State aid — United Kingdom — Aid C 66/2002 (ex N 534/2002) — Gibraltar government corporation tax reform — Invitation to submit comments pursuant to Article 88(2) of the EC Treaty (Text with EEA relevance)
Date: 2002-12-04
Institutions: European Commission
Subjects: Gibraltar, State aid, business tax, control of State aid, corporation tax, property tax, tax on employment income, tax system

C 300/2

EN

Official Journal of the European Communities

4.12.2002

STATE AID — UNITED KINGDOM

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

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

(2002/C 300/02)

(Text with EEA relevance)

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

Interested parties may submit their comments within one month of the date of publication of this
summary and the following letter, to:

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

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

SUMMARY

Description

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

— the Companies (Payroll Tax) Ordinance,

— the Companies (Annual Registration Fee) Ordinance,

— the Rates Ordinance,

— the Companies
Ordinance.

(Taxation

of Designated Activities)

(Qualifying Companies) Regulations

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

repealed. The

income

(the

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

system of

(BPOT) in addition to property rates at 100 % of the liability to
property rates. The total liability for tax (payroll + BPOT) will
be capped at 15 % of profits or GBP 500 000, whichever is the
lower.
it will have no tax
liability.

If a company makes no profit,

In addition to the payroll and property taxes, financial services
companies will be charged a top-up tax at a rate of 8 % of
profits from financial service activities. Total taxation (payroll +
BPOT + top-up) will be capped at 15 % of profit or
In addition to
GBP 500 000 as under the ‘general’ system.
the payroll tax and BPOT, utility companies (telecoms, water,
sewage, electricity, petroleum) will be charged a top-up tax at
the rate of 35 % of profits from the provision of utilities
services. The payroll tax and BPOT are deducted from the
liability for top-up tax so that utilities are taxed at a flat rate
of 35 % of profits. Capital gains are not treated as profit.

Assessment

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

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

types of

Companies will be subject to a payroll tax of GBP 3 000 per
employee per annum and a business property occupation tax

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

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

PROCEDURE

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

The caps on the liability for payroll tax and BPOT will confer
an advantage on those Gibraltar companies that benefit from
them by limiting their tax liability. The 15 % cap is most likely
to apply to labour intensive companies or those with low
profitability. The GBP 500 000 cap will
tend to apply to
large companies.

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

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

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

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

the reform would appear

For these reasons, the reform seems to constitute operating aid
and does not appear to fall within any of the exceptions laid
down in Article 87(2) and (3) of the EC Treaty. Therefore, in
the context of its preliminary assessment under Article 6 of
Council Regulation (EC) No 659/1999 laying down detailed
rules for the application of Article 93 (now Article 88) of
the EC Treaty (2), the Commission has doubts as regards the
compatibility of the reform.

TEXT OF THE LETTER

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

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

BACKGROUND

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

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

the Gibraltar Government

DETAILED DESCRIPTION OF THE MEASURE

Objective the reform

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

i.e.

applicable

registration fee,

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

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Implementation

(6) The reform will be implemented through:

— the Companies (Payroll Tax) Ordinance,

— the Companies (Annual Registration Fee) Ordinance,

— the Rates Ordinance,

— the Companies (Taxation of Designated Activities)

Ordinance.

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

the reform,

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

subject matter of

Payroll tax

(9) Profits-based taxation will be replaced by a general payroll
tax pursuant to which all Gibraltar companies will be
liable in the amount of GBP 3 000 per employee each
year. Liability to payroll
tax together with business
property occupation tax will be capped at 15 % of
profits or GBP 500 000, whichever is the lower. Thus,
companies will only pay payroll tax if they make profit,
but in an amount not exceeding 15 % of profits and not
exceeding GBP 500 000 in any event.

(10) The vast majority of companies in Gibraltar will be
subject to the payroll tax only. According to Gibraltar
Government estimates, not more than 10 of the current
companies in Gibraltar will accrue an estimated payroll

tax liability of in excess of 15 % of profits and, as a result
of the cap, pay tax at a rate corresponding to 15 % of
profits. Every ‘employer’ in Gibraltar will be required to
pay payroll tax for the total number of its full-time and
part-time ‘employees’ who are ‘employed in Gibraltar’. The
central terms used will be defined as follows:

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

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

— ‘employed in Gibraltar’ means any employee employed
in Gibraltar who works in or from Gibraltar or is
based in Gibraltar.

(11) The Gibraltar Government will

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

first sight,

(12) According to the United Kingdom, of a total of 14 000
employees in Gibraltar, 10 100 are employed by the
private sector. At
it would seem that a
payroll tax charge of GBP 3 000 per annum on each
private sector employee would yield tax revenue of
approximately GBP 30 million. This
figure, which
excludes any estimate of top-up tax, business property
occupation tax and registration fees,
is more than
double the
corporation tax yield of about
GBP 14 million.

current

Business Property Occupation Tax

(13) All

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

Registration fee

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

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

(15) Certain designated activities, namely financial services and
utilities, will be subject to an additional top-up or penalty
tax on profits generated by such activities. The respective
top-up taxes will apply only to profits that can be
allocated to such designated activity. The United
Kingdom estimates
approximately 29 000
companies in Gibraltar, 179 will be liable to the top-up
tax on financial services activities, whilst 23 will be liable
to the top-up tax on utilities activities.

that of

(16) The definition of

‘financial services’ company includes,

inter alia:

— credit institution,

— moneylender,

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

— life assurance and collective investment scheme inter-

mediary,

— collective investment scheme operator or trustee,

— insurance broker, agent or manager,

— professional trustee,

— company manager,

— bureau de change,

— auditor.

definition of

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

financial

services

(17) The definition of

‘utilities’ activities encompasses the

provision of services, equipment or premises for:

— telecommunications (voice telephony, fax communi-
and transmissions,
communications

cations, data
callback and call through services),

— electricity (generation, distribution and supply),

— water (production,

import/export, supply of either

potable or salt water),

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

— petroleum (collection, production,

treatment
distribution and supply of fuel oil).

improvement,

pumping,

import/export,
storage,

(18) Financial services companies will,

in addition to the
payroll and property taxes, be charged a top-up tax on
profits from financial services activities at the rate of 8 %
of profit (calculated in accordance with internationally
services
accepted
companies will have their annual liability to payroll tax,
business property occupation tax and top-up tax capped,
in aggregate,
at 15 % of profit or GBP 500 000,
whichever is the lower.

accounting

standards).

Financial

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

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

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

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

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

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

Other features of the reform

gardens,

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

from the additional rate,

government’.

Such

the

of

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

(24) Certain classes of income are exempt for the purposes of

determining profits. These include:

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

financing investment

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

Fund

(25) For the purposes of determining profits, capital gains and

capital losses are excluded.

(26) For the purposes of determining profits, the following

capital allowances, inter alia, are deductible:

— in respect of entertainment centres, mills, factories and

other premises, 4 % per annum,

— in respect of plant and machinery, up to GBP 30 000
for the first year in which the expenditure is made (up
to GBP 50 000 for computer equipment), and 331/3 %
of the remainder in subsequent years.

ASSESSMENT OF THE SCHEME

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

certain undertakings or

the measure must

resources.

Third,

Advantage

(28) According to point 9 of the Commission notice on the
application of the State aid rules to measures relating to
direct business taxation (3) (hereinafter ‘the notice’), the tax

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

advantage may be granted through different
reduction in the company's burden.

types of

the general abolition of

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

starting point of

system is

In this respect,

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

expenses. Under

social

the

(31) Under a pure payroll tax system, the greater the number
of employees, the greater the liability for tax. Similarly,
under a pure business property taxation system, the larger
the rateable value of the business premises, the larger the
tax liability. However,
the Gibraltar system limits the
combined liability for payroll tax and BPOT to 15 % of
profits or GBP 500 000, whichever is the smaller. The
operation of
to confer an
the caps would appear
advantage on those enterprises to which they apply
compared with the generality of companies in Gibraltar
by reducing the amount of payroll tax and BPOT they are
liable to pay. The 15 % cap would appear to be likely to
favour labour intensive companies or those with low
profitability, whilst the GBP 500 000 cap would appear
likely to favour large or highly profitable enterprises.

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

top-up taxes

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

(loans

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

tax burden for companies

Material selectivity

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

State resources

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

that

Impact on competition and trade between Member States

(36) Gibraltar is an open, market economy. Many of

it

in

the

other

aid. For

competing

undertakings

that purpose,

latter must be

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

it

appear

self-evidently

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

grant

to

(39) Similarly, the 15 % and GBP 500 000 caps on the liability
to payroll tax and BPOT, although generally applicable,
seem to be de facto selective in that their very nature
their applicability to a narrow
would seem to restrict
the
group of companies. By their own admission,
United Kingdom and Gibraltar estimate that only 10
companies out of some 29 000 in Gibraltar will benefit
from the 15 % cap. As mentioned in paragraph 31 above,
labour intensive businesses or companies with low profit-
ability seem likely to benefit from the 15 % cap whilst
large and highly profitable companies seem likely to
benefit from the GBP 500 000 cap.
It should also be
noted that the caps do not apply to the utilities sector.

labour

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

the

is

(41) The United Kingdom argues that the GBP 500 000 cap is
not selective since all companies have the potential to
make sufficiently large profits to benefit. Whilst theor-
etically true,
in a
competitive market economy large companies are most
likely to benefit. Small companies are unlikely to have
the human, capital and other
to generate
profits on this scale.

is manifestly self-evident

resources

that

it

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

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

17.

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

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

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

they appear

Regional specificity

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

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

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

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

in the

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

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

(51) This lower effective rate of taxation will strengthen the
position of companies in Gibraltar and the position of the
groups of companies to which enterprises in Gibraltar
might belong. Gibraltar companies are able to operate,

actually or potentially, in sectors where intra-Community
trade takes place and to this extent it would seem that the
notified scheme might affect trade between Member States
and distort, or threaten to distort, competition.

Conclusions on the existence of State aid

(52) Having established,

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

COMPATIBILITY

(53) As the measure appears to constitute State aid,

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

it

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

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

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

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

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

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

4.12.2002

EN

Official Journal of the European Communities

C 300/9

the

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

loss of

revenue

(d) an estimate of

the

from the
loss of
application of the GBP 500 000 cap on the liability
for payroll tax, BPOT and where appropriate, financial
the
services
number of companies to benefit;

top-up taxation and an estimate of

revenue

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

(Taxation

in all

(f) an estimate of the number, size and type of activity

of:

— companies

that will make

and
consequently escape liability for payroll tax and
BPOT,

profit

no

— profit-making companies with no employees (i.e.

zero assessable employee units),

— profit-making companies with less
employee (excluding those with zero).

than one

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

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

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

In addition, Gibraltar

aid map for

soon as

regional

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

CONCLUSION

(60) In the

the

light of

foregoing

considerations,

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

the EC Treaty,

(a) a breakdown of

the expected revenue from each
separate element of
tax,
the reform — payroll
BPOT, registration fee for companies with income,
registration fee
income,
top-up tax on financial
top up tax on
utilities;

companies without

services,

for

(b) an explanation of

the
employees

relationship between the
number
sector
in
(approximately 10 000) and the expected revenue
from the payroll tax;

private

the

of

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

2000.

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