2005/77/EC: Commission Decision of 30 March 2004 on the aid scheme implemented by the United Kingdom in favour of Gibraltar Qualifying Companies (notified under document number C(2004) 928)Text with EEA relevance
Date: 2004-03-30
Institutions: European Commission
Subjects: Gibraltar, State aid, United Kingdom, aid to undertakings, control of State aid, corporation tax, tax relief

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COMMISSION

COMMISSION DECISION

of 30 March 2004

on the aid scheme implemented by the United Kingdom in favour of Gibraltar Qualifying
Companies

(notified under document number C(2004) 928)

(Only the English text is authentic)

(Text with EEA relevance)

(2005/77/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

establishing the European
Having regard to the Treaty
Community, and in particular the first subparagraph of Article
88(2) thereof,

Having regard to the Agreement on the European Economic
Area and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1) and having regard to
their comments,

(2)

Whereas:

tax measures,

including the
mation on a number of
Gibraltar qualifying companies
regime. The United
Kingdom replied by letter dated 22 July 1999. The
Commission requested further information on 23 May
2000 and a reminder was sent on 28 June 2000. The
United Kingdom replied on 3 July 2000. By letter dated
12 September 2000,
the United Kingdom submitted
regime
the
information
(A/37430). A meeting was held with the United
Kingdom and Gibraltar authorities on 19 October
the
2000 to discuss Gibraltar's offshore tax schemes,
Exempt
Qualifying
Companies regime. Further information in response to
questions raised at that meeting were submitted by the
United Kingdom on 8 January 2001 (A/30254).

Companies

Companies

Exempt

regime

and

the

on

letter

dated 11 July 2001 (D/289757),

the
By
Commission informed the United Kingdom that it had
decided to initiate the procedure laid down in Article
88(2) of
the Gibraltar
Qualifying Companies regime. Following an extension
the United Kingdom
of
replied by letter dated 21 September 2001 (A/37407).

the EC Treaty in respect of

the one month deadline,

I. PROCEDURE

(1)

By letter dated 12 February 1999 (D/50716),
the
Commission asked the United Kingdom to provide infor-

(1) OJ C 26, 30.1.2002, p. 9.

(3)

By application lodged at the Registry of the Court of First
Instance of the European Communities on 7 September
2001, the Government of Gibraltar brought an action for

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(7)

In order to obtain the Qualifying Company status, a
company must fulfil, inter alia, the following conditions:

annulment of Decision SG(2001) D/289755 initiating
the formal
investigation procedure into the Gibraltar
Qualifying Companies regime; the action was registered
as Case T-207/01. A further application was brought by
the Government of Gibraltar on the same date for the
adoption of interim measures to suspend the Decision
SG(2001) D/289755 to initiate the formal investigation
procedure and to order the Commission to refrain from
(Case T-207/01 R). By Order dated 19
publishing it
the Court of First
December 2001,
interim
Instance
measures (2).
the
Court of First
Instance dismissed the application for
annulment of the Decision (3).

In its judgment of 30 April 2002,

the President of

application

dismissed

the

for

(4)

(5)

(6)

On 21 November 2001,
the Commission requested
information on the tax rate applicable to Qualifying
Companies. In the absence of a reply, the Commission
issued a formal reminder on 21 March 2002 (D/51275).
The United Kingdom replied on 10 April 2002
(A/32681). Further clarification was requested by the
Commission on 28 October 2002 (D/56088). The
United Kingdom replied on 11 November 2002
(A/38454) and added additional remarks by letter dated
13 December 2002 (A/39209).

their observations (4). By

The Commission Decision to initiate the formal investi-
gation procedure was published in the Official Journal of
inviting interested parties to
the European Communities,
submit
letters dated 27
February 2002 (A/31518)
and 28 February 2002
(A/31557), comments were received respectively from
Charles A. Gomez & Co. barristers and acting solicitors
from the Government of Gibraltar. These comments were
forwarded to the United Kingdom, which replied by letter
dated 25 April 2002 (A/33257).

(8)

(9)

II. DESCRIPTION OF THE MEASURE

The definition of a Qualifying Company is set out in
Gibraltar's Income Tax (Amendment) Ordinance of 14
July 1983. Detailed rules for the implementation of the
Qualifying Company regime have been adopted by
means of the Income Tax (Qualifying Companies) Rules
of 22 September 1983; these rules together are referred
to in this Decision as ‘the Qualifying Company legis-
lation’.

— it must be

registered in Gibraltar under

the

Companies Ordinance,

— it must have a paid up share capital of GBP 1 000 (or

foreign currency equivalent),

— it must deposit GBP 1 000 with the Gibraltar

Government as security for future taxes,

— it must pay a fee of GBP 250 for a Qualifying

Company Certificate,

— no Gibraltarian or Gibraltar resident may have a
beneficial interest in the shares of the company,

— it cannot keep any register of shares outside Gibraltar
and must be prohibited by its memorandum or
articles of association from doing so,

— the company may not, without the prior consent of
the Gibraltar Finance Centre Director, trade or carry
in Gibraltar, with Gibraltarians or
on business
residents of Gibraltar.
It may, however, trade with
other Exempt or Qualifying companies.

A company which fulfils the above conditions obtains a
Qualifying Company Certificate. Once issued the Certi-
ficate is valid for 25 years.

lower

Telecommunications.

A Qualifying Company is liable to taxation on its profits
at a rate which is always
than the normal
corporate tax rate, which currently stands at 35 %. The
rate of tax applied is negotiated between the company
concerned and the Finance Centre Division, part of the
Industry
Gibraltar Government's Department of Trade,
no
and
statutory
these negotiations. The
guidance for the conduct of
vast majority of Qualifying Companies pay a rate of
tax of between 2 and 10 % and, recently, the policy of
the Gibraltar authorities has been to ensure that all
Qualifying Companies pay between 2 and 10 %. Within
these parameters, the rate of tax is set with a view to
ensuring consistency between all companies operating in
the same sector (5). The tax rates are:

There

is

(2) Joined Cases T-195/01 R and T-207/01 R Gibraltar v Commission R

[2001] ECR II-3915.

(3) Joined Cases T-195/01 and T-207/01 Gibraltar v Commission [2002]

ECR II 2309.
(4) See footnote 1.

(5) Approximately 12 companies fall outside this 2 to 10 % range.The
tax rates for such companies have been negotiated on a case-by-case
basis. They range from 0,5 to 1,5 % and from 21 to 34 %. There is
no correlation between the tax rate applied and the area of activity
of the company. The companies operate in diverse sectors including
private investment holdings, marketing and selling holiday homes,
offshore banking, ship repair and marketing consulting services.

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Sector

Rate of taxation

(%)

Private investment

Financial services

Gaming

Satellite operations

Shipping
conversion

services

including

repair

and

General traders

Consultancy services

5

5

5

2

2

5

5

Others (e.g. philatelic services, commission
agents)

2-10

(10) Other benefits
include:

resulting from the Qualifying Status

Commission had doubts as to the compatibility of the
measure with the common market and therefore decided
to initiate the formal investigation procedure.

IV. COMMENTS FROM THE GOVERNMENT
OF GIBRALTAR

(13)

The Government of Gibraltar makes comments under
four headings:

— the Qualify Companies legislation does not constitute
aid within the meaning of Article 87 of the Treaty,

— if

the Qualifying Companies legislation constitutes

aid, it is existing aid and not new, illegal aid,

— fees payable to non-residents (including directors) and
dividends paid to its shareholders are subject to with-
holding tax at
the
company,

the same prescribed rate as

— there is no stamp duty on the transfer of shares of a

Qualifying Company.

in

the

(11) According to information supplied by the United
Kingdom,
intended
circumstances where
operation requires a ‘bricks and mortar’ presence in
Gibraltar, the company undertaking such activity would
usually obtain Qualifying Company status rather than
Exempt Company (6) status. Qualifying Companies are
also of particular benefit in situations where a subsidiary
company needs to make income remittances to a foreign
parent and is required to have suffered tax at a certain
level to reduce further taxation in the home country.

(12)

III. GROUNDS FOR INITIATING THE PROCEDURE

In its evaluation of the information submitted by the
United Kingdom in the course of its preliminary investi-
gation, the Commission considered that the relief from
the obligation to pay the full amount of corporation tax
an advantage on Qualifying
liable
was
Companies.
advantage was
granted via State resources, affected trade between
Member States and was selective. The Commission also
considered that none of the derogations on the general
prohibition on State aid provided for in Articles 87(2)
and 87(3) of the Treaty applied. On these grounds the

to confer
It

considered that

this

— if

the Qualifying Companies legislation constitutes
it is compatible with the common market by
in Article

the exemption provided for

aid,
virtue of
87(3)(b) of the Treaty,

— if

the Qualifying Companies legislation constitutes
illegal and incompatible aid,
the
recovery of the aid would be contrary to general
principles of Community law.

an order

for

(14)

These comments can be summarised as follows.

The Qualifying Companies
constitute aid

legislation does not

(15) Article 87(1) of

the Treaty is not applicable to tax
schemes, such as the Qualifying Company legislation,
which are designed to operate in an international
context.
In particular, given that Qualifying Company
status is granted to the extent that such companies do
there is no
not undertake business within Gibraltar,
advantage in the form of an exemption from the
normally applicable
is not
tax rates,
competent
to grant an advantage relating to another
jurisdiction.

as Gibraltar

(16) Although the Gibraltar Government accepts that

the Code of Conduct

the
advantages granted by the Qualifying Company regime
are ring-fenced from the domestic market in the sense of
paragraph B of
for Business
Taxation (7), adopted by the Resolution of the Council
and the representatives of
the
Member States meeting within the Council of 1
December 1997, no State resources are involved. The
measure places no financial burden on the budget of
the Government of Gibraltar.

the governments of

(6) Exempt Companies do not pay tax on their profits, but instead pay a

fixed annual tax of GBP 225 to 300.

(7) OJ C 2, 6.1.1998, p. 2.

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(17)

economic

The measure is not selective since a Qualifying Company
can be set up by any natural or legal person, irrespective
of nationality or
activity. The Gibraltar
Government accepts that Qualifying Company status is
not available to companies which trade in Gibraltar or in
which Gibraltarians or Gibraltar residents have a bene-
ficial interest. However, this is at most an act of reverse
discrimination which does not affect competition.

(18)

The measure falls outside the scope of Article 87(1) of
the Treaty insofar as some Qualifying Companies are
established by individuals for tax planning reasons, for
holding assets or property, or
for managing their
personal wealth. Such companies do not trade, produce
or compete in the market.

(23)

(19) Gibraltar does not

the Treaty therefore

the Community's
form part of
common customs territory and is treated as a third
country for the purpose of trade in goods. Article 87
of
apply to any aid
perceived to be granted to undertakings engaged in
trade in goods, as goods produced in Gibraltar do not
circulate freely in the common market but are subject to
customs
formalities. Trade between Member States
cannot be affected in such circumstances.

cannot

legislation on company taxation.
applied to national
There are few if any examples before the 1990s of
Commission State aid action against general corporate
tax measures. The legislation predates by 10 years the
liberalisation of capital movements and by 15 years the
clarification of the concept of State aid made by the
Commission in its Notice on the application of
the
State aid rules to measures relating to direct business
taxation (9)
(hereinafter
the Notice). The Qualifying
legislation was modelled on the Exempt
Companies
Company legislation of 1967, which predates
the
accession of Gibraltar to the European Union in 1973.

group

established

the Code of Conduct

The Qualifying Companies legislation was notified to the
‘Primarolo’
in accordance with
paragraph H of
for Business
Taxation by the United Kingdom Government even
before the publication of the Notice of 1998. At the
time there was no indication that measures designated
as harmful under the Code of Conduct
for Business
Taxation would be treated by the Commission as new,
unnotified aid measures.

(20)

used

reasoning

The
Commission Decision
in
2000/394/EC of 25 November 1999 on aid to firms
in Venice and Chioggia by way of relief
from social
security contributions under Laws No 30/1997 and No
206/1995 (8),
the advantage granted to
certain firms did not constitute State aid within the
to
meaning of Article 87(1) of
Qualifying Companies
tax planning
established for
purposes and to those trading in goods.

the Treaty applies

to find that

(21) A large number of companies enjoying Qualifying status
would benefit from the currently applicable de minimis
rules.

The Qualifying Companies
existing aid rather than illegal aid

legislation constitutes

(22)

The Qualifying Companies legislation dates from 1983, a
time when it was far from clear to the Commission, to
Member States or to economic operators whether, and to
what extent, State aid rules were to be systematically

(8) OJ L 150, 23.6.2000, p. 50, recitals 90, 91 and 93.

(24)

The Notice contains the first comprehensive, albeit not
exhaustive, definition of ‘fiscal State aid’. It is an admin-
istrative innovation and can be regarded more as a policy
statement as to future Commission action in this area
rather than as a ‘clarification’ of the applicable legislation.

(25) Article 1(b)(v) of Council Regulation (EC) No 659/1999
of 22 March 1999 laying down detailed rules for the
application of Article 93 of the EC Treaty (10) provides
that measures may become aid as a result of
the
evolution of the common market and through liberal-
isation of certain activities. The Qualifying Companies
legislation constitutes a measure, as referred to in that
provision, which became aid only subsequently. By
failing to regard Qualifying Companies legislation as
existing aid, the Commission is applying, retroactively,
the relatively refined State aid criteria of 2001 to the
different legal and economic situation which prevailed
in 1983. In this regard, the Irish company tax scheme
was initially not classified as aid, although the Commis-
sion's view subsequently changed (11) and reflected the
gradual
tightening of Community discipline regarding
such tax incentive schemes.

(9) OJ C 384, 10.12 1998, p. 3.
(10) OJ L 83, 27.3.1999, p. 1. Regulation as amended by the 2003 Act

of Accession.

(11) OJ C 395, 18.12.1998, p. 19.

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(26)

(27)

(28)

of

the

principle

By using its discretion to treat the Qualifying Companies
the Commission has
legislation as new,
illegal aid,
infringed
Such
proportionality.
treatment has dramatic economic consequences. The
significant damage that will be caused is disproportionate
to any Community interest which might be served by the
initiation of a procedure in respect of illegal aid, parti-
cularly in view of
the diminutive size of Gibraltar's
economy and the necessarily insignificant impact of the
legislation in issue on competition and on international
trade. The Commission would have taken a more
equitable approach if it had considered the qualifying
company legislation either under the Code of Conduct
for Business Taxation, under Articles 96 and 97 of the
Treaty or under the procedure applicable to existing aid.

Last, the Commission has infringed the principles of legal
certainty and legitimate expectations by waiting 18 years
before challenging the Qualifying Companies legislation
and by not carrying out its investigation into the legis-
lation within a reasonable time. The conformity of the
legislation with Community law was never doubted by
the Commission before February 1999. By analogy with
the Defrenne case (12),
this prolonged failure by the
Commission to act gave rise to legitimate expectations
on the part of Gibraltar.

The Commission's investigations should be subject to a
limitation period. Thus, pursuant to Article 15 of Regu-
lation (EC) No 659/1999, any individual aid granted
under an aid scheme 10 years before the Commission
takes action must be deemed to be existing aid. Applying
the Commission should have regarded the
that rule,
Qualifying Companies
legislation as an existing aid
scheme. In any event, the Commission infringed the prin-
ciples of legitimate expectations and of legal certainty by
allowing an excessively long period to elapse after
opening its investigation into the legislation. The preli-
minary investigation began on 12 February 1999, but
the formal
initiated
until two and a half years later. The preliminary investi-
gation was punctuated by long periods of inactivity by
the Commission. Given that
there was some doubts
within the Commission as late as November 2000 as
to the utility of opening the State aid procedure on the
harmful measures identified by the Code of Conduct
it is reasonable to claim that the existing aid
Group,
procedure should have been used.

investigation procedure was not

Compatibility by virtue of Article 87(3)(b) of the
Treaty

(29) Article 87(3)(b) of the Treaty provides that aid to remedy
a serious disturbance in the economy of a Member State

may be considered to be compatible with the common
market. The Qualifying Companies
legislation was
enacted a year before the closure of the Royal Navy
Dockyard (announced in 1981) and at a time when
the British military presence in Gibraltar was being
scaled down. The Dockyard was Gibraltar's main source
of employment and income, accounting for 25 % of
and 35 % of gross domestic product
employment
Its closure caused serious disturbances to the
(GDP).
including structural change and
Gibraltar economy,
economic distress in terms of unemployment, increased
social costs and exodus of qualified workers. The
Qualifying Companies
legislation was a response to
these serious disturbances.

territory (13),

(30) Although the Commission and the Court of Justice of the
European Communities have interpreted Article 87(3)(b)
of the Treaty strictly as meaning that the disturbance in
question must affect the whole economy of the Member
State and not merely that of one of its regions or parts of
for applying the
there are grounds
its
exemption under Article 87(3)(b) to Gibraltar. Unlike a
region or territory of a Member State, Gibraltar is in
every relevant way totally separated from the United
Kingdom, notably in constitutional, political,
legislative,
economic, fiscal and geographical terms. It is the only
territory to which Community law applies by virtue of
Article 299(4) of the Treaty. The Gibraltar and United
Kingdom economies are entirely distinct and separate.
Gibraltar
from the
United Kingdom and raises its own revenue to meet its
expenditure commitments. Consequently, disturbances
which affect one economy do not generally affect the
other, as is the case with the bovine spongiform ence-
phalopathy crisis, a disturbance which affected the United
Kingdom economy but not Gibraltar, treated as an excep-
tional occurrence within the meaning of Article 87(2)(b)
of the Treaty.

receives no financial

assistance

(31)

An order for the recovery of the aid would be
contrary to general principles of Community law

reasoning to that

Essentially similar
summarised in
recitals 22 to 28 on the question of existing aid can
be used to argue in favour of the principle of legitimate
expectations in the context of recovery. These arguments
notably cover uncertainty on the scope of the State aid
rules, the novelty of Commission action on corporate tax
measures and the significance of the Notice as a policy
statement, the age of the measure, notification to the
Primarolo group, evolution of the common market and

(12) Case 43/75 Defrenne v Sabena [1976] ECR 455, paragraphs 72, 73

(13) Joined cases T-132/96 and T-143/96, Freistaat Sachsen and others v

and 74.

Commission [1999] ECR II-3663 p. 167 et seq.

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the
liberalisation, proportionality, prolonged failure of
Commission to act and the delays in the preliminary
investigation. The legitimate expectations thus created
prevent an order
In particular, at all
recovery.
times, both the Government of Gibraltar and the bene-
ficiaries have acted in good faith.

for

the tax liability for each year,
active), assessment of
issuing tax demands, handling appeals and counter
appeals and pursuit of non-payment of tax due. The
administrative burden,
investi-
gation of the Gibraltar Tax Department, the impossibility
of tracing companies which have ceased activity and the
absence of company assets in Gibraltar would paralyse
governmental activity with no guarantee of achieving
satisfactory recovery.

the limited powers of

(32)

the

request

specific

legitimate

expectations

included a specific request

in cases T-207/01 and T-207/01 R,

Paragraph 26 of the Decision opening the formal inves-
tigation procedure (14)
for
comments on possible
that
would pose an obstacle to the recovery of aid. In its
the
defences
Commission confirmed its hesitations as to the possi-
bility of a recovery order and emphasised the unusual
nature of
comments. The
for
Commission also stated that the uncertainty that might
have existed and the possibility that the measure existed
in a ‘grey zone’ of legal uncertainty gave rise at most to a
legitimate expectation and to a debate over the recovery
of aid already paid. In his Order of 19 December 2001,
the President of the Court of First Instance observed that
this unusual request might convince companies not to
leave Gibraltar and must, at first sight, allay to a consid-
that beneficiaries might
erable extent any concerns
have (15). Accordingly,
led the
Gibraltar Government and beneficiaries to believe that
recovery will not be ordered.

the Commission has

(33)

The application of Article 87 of the Treaty to a classic
‘offshore’ scheme is novel and still has conceptual diffi-
culties as regards the determination of an advantage, the
financial burden on the State and selectivity.

(34)

The Commission itself, at the time of opening the formal
investigation, was, exceptionally, not able to decide the
question of existing aid.

Recovery would be contrary to the principle of propor-
tionality. Under Community law, when there is a choice
between several courses of action, the least onerous must
be followed. The disadvantages caused must not be
disproportionate to the aims pursued.

(35)

(36)

(37)

Recovery would have a disproportionate effect on the
Gibraltar economy and would be a disproportionate
penalty in view of the circumstances which led to the
adoption of the Qualifying Companies legislation, the
limited effect on competition and trade and the small
size of the beneficiaries. Financial services account for
approximately 30 % of Gibraltar's GDP
the
employment directly related to Qualifying Companies is
estimated at 1 400 (out of a total workforce of around
14 000). The financial sector has a significant impact on
virtually all other sectors of the economy. A recovery
order would lead to the winding-up, bankruptcy or
exodus of the Qualifying Companies, a destabilisation
the financial services sector and a major unem-
of
in turn causing political, social and
ployment crisis,
economic instability.

and

(38) A large number of Qualifying Companies would not be
assessable to Gibraltar taxation as their income is not
derived from, accrued or received in Gibraltar. As a
in many cases,
result of the conditions for eligibility,
the beneficiaries would have no assets within Gibraltar's
jurisdiction. Others which have ceased trading would be
untraceable.

(39) A large number of beneficiaries would be in receipt of
aid which would comply with the de minimis rule.

V. COMMENTS FROM CHARLES A. GOMEZ & CO.

(40)

The comments from Charles A. Gomez & Co. can be
summarised as follows.

Recovery of aid granted over the previous 10 years
would place a disproportionate burden on the Gibraltar
authorities. Gibraltar is a small
territory with limited
administrative resources, only around 2 000 companies
are assessed for taxation in any given year. Recovery
would involve,
inter alia, requesting suitable accounts
from Qualifying Companies (including those no longer

(41)

(14) See footnote 1.
(15) Joined Cases T-195/01 R and T-207/01, paragraphs 104 and 113.

has

legal

substantial
profession
The Gibraltar
dependency on Finance Centre work to which Qualifying
Companies make a major contribution. Some 130 legal
practitioners employ several hundred more staff and
make a substantial contribution indirectly to employment
in Gibraltar and Spain.

a

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(47)

(48)

(49)

(42)

The recourse to Article 87(3)(a) of the Treaty cannot be
restricted to areas where the standard of living is already
low or where there is already serious unemployment. The
principle of Article 87(3)(a) must also apply in the
and poverty.
interest of preventing unemployment
When the Qualifying Company legislation was enacted,
Gibraltar was faced with 20 years of economic sanctions
by Spain and the imminent closure of the Royal Navy
Dockyard. Faced with the option of poverty, unem-
ployment and emigration, Gibraltar found an alternative
source of prosperity by establishing the Gibraltar Finance
Centre, to which the Qualifying Companies legislation is
a major contributor. The European interest cannot link
acceptance of poverty and unemployment by ruling out
the application of Article 87(3)(a) of the Treaty to this
situation when viable alternatives are available. Unlike
other major financial centres, the Gibraltar centre was
established
self
defence and the duty to mitigate damage caused by
others all justify the Qualifying Companies legislation.

through necessity. This necessity,

(43)

the Community institutions
Since accession in 1973,
have failed to defend the rights and interests of citizens
of the Union residing in Gibraltar. Despite a judgment of
the Court of Justice, citizens of the Union in Gibraltar are
not
In the
in the ‘EU territory of
absence of any involvement
Gibraltar’, the insistence by the Commission on notifi-
cation of defensive measures taken by Gibraltar appears
excessive.

represented in the European Parliament.

VI. COMMENTS FROM THE UNITED KINGDOM

(44)

The United Kingdom restricted its initial comments to
the question of recovery of aid and to regional selectivity
and made further observations in its comments on those
of the Government of Gibraltar. They can be summarised
as follows.

Recovery of aid

(45)

If the Qualifying Companies legislation is found to be
illegal aid incompatible with the common market, there
is a general principle of Community law,
legitimate
expectations, which precludes any order for recovery of
aid already paid. Although legitimate expectations arise in
only exceptional circumstances where a recipient could
legitimately have assumed that the aid was lawful (16),
such circumstances exist in this case and it would be
inappropriate and unlawful
the Commission to
make an order for recovery.

for

(46)

This procedure under Article 88(2) of the Treaty flows
from the adoption of the Code of Conduct for Business
Taxation in 1997 in which the Commission committed
itself to the strict application of the State aid rules to

(16) Case 223/85, Rijn-Schelde-Verolme v Commission [1987] ECR 4617.

measures relating to direct business taxation. It is implicit
in that statement that in the past, the State aid rules had
not been so strictly applied to fiscal regimes of the type
addressed in the Code of Conduct for Business Taxation.

It is highly unlikely that in 1984, any consideration was
given by either the Government of Gibraltar or the
United Kingdom Government to the possibility that the
rules in question were in breach of the United Kingdom's
State aid obligations. While it was clear at that time that
a highly specific or sectoral tax advantage was capable of
being State aid, the application of the State aid rules to
more general
the
company tax schemes,
Qualifying Companies regime, had been the subject of
neither serious academic comment nor pronouncement
by the Commission. It would be unreasonable to expect
the
diligent businessmen to raise questions
compliance of
the measure with the State aid rules.
They would have made business plans and altered their
economic positions on the basis of
the Qualifying
Companies legislation and were entitled to assume that
the tax benefits were lawful.

such as

about

Point 26 of
the Notice specifically mentions circum-
stances where non-resident companies are treated more
favourably than resident ones. This was the first time that
differential
tax treatment between resident and non-
resident companies had been acknowledged by the
‘specificity’
Commission as an act of
capable of bringing the State aid rules into play. The
Qualifying Companies legislation had been in place for
many years prior to this time without any criticism or
comment from the Commission.

selection or

Regional specificity

The sole fact that the Qualifying Companies regime is a
feature of Gibraltar legislation that has no application in
the rest of the United Kingdom cannot give rise to the
element of selectivity required by Article 87(1) of the
Treaty. Gibraltar is a separate jurisdiction from the rest
of the United Kingdom for tax purposes, with autonomy
in relation to tax matters. It is not the case that any
divergence between taxation laws applicable in Gibraltar
and those applying in the rest of the United Kingdom
would automatically give rise to State aid. One juris-
diction within a Member State with autonomy in
relation to taxation matters cannot create a State aid
purely because a particular aspect of its taxation system
results in a lower (or higher) level of taxation than that
applicable to the rest of
If a tax
measure is general within the relevant tax jurisdiction,
it cannot be caught by Article 87(1) of the Treaty. To
rule otherwise would be to call
into question the tax
raising and tax varying powers enjoyed by devolved
and
the
Community. This would constitute a serious intervention
in Member States’ constitutional arrangements.

the Member State.

administrations

decentralised

across

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(50)

(51)

Government of Gibraltar's comments

indeed to other

the Government of
The United Kingdom supports
Gibraltar's contention that
the Qualifying Companies
legislation should be treated as existing aid in accordance
with Article 1(b)(v) of Regulation (EC) No 659/1999. In
the 1970s and 1980s it was universally assumed that
Member States’ sovereignty over fiscal
issues was not
limited by the State aid rules as far as entire corporate
tax systems were concerned. The Commission made no
attempt to apply the State aid rules to the Gibraltar tax
regime or
tax regimes within the
Community, which offered favourable tax treatment to
certain classes of company over others. It was only after
agreement on the complete liberalisation of capital
movements and financial services liberalisation in the
1980s and early 1990s and then on the establishment
of a Single Currency in the 1990s that attention was
seriously
competition
arising out of Member State tax regimes. The use of
the State aid provisions of the Treaty to give effect to
such tax policy is a phenomenon only experienced in the
last four years. The common market has evolved over the
last three decades and many State aid instruments today
would not have been considered State aid 30, 20 or even
10 years ago.

focused on limiting harmful

Justice would have considered it

Even if the Commission is correct in the light of the
current state of Community law in viewing the intro-
duction of
the Qualifying Companies legislation as a
State aid measure which would require notification if
adopted today, neither the Commission nor the Court
to be State aid
of
requiring notification at
In
1984 Spain was not yet a Member State, and many
Member States maintained banking laws and exchange
controls preventing the use of tax advantages such as
those available in Gibraltar. It is far from clear that the
Gibraltar measures were capable of distorting compe-
tition and affecting trade between Member States at
that time.

the time it was adopted.

(52) At that time, the Commission itself addressed cases of
differential tax treatment where possible, using Article 95
of the Treaty (now Article 90), rather than relying on the
State aid rules. Academic commentators and tax law
practitioners did not consider that State aid principles
applied to cases other than those where specific tax
exemptions were offered to individual companies or
groups of companies for industrial policy reasons. It is
not possible to sustain an argument that measures such
as the Gibraltar Qualifying Companies legislation were
capable of being State aid until after the publication of
the Notice on 10 December 1998.

(53) On the question of recovery, the United Kingdom in
particular
the Government of Gibraltar's
arguments that the Commission's commitment system-
atically to apply the State aid rules to direct taxation
measures is novel and that any aid would be impossible

endorses

to recover. Recovery would place a disproportionate
burden on the Gibraltar authorities, many Qualifying
Companies would not have a corporation tax liability
in Gibraltar,
it would be impossible to assess and/or
recover the aid in a large number of cases and many
beneficiaries would be in receipt of de minimis aid.

VII. ASSESSMENT OF THE AID MEASURE

and Charles A. Gomez & Co.,

(54) After having considered the observations of the United
Kingdom authorities as well as those of the Government
the
of Gibraltar
Commission maintains
its position, expressed in its
decision of 11 July 2001 (17) to the United Kingdom
authorities initiating the procedure under Article 88(2)
of
the scheme under examination
constitutes unlawful, operating State aid, within the
scope of Article 87(1) of the Treaty.

the Treaty,

that

Existence of aid

(55)

In order to be considered State aid within the meaning of
Article 87(1) of the Treaty, a measure must fulfil the four
following criteria.

(56)

(57)

the measure must afford the beneficiaries an
First,
advantage that reduces the costs they normally bear in
the course of their business. According to point 9 of the
the tax advantage may be granted through
Notice,
different
types of reduction in the company's burden
in particular, through a reduction in the amount
and,
of tax. The Qualifying Companies regime clearly fulfils
this criterion. Rather than be subject to income tax at the
standard Gibraltar corporate rate of 35 %, Qualifying
Companies negotiate their rate of tax with the Gibraltar
authorities as described in recital (9) above.

accepts

the Commission

The observation that Qualifying Companies legislation is
a tax scheme designed to operate in an international
context is not relevant to its qualification as a State aid
measure. Although
the
argument that Gibraltar is not competent to grant tax
advantages relating to other jurisdictions, the fact that
Qualifying Companies negotiate their tax rate, demon-
strates clearly that
in the
absence of their special treatment, would be subject to
company taxation at the standard rate. Irrespective of the
type of activities in which Qualifying Companies may be
active, their Qualifying status is granted to the extent that
they are
registered in Gibraltar or are
registered branches of overseas companies. Consequently,
Qualifying Companies benefit from a special and more
beneficial
in Gibraltar, when compared
with other companies registered in Gibraltar.

they earn revenue which,

tax treatment

companies

(17) See footnote 1.

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(58)

(59)

(60)

(61)

(62)

Second, the advantage must be granted by the State or
through State resources. The grant of a tax reduction,
such as that negotiated between a Qualifying Company
and the Gibraltar authorities,
tax
revenue which, according to point 10 of the Notice, is
equivalent to the use of State resources in the form of
fiscal expenditure.

involves a loss of

precluded from trading with undertakings within the
common customs
territory, nor are they precluded
from competing in third country markets where other
Community undertakings are active, actually or poten-
tially. Therefore, to the extent that the tax advantage
granted to Qualifying Companies engaged in trade in
goods strengthens their position, trade and competition
is affected.

The Government of Gibraltar's argument that, through
ring-fencing, the measure places no apparent burden on
its budget, must be rejected. The Commission considers
that the tax advantage, for the purposes of Article 87(1)
of the Treaty,
is granted through State resources, since
the origin of this advantage is the renunciation by the
Member State of tax revenue which it would normally
have received (18). In the absence of the ring-fenced tax
advantage, the activities of Qualifying Companies, to the
extent
the
Gibraltar authorities, would be subject to the full rate
of tax in Gibraltar. This difference in tax rate represents
the tax revenue foregone.

they occur under the jurisdiction of

that

Third, the measure must affect competition and trade
between Member States. This criterion is fulfilled to the
extent that Qualifying Companies are able, actually or
to trade with companies located in other
potentially,
Member States or to be active in third country markets
open to undertakings from other Member States. This is
particularly the case since Qualifying Companies may
not,
carry on
in Gibraltar, with Gibraltarians or with
business
residents of Gibraltar.

circumstances,

in normal

trade or

(63)

The parallels drawn with the Commission's reasoning in
Decision 2000/394/EC in respect of aid to firms in
Venice and Chiogga must also be rejected. The circum-
stances of the two cases are quite different. In particular,
the conclusion that there was no impact on trade and
consequently no aid to three particular companies was
based,
the services
provided. These considerations are clearly not applicable
to Qualifying Companies, which, as the Government of
Gibraltar itself points out, operate in an international
context.

inter alia, on the local nature of

(64)

The de minimis rule cannot be used to justify the appli-
cation of the Qualifying Companies regime. There is no
mechanism to prevent the grant of aid in excess of that
allowed under the de minimis rule, nor does the measure
exclude sectors where the de minimis rule does not apply.

Even if some Qualifying Companies are established by
individuals for tax planning purposes and do not trade,
they are not
produce or compete in the market,
that
fact
the
precluded from doing so. However,
tend to have a ‘bricks and
Qualifying Companies
mortar’ presence in Gibraltar and generate income that
is subject to company taxation, albeit at a reduced rate,
suggests that they do in fact engage in economic activity.
This is confirmed by the wide range of sectors in which
Qualifying Companies are active (see recital 9).

(65)

(66)

the Community's

The Commission notes that Gibraltar does not form part
territory.
of
the
However,
State aid rules
in Gibraltar
engaged in trade in goods. Such undertakings are not

customs
the application of

to those undertakings

this does not affect

common

(18) See, for instance, Case C-156/98 Germany v Commission [2000] ECR

I-6857, paragraph 26.

Last, the measure must be specific or selective in that it
favours ‘certain undertakings or the production of certain
goods’. The beneficiaries of the measure are Gibraltar
companies in whose shares no Gibraltarian or Gibraltar
resident may have a beneficial
In addition,
Qualifying Companies may not in normal circumstances
trade or carry on business in Gibraltar with Gibraltarians
therefore
or
selective,
in so far as it grants privileged tax treatment
to those non-Gibraltar owned companies operating in or
from Gibraltar.

residents of Gibraltar. The measure is

interest.

The observation that the measure is not selective because
any person can establish a Qualifying Company and that
the limitations on the availability of Qualifying Company
status is an act of reverse discrimination against Gibraltar
residents fails to demonstrate that the measure is not
selective. When examining a measure, comparison must
be made with the generally applicable system, in this case
the standard regime of corporation tax in Gibraltar. The
Qualifying Company regime is clearly an exception to the
general system.

(67)

(68)

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The Commission notes the United Kingdom's obser-
vations on regional specificity. The Commission also
notes that the United Kingdom has not attempted to
argue that the Qualifying Companies regime constitutes
a general measure within the Gibraltar tax jurisdiction.
The Commission accordingly stands by its conclusion
the measure is materially selective within
that
that
Gibraltar.
is therefore not necessary to examine in
It
this case the question of regional selectivity which is
in the Commission decision of 30
assessed in detail
March 2004 on the Gibraltar Government Corporation
Tax Reform (19).

(71) As for the Notice constituting an administrative inno-
vation or policy statement, the Court of First Instance
has already confirmed (22) that ‘nowhere in (the Notice)
does the Commission announce any change of practice
tax
in its decisions
measures in the light of Article 87 EC and 88 EC’. It
therefore follows that the United Kingdom is wrong to
assert that measures such as the Qualifying Companies
regime were not capable of being classified as State aid
until after the publication of the Notice.

concerning the assessment of

Existing aid or illegal aid

the

against

Commission's

illegal aid in respect of

This question has been considered by the Court of First
Instance, which rejected the Government of Gibraltar's
provisional
arguments
the Qualifying
assessment of
Companies regime (20). Regardless of whether
it was
modelled on the 1967 Exempt Company regime, the
Qualifying Company legislation was enacted in 1983,
after
the
Kingdom's
therefore cannot be considered to be
Community.
‘existing aid’ within the meaning of Article 1(b)(i) of
Regulation (EC) No 659/1999. The Court of First
Instance
sufficient
grounds for the Commission to open the formal inves-
tigation procedure.

the United
It

concluded that

there were

accession

itself

to

(69) As early as 1973, the European Court of Justice expressly
confirmed the applicability of the State aid rules to fiscal
measures (21). Even if there have been few examples of
Commission action against
tax
measures,
the existing or illegal
nature of the aid measure. In this case, the Qualifying
Companies legislation is not a general corporate tax
measure, but quite specific in its scope. In any event,
the application of a Treaty provision for the first time
to a particular situation does not constitute the retro-
active application of a new rule.

this does not affect

corporate

general

(70)

The Qualifying Companies legislation was not notified to
the Commission in accordance with Article 88(3) of the
Treaty. The fact that it was brought to the attention of
the Primarolo group cannot be treated as formal notifi-
cation to the Commission under the State aid rules.

(19) Commission decision of 30 March 2004, not yet published.
(20) See Joined Cases T-195/01 and T-207/01, paragraphs 117-131.
(21) Case 173/73, Italy v Commission, [1974] ECR 709, paragraph 13.

(72)

(73)

In advancing its claim that the Qualifying Companies
legislation became aid only after it was put into effect
in 1983 in the sense of Article 1(b)(v) of Regulation (EC)
No 659/1999, the Government of Gibraltar argues, with
the support of the United Kingdom, that the measure
predates the liberalisation of capital movements by 10
years. However, this general observation has not been
supported by specific arguments relating to Qualifying
Companies and therefore cannot, per se, establish that
the measure, in 1983, did not constitute aid. It is clear
from the legislation itself that there are no limitations on
the sectors of economic activity in which Qualifying
Companies can engage. The extent to which,
if at all,
unspecified restrictions on capital movements in 1983
affected companies benefiting from the tax advantages
granted by the measure is therefore not apparent.

Even if, as the United Kingdom maintains, some Member
States’ banking laws and exchange controls, at the time,
prevented the use of such offshore tax advantages, the
existence of the tax benefits would nevertheless still have
strengthened the position of Qualifying Companies in
markets not subject to such restrictions compared with
their competitors in other Member States. In this respect,
the Government of Gibraltar has advanced essentially the
same arguments used in its pleadings before the Court of
First Instance. The Court rejected these arguments against
the Commission's provisional
the
Qualifying Companies legislation and concluded that
such ‘general arguments are not capable of establishing
that the 1983 tax scheme must, owing to its intrinsic
characteristics, be classified as an existing aid scheme’ (23).
The Court also rejected parallels drawn with the Irish
Corporation Tax case (24) on the grounds
the
factual and legal circumstances were quite different (25).
The Commission therefore sees no grounds on which to
change its view.

classification of

that

(22) Joined cases T-269/99, T-271/99 and T-272/99, Diputación Foral
de Guipúzcoaand others v Commission [2002] ECR II-4217, para-
graph 79.

(23) See Joined Cases T-195/01 and T-207/01.
(24) OJ C 395, 18.12.1998, p. 14.
(25) Joined Cases T-195/01 and T-207/01, paragraphs 120 and 123.

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(74) As for the alleged infringements of

In the Piaggio case (26),

classification of
for

the Commission's
issue as an existing aid,

the principles of
proportionality,
legal certainty and legitimate expec-
tations, the arguments of the Government of Gibraltar
presume a margin of discretion that the Commission
the Court
does not possess.
ruled that
the
scheme at
reasons of
practical expediency, when that scheme had not been
notified in accordance with Article 88(3) of the Treaty,
could not be accepted. Accordingly, as confirmed by the
Court of First Instance (27), the classification of a measure
as new or existing aid must be determined without
reference to the time which has elapsed since the
measure was
any
and
any
previous
alleged economic consequences. For these reasons, the
suggestion by Charles A. Gomez & Co. and the United
Kingdom that the Commission has acted excessively by
considering the measure to have required notification
must be rejected. Similarly,
the limitation period in
Article 15 of Regulation (EC) No 659/1999 does not
set out a general principle under which illegal aid is
transformed into existing aid but merely precludes
recovery of aid established more than 10 years before
the Commission's first intervention.

independently of
regardless of

administrative practice,

enacted

(75)

The Commission notes that the procedure under Articles
96 and 97 of the Treaty concerns differences between
general provisions of Member States (28). In contrast, the
Qualifying Companies legislation is not such a general
provision but a selective measure of narrow scope falling
the State aid rules. The
clearly within the scope of
Commission also notes
entirely
action is
that
consistent with paragraph J of the Code of Conduct for
Business Taxation.

its

Compatibility

(76)

Insofar as the Qualifying Companies regime constitutes
State aid within the meaning of Article 87(1) of the
Treaty, its compatibility with the common market must
be evaluated in the light of the derogations provided for
in Articles 87(2) and 87(3).

(77)

The derogations provided for in Article 87(2) of
the
Treaty, which concern aid of a social character granted
to individual consumers, aid to make good the damage
caused by natural disasters or exceptional occurrences
and aid granted to certain areas of the Federal Republic
of Germany, do not apply in this case.

(26) Case C-295/97 Piaggio v Ifitalia and others, [1999] ECR I-3735.
(27) Joined Cases T-195/01 and T-207/01, paragraph 121.
(28) See point 6 of the Notice.

(78)

In particular, the closure of the Naval Dockyard cannot
be considered to be an exceptional occurrence within the
meaning of Article 87(2)(b) of the Treaty. The Commis-
sion's decision-making practice has established that this
in circumstances where the
derogation only applies
exceptional occurrence is unpredictable and outside the
control of the Member State's authorities. The United
Kingdom authorities announced the closure of
the
Dockyard in 1981, three years before it closed in 1984.

(79)

The derogation provided for in Article 87(3)(a) provides
for the authorisation of aid to promote the economic
development of areas where the standard of
living is
abnormally low or where there is serious underem-
ployment. Point 3.5 of the Commission's Guidelines on
national regional aid (29) establishes the methodology to
be used in demarcating areas to be considered eligible to
benefit from the derogation in Article 87(3)(a) of the
Treaty. This uses historical data. Contrary to the
assertion of Charles A. Gomez & Co.,
this provision
cannot be used prospectively and applies only to areas
where conditions of a low standard of living or serious
underemployment already exist. Such areas are defined
by the United Kingdom's regional aid map (30). The
United Kingdom authorities did not propose Gibraltar
as an assisted area and accepted that no regional aid
could be granted in Gibraltar for the period 2000 to
2006. Since Gibraltar is not and never has been such
an area, Article 87(3)(a) does not apply. In any event,
it has not been argued that Gibraltar has a per capita
gross domestic product below the threshold set in point
3.5 of the Commission's Guidelines on national regional
aid. Article 87(3)(a) cannot be used to palliate uncertain
and unquantifiable future effects which can themselves be
prevented or attenuated by the national authorities
through the use of other policy instruments.

(80)

The Qualifying Companies regime cannot be considered
either to be a project of common European interest or to
remedy a serious disturbance in the economy of a
Member State, as referred to in Article 87(3)(b) of the
Treaty. As the Government of Gibraltar has observed, the
Commission and the Court of Justice interpret Article
87(3)(b) strictly as meaning that a serious disturbance
must affect the whole economy of a Member State (31).
The disturbance in question, the closure of the Naval

(29) OJ C 74, 10.3.1998, p. 9.
(30) OJ C 272, 23.9.2000, p. 43 and Commission approval

letter

No SG(2000) D/106293 of 17 August 2000.

(31) See Joined cases T-132/96 and T-143/96, Freistaat and others v
Commission, ECR [1999] II-3663, paragraphs 166, 167 and 168.

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In any event,

legislative, economic,

regardless of
the Treaty.

the United
Dockyard, did not disturb the whole of
Kingdom's economy. Whilst the Commission notes the
Government of Gibraltar's argument
that Gibraltar is
separated from the United Kingdom in constitutional,
fiscal and geographic
political,
terms, this does not alter the fact that for the purposes
of the State aid rules, Gibraltar forms part of the United
the unique scope of Article
Kingdom,
299(4) of
there are other
areas of the Community which are also characterised
by varying types and degrees of separation from the
Member State of which they form part. None of these
areas is treated as a Member State in its own right for the
purposes of Article 87(3)(b). The parallels
the
Government of Gibraltar draws with measures adopted
in response to the bovine spongiform encephalopathy
(BSE) crisis in the United Kingdom are not relevant.
The BSE crisis was considered to be an exceptional
occurrence and accordingly these measures fell within
the scope of Article 87(2)(b) of the Treaty. There is no
requirement that, for Article 87(2)(b) to apply, the excep-
tional occurrence must affect the whole of a Member
State concerned.

that

(81)

The Qualifying Companies regime does not have as its
object
the promotion of culture and heritage conser-
vation as provided for by Article 87(3)(d) of the Treaty.

(82)

the Qualifying Companies

Finally,
regime must be
examined in the light of Article 87(3)(c) of the Treaty,
which provides for the authorisation of 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 that is
contrary to the common interest. The tax advantages
granted by the Qualifying Companies regime are not
related to investments,
to job creation or to specific
projects. They simply constitute a reduction of charges
that should normally be borne by the undertakings
their business and must
concerned in the course of
the
therefore be considered as operating State aid,
benefits of which cease
aid is
withdrawn. According to the constant practice of the
Commission, such aid cannot be considered to facilitate
the development of certain activities or of certain
the Treaty.
economic areas under Article 87(3)(c) of
Operating aid, according to points 4.15 and 4.16 of
the Commission's Guidelines on national regional aid,
may only be granted in exceptional circumstances or
In addition, Gibraltar is not
under special conditions.
included in the
the United
Kingdom for the period 2000 to 2006, as approved by
the Commission under State aid N 265/00 (32).

regional aid map for

soon as

the

as

(32) Joined cases T-132/96 and T-143/96.

(83)

(84)

Recovery

The Court of
Justice has repeatedly ruled that where
illegally granted State aid is found to be incompatible
with the common market, the natural consequence of
such a finding is that the aid should be recovered from
the beneficiaries (33). Through recovery of the aid, the
competitive position that existed before the aid was
granted is
is possible. However,
far as
Article 14(1) of Regulation (EC) No 659/1999 provides
that ‘the Commission shall not require the recovery of
the aid if this would be contrary to a general principle of
Community law’.

restored as

The Government of Gibraltar's arguments to the effect
that
legitimate expectations have been created by the
uncertainty of the scope of the State aid rules and the
tax
rarity or novelty of Commission action against
measures, whether offshore in nature or not, must be
rejected. Only in exceptional
circumstances may a
recipient of unlawful aid escape the obligation to repay
such aid and it is for the national courts alone to assess
the circumstances of the individual case (34). Similarly, as
the publication of the Notice represented neither a policy
statement by the Commission, nor, as
the United
Kingdom implies, a tightening of the application of the
State aid rules, it cannot have created legitimate expec-
tations (35). The application of a Treaty rule to a specific
situation for the first time cannot create a legitimate
In any event,
expectation in respect of
contrary to what
the
tax treatment between resident and non-
differential
resident companies has played an important part
in
previous Commission State aid decisions (36).

the United Kingdom suggests,

the past.

(85)

The notification of the Qualifying Companies legislation
to the Primarolo group,
far from creating legitimate
expectations, placed the measure clearly within the
scope of the Commission's commitment, mentioned in
for Business
paragraph J of
re-examine Member States’
Taxation,
to examine or
existing tax arrangements, with all
the consequences
that State aid investigations bring.

the Code of Conduct

(33) See for example Case C-169/95, Spain v Commission [1997] ECR

I-135, paragraph 47.

(34) See for example Cases C-5/89 Commission v Germany [1990] ECR
I-3437), T-67/94 Ladbroke Racing v Commission [1998] ECR II-1,
T-459/93 Siemens v Commission (ECR [1995] II 1675.

(35) See footnote 23.
(36) See, for example, Commission Decision 95/452/EC of 12 April
1995 on State aid in the form of tax concessions to undertakings
operating in the Trieste Financial Services & Insurance Centre
pursuant to Article 3 of Italian Law No 19 of 9 January 1991
on, OJ L 264, 7.11.1995, p. 30, recital 10.

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(86) As for the evolution of the common market and liberal-
isation of capital movements and financial services, the
Government of Gibraltar has provided only general
to establish the existence of
arguments
insufficient
the Commission
In particular,
legitimate expectations.
notes that no specific reasoning has been advanced as
to how the evolution of the common market has created
such expectations, nor has any argument been given
relating
liberalisation
to
it is clear that the scope of the
measures. In addition,
Qualifying Companies legislation is wider than those
sectors that may have been affected by restrictions on
capital movements and financial services.

specific

impact

the

of

(87)

(88)

The Government of Gibraltar draws on the Defrenne case
to support its argument that the delays both before and
during the investigation into the Qualifying Companies
regime have created legitimate expectations. However, the
factual and legal situation in the Defrenne case were quite
different. In particular, through its prolonged failure to
take infringement action against certain Member States,
despite its own investigations into the infringements
concerned and repeated warnings that it would initiate
action, the Commission led Member States to consolidate
their belief as to the effect of Article 119 of the Treaty
(now Article 141).
the Commission's
In contrast,
attention had not been repeatedly drawn to the
Qualifying Companies regime and it was only on the
adoption of the Code of Conduct for Business Taxation
that the Commission started a systematic examination of
Member States’ tax arrangements.

Similarly, the alleged delays in the preliminary investi-
gation cannot create legitimate expectations. The United
Kingdom's failure to meet the deadlines set in requests
for information contributed to any delays, if there were
indeed such delays. The preliminary investigation must
also be put into the wider context of the Commission's
follow-up to the adoption of the Code of Conduct for
Business Taxation in which it sought information from
Member States on around 50 tax measures. The
Qualifying Companies regime was but one of
these
measures. The Commission was not inactive during the
investigation, but had to proceed on
preliminary
Qualifying Companies in parallel with its preliminary
investigation into the other measures.

the United Kingdom authorities

the letter of 12 September 2000), saying that the obser-
vations on Exempt Companies apply, mutatis mutandis, to
Qualifying Companies. As far as the Commission is
aware,
the
Government of Gibraltar informed as to the conduct of
the investigation. The Government of Gibraltar was also
given the opportunity to discuss the investigation into its
offshore tax regimes at the meeting held on 19 October
2000 and at all stages had the opportunity to enquire as
to its progress, timing and likely outcome.

kept

(90)

It may be true that there were some doubts as to the
utility of opening the State aid procedure on certain tax
measures pending progress on the rollback of harmful
measures. However this related in part to those existing
aid measures, for which, if rolled back in accordance with
the Code of Conduct for Business Taxation, a State aid
investigation would no longer have any meaning. The
Commission also took the view that in the interests of
equality of
to initiate
proceedings on a number of measures concerning a
wide range of Member States at the same time, rather
than to adopt a piecemeal approach.

it would be better

treatment,

(91) As for the claim that there should be a limitation period,
such a period does in fact exist and is provided for in
Article 15 of Regulation (EC) No 659/1999. It precludes
recovery of aid established more than 10 years before the
in this case, 10 years
Commission's first intervention,
before the Commission's letter of 12 February 1999.

(92)

The Commission notes the Government of Gibraltar's
comments on the significance of
the Commission's
specific request for observations on the recovery of aid.
Whilst the request clearly expressed the Commission's
uncertainties on the question of recovery, it also served
as an explicit signal to the beneficiaries that, in the event
that
the measure was found to constitute illegal and
incompatible aid, recovery remained a distinct possibility
and was in principle the logical outcome. Whilst the
President of the Court of First Instance observed that
this ‘unusual request must, at first sight, allay to a consid-
erable extent any concerns that beneficiaries might have’,
he did not conclude that
such concerns had been
dispelled (37). If he had done so, the Commission would
have been put in the absurd situation where the perverse
consequence of seeking views on a course of action
precluded that very course of action itself.

(89)

Part of the time was spent on the investigation into the
Exempt Companies legislation, on which, according to
the Government of Gibraltar, the Qualifying Company
regime was modelled nearly ‘word for word’.
In this
case, the Government of Gibraltar has itself referred to
submissions it has made on Exempt Companies (for
example its paper submitted by the United Kingdom in

(93)

Similarly, any doubts that the Commission may have
publicly expressed on the existing or illegal nature of
the aid measure would serve to emphasise that a
finding of illegal aid, with all
its consequences, was a
clear possibility.

(37) Joined Cases T-195/01 R and T-207/01 Gibraltar v Commission,

paragraph 113.

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Official Journal of the European Union

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(94)

The claim that an order for recovery would infringe the
principle of proportionality must also be rejected. The
Justice has consistently held (38)
the
Court of
recovery of unlawfully granted State aid with a view to
re-establishing the previously existing situation cannot in
principle be regarded as disproportionate.

that

(97)

cannot,

themselves,

threshold. However,

The Commission notes the Government of Gibraltar's
comments that some Qualifying Companies would not
be assessable to taxation in Gibraltar, that some would
have no assets within its jurisdiction, that some would
have ceased trading and that some would be in receipt of
such
aid below the de minimis
considerations
a
by
recovery order. Nor can they relieve a Member State's
authorities of the obligation to take the necessary steps
to give full effect to a recovery order, since they become
relevant only in the context of an examination of an
individual case. In this context, the Commission notes
that the benefits of Qualifying Company status are not
limited to de minimis aid, nor are they limited to enter-
prises that are assessable to taxation in Gibraltar or that
have no assets within the jurisdiction of the Gibraltar
authorities.

preclude

(98)

(99)

of

otherwise,

the Gibraltar

The Commission makes no observation on the good
faith,
authorities.
or
However,
it follows from the rulings of the Court of
Justice (42) that, when an existing aid measure is altered,
in order for the measure to become new aid by virtue of
the modification or for the modification itself to be new
aid, the alteration must widen the scope of the measure
and/or increase the advantage available.

for

eligibility are

In the present case, the Commission notes the ruling by
the Court of First Instance that Gibraltar's 1967 Exempt
Companies legislation must be considered to be an
existing aid measure (43). The Commission also notes
that the Qualifying Companies legislation was modelled
very closely on the Exempt Company legislation. The
conditions
largely identical. The
substantive differences concern the determination of the
annual tax due. Rather than pay only a very low, fixed
annual tax, Qualifying Companies pay a percentage of
their annual profits. It therefore follows that Qualifying
Companies pay tax on their profits at a higher rate than
Exempt Companies. The more restrictive Qualifying
Companies regime can therefore be considered to offer
a reduced advantage, within the meaning of Article 87(1)
of the Treaty, compared with the Exempt Companies
regime. The Commission also notes that in the unlikely
event that the tax paid by a Qualifying Company would
be lower than the fixed annual
tax of an equivalent
Exempt Company, the difference would fall below the
for a
de minimis
minimum tax rate of 0 % for a Qualifying Company,
whilst Exempt Companies pay a fixed annual
tax of
between GBP 225 and 300.

threshold. The legislation provides

(42) Joined Cases T-195/01 and T-207/01, paragraph 111.
(43) Joined Cases T-195/01 and T-207/01, paragraph 113.

(95)

less

than 10 % of

The Commission rejects the assertion that an order for
recovery would place a disproportionate administrative
burden on the Gibraltar authorities. According to the
there are around 140 Qualifying
United Kingdom,
Companies. This
the
represents
companies assessed for taxation each year in Gibraltar.
if not all, Qualifying Companies pay
Given that most,
some income tax, albeit at a reduced rate, and that
such companies tend to have a ‘bricks and mortar’
presence in Gibraltar,
the Commission concludes that
the administrative burden would not be excessive. As
for the suggestion that the powers of investigation of
Gibraltar Tax Department are limited,
the Court of
Justice has ruled that national provisions cannot be
invoked in such a way
recovery
impossible (39).

to render

as

the

and

Exempt Companies

(96) Arguments similar to those in recital 37 on the conse-
quences of recovery for the Gibraltar economy were used
by the Government of Gibraltar in an attempt to prevent
publication of the decision to open the formal investi-
gation procedure (40). They have not materialised. It is far
from certain that they would do so as a result of a
recovery order in this case. The Commission also notes
that the arguments on the impact of recovery on the
Gibraltar economy encompassed both the Qualifying
Companies
regimes.
However, since the Government of Gibraltar made its
observations, the threat of recovery has diminished to
the extent that following the annulment of the Commis-
sion's decision initiating the formal State aid investigation
procedure (41),
the original 1967 Exempt Companies
legislation is now under investigation as an existing aid
scheme. There can be no recovery order in respect of this
legislation and consequently the impact forecast by the
Government of Gibraltar, to the extent it materialises at
all, will be reduced. In any event, the Commission cannot
allow such hypothetical considerations to impede the
competitive
restoration,
situation that existed before the implementation of an
illegal aid measure.

as possible, of

the

far

as

(38) See, for example, Joined cases C-278/92, C-279/92 and C-280/92

Spain v Commission [1994] ECR I-4103.

(39) See for example case C-24/95 Rheinland Pfalz v Alcan, [1997] ECR

I-1591.

(40) Joined Cases T-195/01 R and T-207/01 Gibraltar v Commission,

paragraphs 94 to 105.

(41) Joined Cases T-195/01 and T-207/01, paragraph 115.

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2.2.2005

the

State

subject

between

to different

Exempt Companies

(100) The Court of Justice has consistently ruled that where a
diligent businessman could have foreseen the adoption of
a Community measure likely to affect his interests, he
cannot rely on the principle of protection of legitimate
the measure is adopted (44). Given the
expectations if
similarities
and
Qualifying Companies regimes, it is hard to see how a
the two
diligent operator could have anticipated that
regimes would be
aid
procedures. The differences between the two schemes,
rather than being inherent in their design, reflect the
the Gibraltar authorities to require those
practice of
offshore
in
Gibraltar to pay tax, albeit at a low level. It is therefore
reasonable to assume that a conscientious businessman,
acting in good faith, could legitimately have believed that
by opting for the less generous Qualifying Companies
regime rather than the manifestly legal
(in State aid
terms, existing) Exempt Companies regime, he would
also enter a regime whose legality was not in doubt.
Accordingly, the Commission concludes that an order
for recovery would, in the exceptional circumstances of
this
contrary to a general principle of
Community law.

companies with a physical presence

case, be

Qualifying Companies legislation should therefore not
be required,

HAS ADOPTED THIS DECISION:

Article 1

The State aid which the United Kingdom has implemented
the Qualifying Companies regime, contained in the
under
Income Tax (Amendment) Ordinance of 14 July
Gibraltar
1983 and the Gibraltar Income Tax (Qualifying Companies)
Rules of 22 September 1983,
incompatible with the
common market.

is

Article 2

The United Kingdom shall withdraw the scheme referred to in
Article 1.

Article 3

The United Kingdom shall inform the Commission, within two
months of notification of this Decision, of the measures taken
to comply with it.

VIII. CONCLUSIONS

Article 4

(101)

also concluded that

It is concluded that the Gibraltar Qualifying Companies
regime constitutes State aid within the meaning of Article
87(1) of the Treaty and that none of the derogations
provided for in Article 87(2) or Article 87(3) apply. It
the United Kingdom has
is
unlawfully implemented the scheme in question,
in
breach of Article 88(3) of the Treaty. However, benefi-
the scheme were entitled to entertain a
ciaries of
legitimate expectation that
the scheme
was not in doubt. Recovery of aid granted under the

the legality of

This Decision is addressed to the United Kingdom of Great
Britain and Northern Ireland.

Done at Brussels, 30 March 2004.

For the Commission

Mario MONTI

Member of the Commission

(44) See for example Case 265/85, Van den Bergh and Jurgens v

Commission [1987] ECR, 1155, paragraph 44.