State aid — United Kingdom — Aid C 53/2001 (ex NN 52/2000) — Gibraltar exempt companies — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance)
Date: 2002-01-30
Institutions: European Commission
Subjects: Gibraltar, State aid, United Kingdom, aid to undertakings, control of State aid, tax relief

30.1.2002

EN

Official Journal of the European Communities

C 26/13

STATE AID (cid:151) UNITED KINGDOM

Aid C 53/2001 (ex NN 52/2000) (cid:151) Gibraltar exempt companies

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

(2002/C 26/05)

(Text with EEA relevance)

By means of the letter dated 11 July 2001, reproduced in the authentic language on the pages following
this summary, the Commission notified the United Kingdom of its decision to initiate the procedure laid
down in Article 88(2) of the EC Treaty concerning the abovementioned measure.

Interested parties may submit their comments on the measure in respect of which the Commission is
initiating the procedure within one month of the date of publication of this summary and the following
letter, to:

European Commission
Directorate-General for Competition
State Aid Registry
B-1049 Brussels
Fax (32-2) 296 12 42.

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

SUMMARY

Assessment

Procedure

The measure has not been notified to the Commission.

in 1967. These

The State aid measure, which is the object of the initiation of
procedure, is a measure in force in Gibraltar (United Kingdom).
The measure has been established by the Companies (Taxation
and Concessions) Ordinance
rules have
undergone several modifications and amendments in 1969,
1970, 1974, 1977, 1978, 1983, 1984, 1985, 1987, 1988, 1990
the
the information provided,
and 1993. On the basis of
measure has known at
two substantial modifications
least
since the accession of the United Kingdom to the European
Union and should therefore be considered as an non-notified
aid.

Description

The measure appears to constitute aid as it fulfils the four
relevant criteria.

Firstly, the measure affords the beneficiaries an advantage that
reduces the costs they normally bear in the course of their
business. According to point 9 of the Commission notice on
the application of the State aid rules to measures relating to
direct business taxation (1), the tax advantage may be granted
through different types of reduction in the company’s burden
and, in particular, through a reduction in the amount of tax.
The relief
from the obligation to pay the full amount of
corporation tax appears to fulfil this criterion.

regime,

a company satisfying certain
According to the
(amongst which, no Gibraltarian or Gibraltar
conditions
interest in the shares of the
resident may have a beneficial
company)
certificate.
Possession of this certificate will allow the exempt company
to pay a lump sum ranging from GBP 200 to GBP 300
instead of being subject to the normal corporate tax.

can obtain an exempt

company

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

relating to direct business

to measures

taxation,

The purpose of
companies to Gibraltar through considerable tax advantage.

this regime is to attract non-Gibraltarian

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

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the measure must affect competition and trade
Thirdly,
between Member States. This criterion is fulfilled by the
measure to the extent that these companies are able, actually
or potentially,
located in other
Member States. This is all the more so that, on the basis of
the information provided, the exempt company may not,
in
normal circumstances, trade or carry on business in Gibraltar,
with Gibraltarians or residents of Gibraltar.

to trade with companies

Lastly, the measure must be specific or selective in that it
favours (cid:145)certain undertakings or the production of certain
the measure are companies in
goods(cid:146). The beneficiaries of
resident may have a
which no Gibraltarian or Gibraltar
the exempt
beneficial
company may not in normal circumstances trade or carry on
business
residents of
Gibraltar. On the basis of these elements it can be presumed
that the measure is selective,
in so far as it favours foreign
resident companies over others.

in Gibraltar with Gibraltarians or

in their shares.

In addition,

interest

the Commission notice on the
As stated in point 26 of
the State aid rules to measures relating to
application of
are
companies
(cid:145)if non-resident
taxation,
direct business
it is difficult to
treated more favourably than resident ones(cid:146)
justify such an exception by the logic of
the tax system.
Despite the fact that exempt companies are resident companies,
the exempt status is granted to them only on the basis that
they are foreign-owned. Exempt companies are treated more
favourably than other
the
application of a lower corporate tax rate cannot be justified
by the logic of the tax system.

resident companies. Therefore,

For these reasons, the measure seems to constitute an operating
the State aid in question does not
State aid. Furthermore,
the exceptions laid down in
appear to fall within any of
in the
Article 87(2) and (3) of
context of
its preliminary assessment under Article 6 of
Council Regulation (EC) No 659/1999 laying down detailed
rules for the application of Article 93 of the EC Treaty, the
Commission has doubts as regards the compatibility of the tax
measure.

the EC Treaty. Therefore,

In accordance with Article 14 of Regulation (EC) No 659/1999,
all unlawful aid can be subject to recovery from the recipient.

TEXT OF THE LETTER

(cid:145)The Commission wishes to inform the United Kingdom that,
having examined the information supplied by your authorities
on the measure referred to above, it has decided to initiate the
procedure laid down in Article 88(2) of the EC Treaty.

taken by way of

taxation with the objective of

In 1997, the Ecofin Council adopted a code of conduct for
direct business
tackling
harmful tax competition (OJ C 2, 6.1.1998). Following to the
the Commission
commitment
published in 1998 a notice on the application of State aid
rules to measures relating to direct business taxation (OJ C
384, 10.12.1998) stressing its determination to apply them
rigorously and to respect the principle of equality of treatment.
The current procedure is carried out within this framework.

this code,

I. PROCEDURE

1. Aid NN 52/2000 (cid:151) (cid:145)Gibraltar exempt companies(cid:146) has not

been notified to the Commission.

in respect of

2. On 12.2.1999 the Commission has sent a first

formal
information (D/50716)
a
request
for
number of
tax schemes applicable in Gibraltar. The
Permanent Representation of the United Kingdom to the
European Union provided an answer dated 27.7.1999
(registered under No A35879). A second request
for
information was sent on 23.5.2000 (D/53070), followed
by a reminder on 28.6.2000 (D/53572). The answer was
provided by letter dated 3.7.2000 (A/35549).

the

relevant measure

appeared to be not

3. On 14.7.2000 the Commission addressed to the United
Kingdom Authorities a further letter (D/53831), indicating
that
in
conformity with Community law and asking for further
status
information, with a view to determine
the
(existing or unlawful) of
relevant
rules was
required. The United Kingdom authorities were also
given the opportunity to submit comments in case the
aid could be qualified as an existing aid.

legislation on exempt

In particular, all

companies

the aid.

the

4. By letter dated 3 August 2000 (A/36639),

requested an extension of

the United
Kingdom Authorities
the
deadline to reply until the week beginning 11 September
2000. By
the
Commission granted the United Kingdom authorities an
extension of the original time limit, until 8.9.2000.

(D/54255),

10.8.2000

dated

letter

5. On 12.9.2000, the United Kingdom authorities submitted
to the Commission (A/37430). These

their comments
comments are outlined in section III below.

6. On 19.10.2000 a meeting was held with British authorities
and following that meeting, further information from the
Gibraltar Government was transmitted to the Commission
by letter from the British Permanent Representation dated
8.1.2001 (A/30254). This information is also outlined in
section III below.

II. DETAILED DESCRIPTION OF THE MEASURE

Relevant
occurred

legislation

and

substantial modifications

companies

7. According to the information transmitted, the rules on
rules(cid:146)) were
((cid:145)exempt
exempt
introduced by the Companies (Taxation and Concessions)
Ordinance in 1967. These rules have undergone several
modifications and amendments
in 1969, 1970, 1974,
1977, 1978, 1983, 1984, 1985, 1987, 1988, 1990 and
1993.

company

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8. According to the exempt company rules, subject to certain
conditions, a company may apply for a Tax exemption
certificate ((cid:145)exemption certificate(cid:146)). Possession of
such
exemption certificate will, in return for the payment of a
fixed annual tax, exempt the company or branch from
further taxation in Gibraltar. Possession of the exemption
certificate will give the company the exempt company
status (the company holding such status being referred
hereinafter as (cid:145)exempt company(cid:146)). Among the conditions
to be fulfilled in order to obtain the exemption certificate,
no Gibraltarian or Gibraltar resident may have a beneficial
interest in the shares of the company.

it results that

companies which was

9. On the basis of the information transmitted by the United
the legislation on
Kingdom authorities,
exempt
the
accession of the United Kingdom to the European Union
appears to contain at least two changes which can be
considered as a notifiable events under State aid rules.
This preliminary conclusion is drawn essentially for the
reasons explained here below.

introduced after

10. According to the 1967 exempt company rules, a company
the

is eligible to be an exempt company if at
following requirements are fulfilled, in particular:

least

(a)

it is registered in Gibraltar other than under Part IX of
the companies ordinance);

(b) the paid-up share capital of the company is not less

than GBP 100;

(c)

the company does not carry on or transact any trade
or business in Gibraltar (unless the income of that
business
from
dealings with other exempt companies and originate
from persons other than Gibraltarians or residents of
Gibraltar);

either outside Gibraltar or

arises

(d) the company does not keep any register of shares

outside Gibraltar;

(e) no Gibraltarian or resident of Gibraltar is interested in
any of its shares (other than a shareholder in a public
company).

11. According to the 1967 exempt company rules, exempt
companies are liable to taxation only at a fixed sum,
which is:

(cid:151) GBP 200 per annum in the case of an exempt
company which is not ordinarily resident in Gibraltar,

(cid:151) GBP 225 per annum in the case of an exempt
company which is ordinarily resident in Gibraltar.

12. The 1978 companies ordinance contains a substantial
modification to the previous exempt companies rules (as
legislation) by introducing an
amended by subsequent
exemption of stamp duty on the issue of
life insurance
policies by exempt companies, on annuities payable by

exempt companies and on any dealings by way of
mortgage, sale, etc. relating to such policies or annuities.
This advantage granted to exempt companies was not
available in the 1967 exempt companies rules.

13. The 1983 exempt

(as

amended by
company rules
subsequent legislation) contain another substantial modifi-
cation to the previous exempt company rules (and in
particular the 1967 text) as concerns one of the conditions
to be fulfilled in order for eligibility as exempt company,
and the consequent amount of tax to be paid. In particular,
as it is shown here below, the 1983 exempt company rules
contain an extension of the system on exempt companies
to companies which were not, according to the previous
legislation, eligible for becoming exempt companies.

that

14. According to the 1983 exempt company rules (as modified
by subsequent legislation), a further category of companies
is eligible to become exempt companies,
is also
registered branches of overseas companies. This type of
companies were explicitly excluded by the scope of
application of the 1967 exempt company rules, which,
as indicated above in point 8(a) above, did not allow
companies registered under part
the companies
ordinance (which are registered branches of overseas
companies)
system on exempt
companies. For this type of companies, the 1983 exempt
companies rules fix the rate of
taxation applicable at
GBP 300 per annum.

to benefit

from the

IX of

15. As to the other conditions to be fulfilled for eligibility as
an exempt company no substantial change appears to have
occurred in the 1983 exempt company rules in relation to
previous legislation, in particular those indicated in point
10 above.

16. Taking account of

these two substantial modifications,
relating both to the amount of
the advantage granted
and to the number of potential beneficiaries it can be
regime can not be
said that
regarded as an existing but an illegal aid.

the exempt companies

Other characteristics

17. An exemption certificate remains in force for a period of

25 years after the date stated in it.

18. The main tax benefits for an exempt company are the

following:

(a) no tax shall be charged on or payable on the profits of
the company or upon any dividend or interest or
director’s fee or annual payment;

(b) subject to certain exceptions, no stamp duty shall be

payable by an exempt company;

(c) on the basis of the above, exempt company are liable
tax included between
annual

to an amount of
GBP 200 and GBP 300 per annum (see above).

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III. COMMENTS SUBMITTED BY THE UNITED KINGDOM

AUTHORITIES

concluded by the United Kingdom Government has
been extended to apply to Gibraltar;

19.

have

submitted

In their letter of 12.9.2000, the United Kingdom auth-
orities
the
their
preliminary position of the services of the Commission,
as expressed in the letter of 14.7.2000. These observations
take the form of a letter, dated 5 September, from the
Government of Gibraltar.

observations

on

20. In the first place it is argued that Article 87(1) would not
be applicable to tax schemes, such as the exempt company
rules, which are designed to operate in an international
context. In particular, given that exempt companies status
that such companies do not
is granted to the extent
undertake business with Gibraltar,
there would be no
advantage, consisting of an exemption from the normally
applicable tax rates, as Gibraltar would not be competent
to grant an advantage relating to another jurisdiction.

21.

It is further claimed that a tax advantage cannot constitute
an aid and that the exempt companies rules is not selective
in nature.

it
rules,

is argued that,

in assessing the exempt
22. In addition,
company
into
account Gibraltar’s precise status within the Community,
in particular the fact that Gibraltar does not form part of
the Community’s common customs territory.

the Commission should

take

23. As a last point, the letter indicates that a large number of
companies holding the exempt status would benefit of the
currently applicable de-minimis rules.

24.

to

authorities

transmitted

In the letter dated 8 January 2001 referred above, the
British
the Commission
answers provided by the Government of Gibraltar on
several questions raised by the Commission during the
In their letter, the
meeting held on 19 October 2000.
British authorities informed the Commission that
they
had no comments to make at this stage. The information
contained in the forwarded document, can be summarised
as follows:

it

to
the

(a) the modification to the exempt companies status in
1983 should not be regarded as a notifiable event
administrative
because
amounted
improvement. Therefore,
be
should
considered as an existing aid regime and not an
illegal aid. It is added that the case Namur-les Assurances
du CrØdit v OND, where the ECJ examined an
analogous situation proves that
the amendment of
1983 should not be regarded as a substantive change
to the regime;

an
regime

(b) the payment of a flat rate of tax is commensurate and
proportional
to the extremely negligible economic
activity which exempt companies are allowed to
conduct within Gibraltar. The activities carried out
by exempt companies outside Gibraltar cannot be
taxed in Gibraltar;

(c) as result of
concluding

its status, Gibraltar is precluded from
treaty
double

treaties. No

taxation

(d) the vast majority of the 8 000 exempt companies have
been set up by and for individuals and do not carry
any economic activity within Gibraltar. The other
exempt companies set up by undertakings only carry
from their office in Gibraltar an economic activity
ancillary to the principal trade which never amounts
to substantial activities. Exempt companies can subject
to normal regulatory requirement, do the activity of
banking only with non-residents.

services providers
set up themselves

to exempt
(e) a few management
exempt
as
companies have
companies which allows
an
economic activity in Gibraltar and to enjoy a flat
rate of
the
Government of Gibraltar is seeking to repeal this possi-
bility.

them to undertake

taxation. However,

stated that

is

it

IV. ASSESSMENT OF THE MEASURE

25. To be considered an aid under Article 87(1) of the EC
Treaty, a measure must fulfil the four following criteria.

26. Firstly,

the measure must afford the beneficiaries an
advantage that reduces the costs they normally bear in
the course of their business. According to point 9 of the
Commission notice on the application of the State aid
rules to measures relating to direct business taxation (2),
the tax advantage may be granted through different
types of
in
reduction in the company’s burden and,
particular, through a reduction in the amount of tax.

27. The relief from the obligation to pay the full amount of
corporation tax seems to fulfil this criterion. As regards
the exemption of stamp duties on life insurance policies,
annuities and any dealings related to such policies or
annuities, seems to constitutes an indirect advantage to
the exempt companies because this exemption is not
available to other companies and therefore individuals
are encouraged to subscribe policies written by, or
receive annuities from exempt companies.

28. Secondly, the advantage must be granted by the State or
through State resources. The grant of a tax reduction
involves a loss of tax revenue which, according to point
10 of the Commission notice on the application of the
State aid rules to measures relating to direct business
is equivalent to the use of State resources in
taxation,
the form of
fiscal expenditure. As regards stamp duty,
and as confirmed by the case law of the European Court
the
of
advantage indirectly conferred on exempt companies is
the renunciation by the Member State of
tax revenue
which it would normally have received, inasmuch as it is
this
to
subscribe policies issued by or to receive annuities from
exempt companies on conditions which are in tax terms
more advantageous.

renunciation which has

in an analogous case,

enabled individuals

the origin of

Justice (3)

(2) OJ C 384, 10.12.1998, p. 3.
(3) Case C-156/98, ECR 2000, p. I-6857.

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extent

to the

29. Thirdly, the measure must affect competition and trade
to be
between Member States. This criterion seems
fulfilled by the measure
these
that
companies are able, actually or potentially, to trade with
companies located in other Member States. This is all the
more so that, on the basis of the information provided, the
exempt company may not, in normal circumstances, trade
or carry on business in Gibraltar, with Gibraltarians or
residents of Gibraltar. Moreover, as undertakings registered
as exempt companies can, under certain conditions, issue
insurance policies or be active in the field of banking, it
cannot be excluded that Community trade might be
affected in these domains.

30. Lastly, the measure must be specific or selective in that it
favours (cid:145)certain undertakings or the production of certain
goods(cid:146). The beneficiaries of the measure are companies in
which no Gibraltarian or Gibraltar resident may have a
beneficial interest in their shares. In addition, the exempt
company may not in normal circumstances trade or carry
on business in Gibraltar with Gibraltarians or residents of
it can be
Gibraltar. On the basis of
presumed that the measure is selective,
in so far as it
accords privileged tax treatment to those non-Gibraltar-
owned companies. It should be borne in mind that the
identification of
the abovementioned features regarding
material specificity do not exclude the existence of other
features that would confer specificity to the envisaged tax
regime, like for example regional specificity.

these elements

31. As stated in point 26 of the Commission notice on the
application of the State aid rules to measures relating to
direct business taxation,
(cid:145)if non-resident companies are
treated more favourably than resident ones(cid:146) it is difficult
to justify such an exception by the logic of the tax system.
Despite the fact that exempt companies can be resident
the exempt
it cannot be challenged that
companies,
status is granted to them only on the basis that they are
foreign-owned. Qualifying companies are treated more
favourably than other resident companies. Therefore, the
application of a lower corporate tax rate does not seem at
this stage to be justified by the logic of the tax system.

32. As to first argument put forward by the United Kingdom
authorities (which is indicated in point 20 above) in their
comments of 12.9.2000, it is noted that, irrespective of
the type of activities in which exempt companies may be
active in, their exempt status is granted to the extent that
these
are
companies.
registered
Consequently, these companies benefit of a special and
more beneficial
in Gibraltar, when their
position is compared to that of other companies registered
in Gibraltar.

registered in Gibraltar or
overseas
of

are
branches

tax treatment

companies

an

33. As to the argument relating to the special status of
Gibraltar, it is however recalled in the first place that the
Act of Accession to the European Communities of,
inter
alia, the United Kingdom does not provide any exclusion
as to the applicability of the relevant provisions on State
aid (e.g. Articles 92 (now 87) and 93 (now 88) of the
Treaty to Gibraltar. Second,
is recalled that current
Articles 28 to 30 of the EC Treaty only refer to goods,
while exempt companies may be active in financial

it

activities for example. Third, it is noted that, to the extent
that there is a possibility of diversion of trade within the
the existence of exempt companies in
EU because of
Gibraltar,
there is an effect on intra-Community trade
which is created by this Gibraltarian system, which is
under consideration.

34. As a last point, it is noted that the argument relating to
the de-minimis rule cannot be accepted, given that there is
no guarantee that aid in excess of that allowed under the
de-minimis rule will not have been granted in certain cases,
nor that aid may have been granted in sectors where the
de-minimis rule does not apply.

35. As regards the information forwarded by the British auth-
orities on 12.1.2001, none of the arguments transmitted
allowed the Commission to dissipate at
this stage its
doubts as regards the nature of the aid.

36. As regards, the status as existing aid, it should be noted
that the reference to the ECJ case Namur-les assurances du
CrØdit v OND is non relevant because it targets the scope
of activities of a company enjoying State aid and not the
number and the nature of beneficiaries of
the aid.
Moreover, even if the 1983 amendment consisted in a
small administrative modification, it cannot be contested
that it lead to an extension of the number of potential
beneficiaries which should have been notified to the
Commission pursuant Article 93(3) of
the EC Treaty
(now Article 88(3)).

37. As regards,

the fact

that activities carried out outside
Gibraltar cannot be taxed in Gibraltar, it should be noted
if it is true for certain kind of activities which require a
physical presence outside Gibraltar and that have already
been taxed outside Gibraltar,
it should be noted that
financial services can be provided by exempt companies
from Gibraltar
to non-residents, no physical presence
being necessary outside Gibraltar. The revenue of these
activities will probably arise directly in Gibraltar without
having being taxed outside Gibraltar. Furthermore, no indi-
cation was given as regards revenue arising from economic
activities outside Gibraltar of Gibraltarian undertakings not
registered as exempt companies.

38. As

far as

the fact

that Gibraltar
taxation agreements

is precluded from
concluding double
and is not
covered by any double taxation agreement concluded by
the United Kingdom, it should be noted that, as stated in
point 26 of the Commission notice on the application of
the State aid rules to measures relating to direct business
taxation: (cid:145)the whole purpose of the tax system is to collect
revenue to finance State expenditure(cid:146). The non-collection
of taxes can therefore be justified in order to avoid double
information
taxation. However,
available at this stage that no information on whether
taxation occurred abroad, or not,
required from
exempt companies.

it appears

from the

is

39. Regarding,

the fact

the 8 000 exempt
that most of
companies have been set up by individuals shall not
exclude the possibility for these companies to carry on
economic activity, an affectation of trade can therefore
not be excluded.

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40. Finally, as regards the possibility to carry on economic
activity with an exempt company status within Gibraltar,
it is recognised that such possibility exists for the moment,
even if it is claimed to be limited.

V. COMPATIBILITY OF THE AID

therefore formed the view that

41. On the basis of the information currently available, the
Commission has
the
measure as currently applied appears to constitute an
operating aid in the meaning of Article 87(1) of the EC
Treaty. This measure allows a company or
registered
branch holding the status of exempt company to be
liable to taxation at a lower level than that applied to
other companies.

42. It is therefore necessary to determine if such an aid is
compatible with the common market under the exceptions
laid down in Article 87(2) and (3) of the EC Treaty.

43. It appears that the exceptions under Article 87(2) of the
EC Treaty cannot be applied in this case, as the aid is not
aimed at the objectives listed in these provisions.

44. Under Article 87(3)(a), an aid is considered compatible
with the
is designed to
common market when it
promote the economic development of areas where the
standard of
living is abnormally low or where there is
serious underemployment. Since Gibraltar is not such an
area, this provision does not apply.

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

trading conditions to an extent contrary to the common
interest.

47. The rules according an exempt company status are not
related to an investment or to a job creation and constitute
a permanent relief from charges that should be normally
met by these companies in the course of their business.

48. The aid can, at this stage, be considered as an operating
aid, the benefits of which will cease as soon as the aid is
withdrawn. According to the constant practice of
the
Commission, such aid cannot be considered to facilitate
the development of certain economic activities or of
certain economic areas.

49. Since the aid does not appear to qualify for any of the
exceptions provided for in the Treaty, the Commission has
doubts about
the aid with the
common market.

the compatibility of

50. In the

the

light of

foregoing

considerations,

the EC Treaty,

the
Commission, acting under the procedure laid down in
Article 88(2) of
the United
requests
its comments and to provide all
Kingdom to submit
such information as may help to assess the aid, within
one month of
this letter. The
the date of receipt of
Commission would in particular like to gather the obser-
vations of the United Kingdom and interested parties on
that would
possible legitimate expectations of
pose an obstacle to the recovery of aid, in the event that
this aid would be qualified as being illegal and incom-
patible.

the sort

51. The Commission requests your authorities to forward a
copy of this letter to the potential recipient of the aid
immediately.

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

52. The Commission wishes to remind the United Kingdom
that Article 88(3) of the EC Treaty has suspensive effect,
and would draw your attention to Article 14 of Council
Regulation (EC) No 659/1999, which provides that all
unlawful aid may be recovered from the recipient.(cid:146)