law and the rules of procedure in relation to the burden of proof and the taking of evidence have been observed. ( ) The Court of Justice has jurisdiction, under Article 225 EC, solely to review the legal characterisation of those facts by the General Court and the legal conclusions it has drawn from them. ( )

212. As regards the first element of the General Court’s reasoning, referred to in paragraph 176 of the judgment under appeal, I would observe that the Court held, in paragraph 177 of that judgment, that the Commission had not rebutted to the requisite legal standard the Government of Gibraltar’s argument that the requirement that a company must make a profit was inherent in the logic of a system based on staff numbers and the occupation of land. Moreover, the Court stated, in paragraph 178 of the judgment under appeal, that the mere assertion by the Commission that, in a tax system such as that proposed by the Gibraltar authorities, the more people a company employs and the more property it occupies, the greater the tax liability will have to be would not be sufficient to call into question the validity of the choice made by those authorities as to the elements constituting the common or ‘normal’ regime under that tax system.

213. As regards the second element of the Court’s reasoning, in paragraphs 179 to 181 of the judgment under appeal, the Court held that the classification of the Gibraltar tax system as a hybrid system does not demonstrate, in itself, that such a system cannot constitute a common or ‘normal’ tax regime. The Court also criticised the Commission and the Kingdom of Spain for advancing purely hypothetical arguments concerning two aims assigned to the tax system and to the common regime introduced by the reform.

214. As regards the third element of the Court’s reasoning, in paragraphs 182 to 185 of the judgment under appeal, after citing certain paragraphs of the contested decision without distorting their clear sense, the Court held that the Commission’s arguments were not such as to call into question the position taken by the Gibraltar authorities.

215. Since distortion of the clear sense of the matters on which the Court adjudicated is not alleged by the Commission in this instance, the fourth part of the sole ground of appeal could be regarded from the outset as unfounded.

216. If, however, the Court of Justice were to consider it appropriate to give its views on the legal conclusions drawn by the General Court from the arguments put forward by the Government of Gibraltar, it is clear from paragraph 184 of the judgment under appeal that the General Court based its rejection of the Commission’s arguments on the methodological error which it considered the Commission to have committed in this instance.

217. In that regard, while I endorse the General Court’s analysis finding that the Commission’s methodological approach was incorrect, I would observe, with respect to the allocation of the burden of proof, that it was the Commission’s responsibility to identify the existence of a measure conferring a selective advantage. It was then for the Member State concerned, which has introduced a differentiation between undertakings in relation to the tax burden, to s