2005/261/EC: Commission Decision of 30 March 2004 on the aid scheme which the United Kingdom is planning to implement as regards the Government of Gibraltar Corporation Tax Reform (notified under document number C(2004) 929) (Text with EEA relevance).
Date: 2004-03-30
Institutions: European Commission
Subjects: Gibraltar, State aid, United Kingdom, control of State aid, corporation tax, infringement of EU law, tax reform

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 30 March 2004

on the aid scheme which the United Kingdom is planning to implement as regards the Govern-
ment of Gibraltar Corporation Tax Reform

(notified under document number C(2004) 929)

(Only the English text is authentic)

(Text with EEA relevance)

(2005/261/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity, 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)

(3)

Whereas:

On 16 October 2002,
the Commission decided to
initiate the procedure laid down in Article 88(2) of the
EC Treaty in respect of the reform (C(2002) 3734). This
decision was notified to the United Kingdom on
18 October 2002 (SG(2002) D/232221). After an exten-
sion of the deadline, the United Kingdom replied by
letter dated 16 December 2002 (A/39214).

The Commission Decision to initiate the formal investi-
gation procedure was published in the Official Journal of
the European Communities,
inviting interested parties to
submit their observations (2). Comments were submitted
by the Spanish Confederation of Business Organisations
(Confederación Española de Organizaciones Empresa-
riales) on 30 December 2002 (A/39469), by the Åland
Executive,
on
2 January 2003 (A/30002), by the Spanish Government
on 2 and 3 January 2003 (A/30003 and A/30018), and
by the Government of Gibraltar on 3 January 2003 (A/
30011). These comments were forwarded to the United
Kingdom, who replied by letter dated 13 February 2003
(A/31313).

Landskapsstyrelse)

(Ålands

Finland

I. PROCEDURE

II. DETAILED DESCRIPTION OF THE MEASURE

(1)

By letter dated 12 August 2002, registered on 19
August (SG(2002) A/8328), the United Kingdom notified
to the Commission, pursuant to Article 88(3) of the EC
the Government of Gibraltar corporation tax
Treaty,
reform (hereinafter the reform).

(4)

The description that follows takes account of the modifi-
cations to the reform proposals made by the Govern-
ment of Gibraltar in response to the opening of the
formal State aid investigation procedure. These modifica-
tions were set out in the United Kingdom's letter of
16 December 2002. They are summarised in para-
graphs 27 to 30 below.

(1) OJ C 300, 4.12.2002, p. 2.

(2) See footnote 1.

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(5)

(6)

Objective of the reform

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 (3) (herein-
after the Code of Conduct) and with the OECD Report
on Harmful Tax Competition (4). According to the
Government of Gibraltar, an essential element of the
reform is the general abolition of taxation on company
profits, with the exception of top-up taxes on utilities
and financial services activities. The reform proposals are
based on the complete elimination of all discrimination
between resident and non-resident, or domestic and
non-domestic economic activity, i.e. the elimination of
so-called ring-fencing provisions. The exempt and quali-
fying companies legislation will be abolished. Thus the
formal distinction between the so-called offshore and
onshore economy will be removed.

The general
tax system to be introduced under the
Reform will be a payroll tax, a business property occupa-
tion tax and a registration fee, applicable to all Gibraltar
companies. The Gibraltar Government estimates that its
current very limited but essential income from corporate
taxes of GBP 13,7 million (about EUR 20 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.
This compares with personal income tax of GBP 53,6
million (about EUR 77 million) representing 36,3 % of
revenue. Income from top-up taxes on financial services
and utilities activities will be limited, but will likely make
up any shortfall
in corporate tax revenue under the
general system.

Implementation

(7)

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.

(8)

The legislation will be implemented by the Gibraltar
Government after it is passed by Gibraltar's Parliament
(the House of Assembly). As part of the reform, the
Companies Taxation and Concessions Ordinance (the

(3) OJ C 2, 6.1.1998, p. 1.
(4) Approved by the OECD Council on 9.4.1998.

exempt company legislation) and the Income Tax (Quali-
fying 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.

(9)

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 4th and 7th EC
Company Law Directives. All companies in Gibraltar
with a tax liability will be required to file tax accounts
with the Commissioner and stringent measures will also
be introduced in order to ensure compliance with such
obligations. For the first time in Gibraltar, a tribunal to
deal specifically with company taxation matters (to be
called the Companies Taxation of Designated Activities
Tribunal) will be set up whose purpose will be to exer-
cise such powers relating to appeals and other matters
arising from the operation of the new legislation. Such
powers will include the power to require a company to
make available for inspection by the Tribunal all such
books, accounts, employment records or other docu-
ments which, in the opinion of the Tribunal, contain or
may contain information relating to the subject matter
of the proceedings.

Payroll tax and business property occupation tax

(10)

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. Every ‘employer’ in Gibraltar will be required
to pay payroll tax for the total number of its full-time
‘employed in
‘employees’ who are
and part-time
Gibraltar’. The central
terms used will be defined as
follows:

— Employer is any company incorporated or registered
under any law in force in Gibraltar paying emolu-
ments on its own account or making payments to
any person in respect of service or services provided
by an individual who is deemed to be an employee.

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

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

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(11)

The Gibraltar Government will introduce detailed anti-
avoidance rules intended to eliminate all possibility for
abuse. This will
include introducing the concept of
‘deemed employee’ and rules targeted at employees who
may be carrying out an activity outside Gibraltar. The
combined effect of the meaning of the terms ‘employees’
and ‘employed in Gibraltar’ will be to cover, essentially,
all employees physically present in Gibraltar. According
to the United Kingdom, of a total of 14 000 employees
in Gibraltar, 10 100 are employed by the private sector.

(12) All companies occupying property in Gibraltar for busi-
ness 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 %).

(13)

(14)

Liability to payroll tax together with business property
occupation tax will be capped at 15 % of profits. Thus,
companies will only pay the payroll tax and the business
property occupation tax if they make profit, but in an
amount not exceeding 15 % of profits.

it

The vast majority of companies in Gibraltar will be
subject to the payroll tax and to the business property
occupation tax only. According to the Gibraltar Govern-
ment,
is not possible to estimate the number of
companies in Gibraltar that will accrue an estimated
payroll tax and business property occupation 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
as this will vary year-on-year and will depend on the
individual circumstances of each company.

Registration fee

(15)

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

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

(19)

(16)

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 activities. The United
approximately 29 000
Kingdom estimates

that of

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.

(17)

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.

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

(18)

The definition of
provision of services, equipment or premises for:

‘utilities’ activities encompasses the

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

— electricity (generation, distribution and supply),

— water (production,

import/export, supply of either

potable or salt water),

— sewage (provision, operation, management, mainte-
nance, repair, replacement, modification, renovation,
replacement, renewal of sewers and disposal/treat-
ment of sewage),

— petroleum (collection, production,

import/export,
treatment improvement, pumping, storage, distribu-
tion and supply of fuel oil).

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.

accounting

standards).

Financial

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(20) Utility companies, in addition to the payroll and prop-
erty taxes, will be charged a top-up tax on profits from
utility activities at the rate of 35 % of profit (calculated
in accordance with internationally accepted accounting
standards). Such companies will be permitted to deduct
payroll tax and business property occupation tax from
their liability to top-up tax. Although utilities companies
will also have their annual liability to payroll tax and
business property occupation tax capped, in aggregate,
at 15 % of profit, the operation of the utilities top-up
tax will ensure that these companies always pay a tax
equal to 35 % of profits.

(21)

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. Accord-
ingly, 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 %.

(22)

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, inter-
ests 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 utili-
ties activities bears to the whole of the trading profits or
gains made by the company.

Other features of the reform

include

courts of

exempt premises

(23) Under the Rates Ordinance, certain premises are exempt.
These
justice,
churches, cemeteries, public gardens, uninhabitable mili-
tary defences, civil defence premises, lighthouses and the
Gibraltar Museum. Such premises will consequently be
exempt from the additional rate, the business property
occupation tax. The Gibraltar authorities may also
reduce or remit the payment of any general rate where
this ‘is in the interests of the development of Gibraltar’.

(24)

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 Accoun-
tancy Bodies.

(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 33 1/3 % of the remainder in subsequent years.

Modifications to the reforms originally notified

(27)

(28)

In response to the opening of the formal State aid inves-
tigation procedure,
the following changes have been
made by the Government of Gibraltar to the tax reform
proposals.

The provisions which would cap, at GBP 500 000, the
combined liability to payroll tax, business property occu-
pation tax and, where applicable, the 8 % top-up tax on
financial services activities, have been removed. The
removal of the quantum cap will be accompanied by a
lowering of the top-up tax for financial services compa-
nies from 8 % of profits to a single but as yet undeter-
mined rate in the range of 4 to 6 %.

(29)

The provision which would exempt certain premises of
the Upper Rock of Gibraltar from rates (and conse-
quently from business property occupation tax) has been
removed.

(30)

The provisions which would exempt
the following
classes of income for the purposes of determining profits
have been removed:

— 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

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— 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

investigation procedure fall under six headings, all based
on specificity:

III. GROUNDS FOR INITIATING THE PROCEDURE

(31)

In its evaluation of the information submitted by the
the Commission
United Kingdom in the notification,
considered that a number of
the reform
proposals would be liable to confer an advantage on
Gibraltar companies. In particular:

features of

— the entire system would grant an advantage to
Gibraltar companies compared with UK companies
(regional selectivity),

— the requirement to make a profit before incurring
any payroll and property tax liability would confer
an advantage on unprofitable companies;

— the 15 % cap on liability to payroll and property
taxes would confer an advantage on those companies
to which it applies,

— the GBP 500 000 cap on liability to payroll and
property taxes would confer an advantage on those
companies to which it applies,

— some technical features of the reform would be liable
to give rise to State aid (certain exemptions from
rates/property tax and exemptions for certain speci-
fied interest income for the purposes of determining
profits).

(32)

The Commission also considered that these advantages
would be granted via State resources, would affect trade
between Member States and would be selective. The
Commission also considered that none of the exceptions
on the general prohibition on State aid provided for in
Articles 87(2) and 87(3) of the EC Treaty applied. On
these grounds the 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 UNITED KINGDOM

— the fact that companies are liable to taxes only if
they make profits would confer an advantage on
unprofitable companies compared with profitable
ones,

— the operation of the 15 % profits-based cap would
benefit those undertakings to which it applies by
reducing their liability to payroll tax, business prop-
erty occupation tax, and financial services top-up
tax, if applicable,

— the operation of

the GBP 500 000 quantum cap
would benefit those undertakings to which it applies
by reducing their liability to payroll tax, business
property occupation tax, and financial services top-
up tax, if applicable,

— the exemption for certain properties on the Upper
Rock confers a tax advantage on undertakings occu-
pying such premises,

— the two provisions exempting interest on certain
loans from the calculation of profits for purposes of
the corporate tax rules confer an advantage on
certain companies,

— several features of the proposed tax scheme result in
a lower tax burden for companies in Gibraltar when
compared with companies in the United Kingdom
and therefore constitute an advantage for the former
(regional specificity).

(35) Neither the United Kingdom nor the Government of
Gibraltar shares the Commission's doubts as to the
possible State aid character of certain elements of the
reforms. However, without prejudice to whether the
original reform proposals contain any element of state
aid, the Government of Gibraltar will:

— drop the GBP 500 000 cap from the planned new

tax system,

— remove the provision to exempt

from rates (and
hence from business property occupation tax) certain
properties on the Upper Rock of Gibraltar,

(33)

The observations of
summarised as follows.

the United Kingdom can be

— remove the provision to exempt certain interest
income for the purposes of determining profits.

(34)

The Commission's objections to the reform proposals as
set out in the decision to open the formal State aid

(36)

The three remaining objections do not give rise to State
aid.

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Not taxing unprofitable companies is not State aid

(37) No selectivity arises from the absence of liability for tax
where no profits are made. It is true that neither the
payroll tax nor the business property occupation tax is
payable if the taxpayer company has no profit. Profit is
a sine qua non of liability. But it is not the tax base. It is a
condition precedent for liability to the tax in question.
This is natural, since a tax on a company which makes
no profit becomes a tax on the capital of the company.
Contrary to what the Commission claims, the ‘operative
event’ under the payroll tax and the business property
tax is not profit. The ‘operative events’ are the profitable
employment of an employee and the profitable use of
property. It is not the case that payroll or occupation of
business premises are secondary factors. The logic of the
proposed scheme is dual — employment and occupation
constitute the tax base, while profitability constitutes a
lower quantitative threshold to liability. Both the tax
base and the quantitative limitation are of a general
nature, applicable in the same way to all companies
regardless of their size or the sector in which they are
active.

(38)

(39)

the quantitative limitation were selective,

Even if
it
follows from the nature and logic of the planned corpo-
rate tax scheme that companies are only taxed if they
make money from which to pay the taxes. The Commis-
sion has itself conceded in point 25 of the Commission
notice on the application of
the State aid rules to
measures relating to direct business taxation (5) (herein-
after the Notice) that such selectivity is justified by the
nature of the tax system. This is as valid for a tax system
which is based on the profitable use of labour and prop-
erty as it is for a ‘pure’ profit-based system in which
companies that make no profit are not taxed. A parallel
cannot be drawn with social security contributions as
they serve a different purpose unrelated to whether a
company is profitable.

Limiting tax to 15 % of profits is not State aid

The proposed limitation is not selective.
In order to
constitute State aid, a tax measure must be selective in
favouring certain companies and/or sectors over others.
The application of the 15 % cap will depend on the rela-
tionship between profit and the number of employees in
a given year. This will potentially benefit all companies,
whether
the
economy, which in a given year reach that level of profit
in relation to payroll. A specific group of companies to
which the limits on tax liability will apply cannot be

small and in all

sectors of

large or

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

(40)

(41)

(42)

defined and in any case the group will change year-on-
year. The rules are generally applicable and available to
all Gibraltar companies. The Commission itself explains
in point 14 of the Notice that the fact that some firms
or some sectors benefit more than others from a tax
measure does not necessarily mean that the measure is
caught by the State aid rules.

The Government of Gibraltar has devised a general tax
scheme based both on the simple factors of property
and payroll, and of the existence of profitability. At the
same time, it has decided that it wishes to apply the tax
in a regressive way. In effect, there are two bands of tax,
based on overall profit. Where the tax bill is below 15 %
of overall profits, the full tax is paid. Where the tax bill
exceeds 15 % of overall profits, a zero rate is applied as
regards the surplus. Such a decision is also fully in line
with the freedom of the Government of Gibraltar to
devise its tax regime without engaging the State aid
rules.

to limit

The Government of Gibraltar wishes
the
maximum tax bill of companies under the new system.
If there are different tax rates in different ‘bands’ (when
the tax base is different in size) one tax rate is always
lower than another, and therefore in some sense confers
an advantage on the taxpayers who are lucky enough, or
who are able to arrange their affairs, to pay the lower of
the rates. But this does not create a State aid.

Even if the 15 % cap confers a specific advantage on the
companies to which it applies, such a limit would still
be justified by the nature or general scheme of the
system of which it is a part. All direct taxes in Gibraltar
must find the optimal balance between maximising tax
revenue and limiting the maximum liability of individual
taxpayers so that it does not exceed their ability to pay.
It may therefore be necessary to make the direct taxes
regressive at some level. Some limit of this kind is essen-
tial because of the specific circumstances of the Gibraltar
economy, such as its limited geography and labour. The
economy of Gibraltar is small and more vulnerable than
to shocks created by the natural and fair tax
most
competition between jurisdictions. Companies may not
be able to afford to leave a large Member State as easily
as they can move out of a tiny economy like Gibraltar.
Without the tax base being subject to quantitative limita-
tions the principal objective inherent in any tax system
— which is to ensure the necessary revenue to meet
public expenditure — might be endangered by market
fluctuations.

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(43)

Labour in Gibraltar is a scarce taxable asset. However, a
tax on labour cannot follow the same progressive prin-
ciple and logic as a tax on profit. A tax on labour must
at the same time take into consideration both the ability
of a company to create taxable income and the need to
ensure the necessary stability in the workforce. Given
the cyclical nature of the economy and corporate profit-
ability, a labour tax that does not contain a regressive
element could trigger mass layoffs and instability in
times of cyclical market fluctuations or depression. As a
very small economy, random variations resulting from
overall economic fluctuations can have a much larger
larger
in Gibraltar
proportional
economy. The internal logic of the proposed payroll tax
system therefore justifies capping payroll tax liability in
relation to profits.

than in a

effect

(44)

In contrast, utilities would have a corporate tax liability
of 35 % of profits. This is justified by the nature and
logic of the system, as labour stability is ensured because
utilities are closely linked to the territory served and, as
a direct result of the small size of the Gibraltar market,
occupy a natural monopoly or semi-monopoly position
making them highly profitable. The same need for a
regressive element in the tax applied to utilities does not
therefore arise.

Regional specificity

(45)

There is no legal authority for the suggestion that where
there are two separate genuinely autonomous tax juris-
dictions in one Member State, the rates of tax in the two
jurisdictions can be compared, and the lower rate of tax
regarded as a State aid merely because it is lower than
the other tax rate. This would mean that there would be
a State aid every time an autonomous regional
tax
authority, which is responsible for managing public
spending in the region, chooses on the basis of democra-
tically expressed public preferences to cut spending and
reduce taxes. The issue has been discussed by the Advo-
cate General (6) but has never been addressed by the
Court as the cases concerned were withdrawn. In one of
a series of more recent cases concerning the Basque
provinces, the Court of First Instance stated that the
contested decision had no effect on the competence of
Álava to adopt general tax measures applicable to the
whole of the region (7).

(46)

Such regional variations between autonomous jurisdic-
tions are not State aid within the meaning of Article 87
EC. A State aid measure is only present if State resources
are used through a tax foregone. This assessment
presupposes that there is a rate of tax for a certain
activity that applies across the Member State, which is

(6) Opinion in Joined Cases C-400/97, C-401/97 and C-402/97,

[2000] ECR I-1073.
Joined Cases T-92/00 and T-103/00, [2002] ECR II-1385, p. 27.

(7)

(47)

(48)

the case where taxation is subject

not
to territorial
autonomy, as opposed to being set in a uniform way
and then varied according to location. Similarly,
the
analysis of a selective advantage relies on the assumption
that there is a level of tax that would otherwise apply to
a certain activity in the relevant territory.

The State aid criteria assume that the supposed aid may
be compared with a standard or normal tax rate. A
supposed State aid measure can only be present if it is in
some sense an exception to or an exemption from a
standard which would otherwise be applicable to the
company receiving it. A tax rate to which the recipient
of the supposed aid measure would not be subject —
not even if the currently applicable rate allegedly consti-
tuting aid was abolished — cannot be a valid standard
of comparison for the purposes of deciding whether ‘aid’
is present or not. The only possible standard of compar-
ison for the purpose of assessing selectivity is the tax
situation which would otherwise apply in the same tax
jurisdiction. Where such a regime is devised locally, as in
Gibraltar, this is not meaningful.

The Commission's position would appear to make it
impossible for any tax jurisdiction which did not cover
the whole Member State to adopt any tax rate except the
one applicable in the other tax jurisdiction in the State.
It could not adopt a lower rate, because that would auto-
matically constitute State aid, merely by comparison. But
nor could the tax jurisdiction adopt a higher tax rate,
because the tax rate in the rest of the State would auto-
matically become State aid. This would make almost
every exercise of
fiscal autonomy into a measure
creating State aid, either in the jurisdiction in question
or, still more absurdly, elsewhere in the Member State.
Differentiations in direct business taxation frequently
exist within Member States as a consequence of the
various layers of
the
lowest municipality levels. In this context, a parallel can
be drawn with the WTO Agreement on Subsidies and
Countervailing Duties where it is clearly stated that ‘the
setting or change of generally applicable tax rates by all
levels of government entitled to do so shall not be
deemed to be a specific subsidy’ for purposes of the
rules prohibiting the grant of such subsidies (Article 2.2).

territorial subdivision even at

(49)

If the United Kingdom and Spain were to enter into an
agreement to establish joint sovereignty over Gibraltar,
the Commission's position on regional specificity would
have the nonsensical effect that the prevailing tax rate in
Gibraltar would have to equal both the prevailing tax
rate in the United Kingdom and the prevailing tax rate
in Spain. Otherwise State aid would be present in the
jurisdiction applying the lower rate.

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(50)

(51)

(52)

The Commission appears to suggest that if there are
taxes in two separate tax jurisdictions in the same State,
even if the formal percentage tax rate is the same, the
fact that different exemptions apply or different allow-
ances are given would mean that the companies getting
the allowance or exemption would be in receipt of aid
if, all other things being equal, they would have paid a
higher rate of tax in the other jurisdiction. However, the
Commission's theory is inappropriate to the facts of the
Gibraltar case. Comparisons between the tax base or tax
structure of a company profits tax can sometimes be
made with a company profits tax in another jurisdiction.
But it is simply impossible to make useful or meaningful
comparisons between tax systems that are completely
different because the tax base is not the same.

If maintained, the Commission's reasoning on regional
specificity would not respect the fundamental principle
of subsidiarity in EU law and could constitute a misuse
of its powers. If the Member State concerned can func-
tion with two or more autonomous tax jurisdictions
competing for corporate tax revenue within its territory
without suffering significant distortive effects on compe-
tition, it does not under the subsidiarity principle of the
EC Treaty become a Community task to intervene in the
constitutional arrangements of the Member State. The
Commission seems in fact to be seeking to use the State
aid rules to pursue tax uniformity within EU Member
States.

The Commission may suggest that a State cannot plead
its own national law, even constitutional law, to avoid
its obligations under Community law. But this principle
is irrelevant to the issue of selectivity. The question of
selectivity arises because it is suggested that a given tax
provision is more favourable than a more general tax
rule which would otherwise apply. This cannot alter the
fundamental right of a Member State to organise its tax
system so that autonomous tax regions can raise in an
independent and non-discriminatory way the necessary
revenues to fund public tasks. There can be no State aid
on the basis of regional specificity in circumstances
where, as in Gibraltar, there is a genuinely autonomous
tax jurisdiction which determines its tax system indepen-
dently, and in which taxes imposed by the other tax
jurisdictions in the State are not payable.

(53)

The Commission's position would seriously interfere
with the possibilities for Member States to decentralise
their powers and thereby establish the necessary fiscal
autonomy in the regions to cover the expenditures
incurred in the exercise of such decentralised powers. It
would make it impossible for any region or tax jurisdic-
tion to increase or reduce its taxes without creating a
State aid, either in its own region (if tax was reduced) or
elsewhere (if tax was increased). It would be absurd to
suggest that the State aid rules should be interpreted in

such a way as to make it impossible for a Member State
to decentralise
effectively when it
amended its constitution.

taxing powers

(54)

The Commission states that in the absence of a specific
company taxation regime in Gibraltar, companies in
Gibraltar would be subject
to the standard United
Kingdom tax regime. This represents a serious misunder-
standing of the constitutional position of Gibraltar. The
standard United Kingdom tax regime applies in the
United Kingdom. It does not apply in other tax jurisdic-
tions. It is not a normal or residual regime which applies
in the absence of special provisions. The fact that the
United Kingdom is responsible for the foreign relations
of Gibraltar does not mean that any provisions of United
Kingdom law would ever
apply automatically in
Gibraltar.

(55) Gibraltar is an overseas territory of the United Kingdom.
It forms part of Her Majesty the Queen's Dominions but
is not part of the United Kingdom. Gibraltar is not a
region of the United Kingdom in any sense. It has its
own constitutional order including its own institutions
distinct from those of the United Kingdom. Gibraltar
also adopts its own legislation.
In respect of defined
domestic matters, Gibraltar is autonomous and self-
governing. Gibraltar is an economically self-sufficient
autonomous tax jurisdiction.
It receives no financial
assistance
from the United Kingdom and United
Kingdom tax laws do not apply to Gibraltar. The
Gibraltar Government is required to generate sufficient
revenue through taxation to finance its expenditure
autonomously, and is competent
to propose to the
Gibraltar
legislature and to enforce within Gibraltar
corporate taxation laws. The Gibraltar and United
Kingdom economies are two entirely distinct and sepa-
rate economies. Accordingly, Gibraltar is, in every rele-
vant way,
from the United Kingdom,
notably in constitutional, political, legislative, economic,
fiscal, revenue-raising and geographical terms.

totally distinct

(56)

In the same way as Gibraltar is not part of the United
Kingdom, and indeed for that reason, Gibraltar is not
part of
the United Kingdom for Community law
purposes. Community law applies to Gibraltar by virtue
of Article 299(4) of the EC Treaty and not Article 299(1).
The following points illustrate Gibraltar's special, sepa-
rate status and the fact that Gibraltar cannot be consid-
ered to be a region of the United Kingdom for State aid
purposes:

— the extent of Gibraltar's Community membership is
different to that of the United Kingdom's. In particu-
lar, Gibraltar does not form part of the only fiscal
territory which has been defined at Community level
(i.e. the Community VAT territory),

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— European Community law is given effect in Gibraltar
by virtue of the European Communities Ordinance
1972 — primary legislation passed by Gibraltar's
the European
Parliament, and not by virtue of
Communities Act 1972 which gives effect to Com-
munity law within the United Kingdom,

— the Gibraltar legislature implements EC directives
within Gibraltar independently of the United King-
dom's own implementation,

(60)

— whenever Community law requires the setting up of
competent authorities, Gibraltar sets up its own
competent authorities, distinct from those set up for
the same purpose in the United Kingdom, and

— until the European Court of Human Rights' judgment
in the Matthews case, Gibraltar was excluded from
participation in elections to the European Parliament
even though that exclusion was operated by Annex II
to the 1976 Act on Direct Elections which was
termed as follows: ‘The United Kingdom will apply
the provisions of this Act only in respect of the
United Kingdom.’

General comments

(57)

to fear

The Commission appears
that Gibraltar's
proposed new corporate tax system might perpetuate
harmful tax competition. Both the United Kingdom and
the Gibraltar Governments believe that the proposed tax
reform is compatible with the Code of Conduct on busi-
ness taxation and the OECD report on harmful
tax
competition. Harmful tax measures typically involve lack
of transparency, lack of exchange of information, and a
more favourable tax treatment of non-resident compa-
nies compared with resident ones. With the proposed
reform Gibraltar will eliminate all such harmful aspects
of the current exempt and qualifying companies taxa-
tion. Even if Gibraltar were to be considered a favourable
tax territory, this concern cannot be addressed through
the application of the State aid rules when no State aid
is involved.

V. COMMENTS FROM INTERESTED PARTIES

(58) Observations were received from the Government of
Gibraltar, Spain, the Spanish Confederation of Business
Organisations and the Åland Executive.

The Government of Gibraltar

(61)

(62)

Kingdom (8). The additional points made by the Govern-
ment of Gibraltar in its separate observations can be
summarised as follows.

The Gibraltar Government has no power to tax United
Kingdom companies. Similarly,
the United Kingdom
Government has no power to tax Gibraltar companies.
Gibraltar's tax laws are enforced exclusively by the
Gibraltar authorities.

The objective of the reform is to implement a corporate
tax regime which complies both with the State aid rules
and with the Code of Conduct. The reform is also part
of the wider aim to secure compliance with international
standards for financial regulation and supervision and to
obtain good standing in the international financial com-
munity. Gibraltar had previously been found to be a ‘tax
haven’ by the International Monetary Fund (IMF), the
Financial Action Task Force (FATF) and the OECD. The
IMF and FATF Reports on Gibraltar (9) confirm Gibral-
tar's compliance with the main international standards
on financial regulation and supervision. The Gibraltar
to the OECD (10) delivers
Government's commitment
compliance with the requirements for exchange of infor-
mation and transparency. Gibraltar's
tax reform, as
amended, delivers de facto compliance with the EU Code
of Conduct. The reform also delivers compliance with
the State aid rules. Clearance under State aid rules
remains the last obstacle in the way of ensuring that
Gibraltar, as required by the international community
including the European Union, has now addressed all the
perceived evils of a tax haven.

Two Gibraltar measures,
the exempt and qualifying
company regimes, were among eleven measures into
which the Commission opened formal State aid investi-
gations on 11 July 2001. All 11 were among the large
number of fiscal measures identified as harmful by the
Code of Conduct Group (11). They were singled out
under the Commission's powers to enforce State aid
rules, sometimes by applying new interpretations of the
selectivity criterion, essential to the notion of State aid.
The mere fact that a tax regime is listed as harmful
under the Code of Conduct does not, however, necessa-
rily mean that it involves State aid (point 30 of the
Notice). By proceeding in this way, the Commission has
embarked on a strategy which could easily lead to the
unwanted consequence for competition policy that tax
measures which constitute a significant distortion of
competition to the detriment of the effective functioning
of the single market are left intact for political reasons

(59)

The Government of Gibraltar is aware of, and fully
forward by the United
endorses,

the arguments put

(10) Public commitment made on 27 February 2002.
(11) Report of Code of Conduct Group (Business Taxation) to the
Ecofin Council on 4 December 2001 (14467/01 — FISC 249,
27.11.2001).

(8) See paragraphs 33 to 57.
(9) Published, respectively,

2002.

in October 2001 and on 22 November

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are being persistently

— the Commission refrains from using appropriate tax
harmonisation measures — while less harmful
tax
systems
challenged by the
Commission in a way that does not respect equality of
treatment. In order to achieve a common level of busi-
ness taxation across the European Union, if that is the
objective, the Commission must resort to tax harmonisa-
tion measures. Otherwise an abuse of powers may be
involved. Point 15 of the Notice confirms that differ-
ences between tax systems as such are not regulated by
the State aid rules, but should rather be addressed under
Articles 95 to 97 EC.

mous region (in contrast to a region acting by ad hoc
delegation of powers) without any link to the central
budget would constitute State aid or not, the Gibraltar
tax reform is also in that respect fundamentally different.
Not only is there a genuine, sui generis, autonomy in the
territory, but this autonomy is used to devise indepen-
dently a wholly different and separate system which is
not based, in any way, on the United Kingdom scheme
or norms. It is thus completely inappropriate and irrele-
vant to compare the Gibraltar tax rules to the rules
which would apply had the same tax subject been based
in the United Kingdom.

(63)

(64)

(65)

(67)

tax competition. First,

The new system will address the concerns regarding
the reform
possible harmful
abolishes any distinction between resident and non-resi-
dent companies (so-called ring-fencing) which has been
at the heart of the Code of Conduct exercise, the OECD
Report on Harmful Tax Competition, and the selectivity
aspect of the exempt and qualifying companies legisla-
tion. The reform applies in a uniform way to all compa-
nies registered in Gibraltar. Second, it delivers transpar-
ency of
the system because all companies will be
required to file tax accounts. Finally, financial services
companies in Gibraltar will not be exempted from taxa-
tion, but will be subject to an extra top-up tax on profits
attributable to such activities.

Provinces under

the Basque Provinces applied their

The Court of First Instance (CFI) has recently reviewed
the Commission's decisions to open formal procedures
in cases concerning fiscal measures adopted pursuant to
regional autonomy granted to the
some degree of
the Spanish constitution.
Basque
However
fiscal
powers to deviate from the national
tax system by
granting tax relief from otherwise applicable rules. In its
preliminary conclusions that the tax measures in ques-
tion were selective and could constitute illegal State aid,
the Commission did not rely on the fact
they
applied only to part of the Spanish territory. The CFI
specifically noted in one case (12) that the Commission's
decision to open procedures ‘has no effect on the
competence of
the Territorio Histórico de Álava to
adopt general tax measures applicable to the whole of
the region concerned’.

that

The 15 % profits-based cap and non-taxation of compa-
nies making no profit are of general application and do
not constitute material selectivity. The simple fact that
one company may benefit from a general rule in a given
year as compared to another company in the same tax
jurisdiction cannot be sufficient to constitute a State aid
under the rules of the EC Treaty. This result is clearly
not contemplated by the points 13 and 14 of the Notice.

Regional selectivity could arise if there was a tax, applic-
able throughout the whole State, but regional parlia-
ments or authorities had power to reduce the rate of
that tax (or to give exemptions from it) in their regions.
Selectivity issues therefore can arise if the taxing powers
of the region said to be giving aid are in some sense
secondary or supplementary powers to modify a stand-
ard or residual regime. This may perhaps be the position
in some other Member States, but it is not the position
in Gibraltar. The situation is entirely different if the tax
jurisdiction said to be giving aid is, and has been at all
relevant times, a genuinely autonomous tax jurisdiction
which determines its tax system independently under its
own budgetary responsibility, and in which taxes
imposed by the other tax jurisdictions in the State are
not payable.

(68)

The reform is not regional in scope for the purposes of
the State aid rules because the fiscal measures in ques-
tion, which constitute the entire and exclusive corporate
tax system, would apply in the same way throughout
the relevant tax jurisdiction.

The Åland Executive

(69)

comments of

The
summarised as follows.

the Åland Executive

can be

(70)

In deciding that the reform is likely to constitute State
aid, the Commission states that the possible existence of
regional selectivity is taken into account in order to
reach its conclusions. The Commission cites previous
decisions,
including the decision to open the formal
State aid investigation procedure on captive insurance
companies in the Åland Islands. This
invitation to
submit comments refers to the possible existence of
regional specificity. But the reference was dropped from
the Commission's final decision. Therefore the Åland
case cannot serve as an example of regional specificity
or selectivity. The account of previous Commission prac-
tice should refer only to the Commission's final decision.

(66) Without prejudice to whether generally applicable devia-
tions from a national norm adopted by a fully autono-

(12) See footnote 7.

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(71)

If a self-governing region has sole power to legislate in
matters relating to direct corporate taxation, and that
region introduces a tax measure, the measure has to be
assessed and authorised in accordance with the same
it were taken by a
principles that would apply if
Member State. The self-governing region is
to be
regarded as a separate jurisdiction in those areas where
legislative power lies with its legislature exclusively. This
means that the compatibility of a tax measure with the
rules on State aid is to be judged in the same way
whether it is taken by a Member State or by a self-go-
verning region. Any other conclusion would make it
impossible for a region under self-government to exer-
cise its legislative power in a way that differed from the
rest of the Member State. Accordingly, a tax measure
that is plainly a general one within a self-governing
region is not to be regarded as selective, and does not
constitute State aid for purposes of Article 87(1) of the
EC Treaty, in so far as the region has exclusive power in
tax matters, irrespective of whether the tax charged in
the area is different from that in the Member State to
which the region belongs. Any other
interpretation
would jeopardise the region's authority in tax matters.

Spain

(72)

Spain essentially endorses the Commission's preliminary
analysis of
in the invitation to
comment (13). The additional comments made by Spain
can be summarised as follows.

the reform set out

(73) Gibraltar's tax system is an extremely important issue for
Spain, given the geographical contiguity of the two terri-
tories and the serious detriment it is causing to Spanish
public finances. The unfair competition from Gibraltar
the
can be described as harmful since both under
present system and under the proposed new arrange-
ments the tax burden on businesses and investments is
much lower there than in Spain. The reform would
continue to be harmful to the Spanish tax system since
it would maintain a level of taxation substantially lower
in Gibraltar than in Spain, where the standard rate of
corporation tax is 35 %, and would differ greatly from
the tax system in the United Kingdom, creating a risk
that businesses would relocate to Gibraltar in order to
benefit from more favourable tax arrangements.
It is
likely that most firms in Gibraltar would pay less than
the maximum liability of 15 %, at least 15 to 20 percen-
tage points lower than in either Spain or the United
Kingdom.

(74)

For the 28 800 companies not liable to the top-up taxes
on utilities and financial services activities, the proposed

(13) See footnote 1.

tax system is not in fact an overall corporation tax on
business profits but a combination of various individual
taxes subject to ceilings which render the tax liability
either extremely small or non-existent (the reform is
referred to as ‘zero rate tax’ in Gibraltar). Most of these
companies can be regarded as letterbox or asset manage-
ment companies and provided that
they generated
profits they would be liable to GBP 3 000 per employee
them will have only one
per year. Since most of
employee (an accountant or auditor), usually part-time,
they would pay only a maximum of GBP 3 000 per year
in tax if they do not occupy property, which is usually
the case.

(75)

(76)

The introduction of the registration fee would discrimi-
nate in tax terms in favour of companies that do not
generate profits (GBP 150), such as letterbox or asset
management companies,
in comparison with active
companies (GBP 300). This would be a clear example of
maintenance of the status quo in favour of that type of
company.

The financial services sector accounts for 30 % of gross
domestic product. The tax on the profits of financial
services firms would not constitute a genuine corpora-
tion tax since those firms' combined liability by way of
payroll tax, business property occupation tax and top-up
tax would not exceed 15 % of
their profits or
GBP 500 000.

(77) Offshore companies would remain outside the scope of
two of the new taxes: around 8 000 companies without
any physical presence in Gibraltar would thus be
exempt. The reform leaves intact the tax situation of
businesses with no staff or premises in Gibraltar.

(78) Gibraltar is a region which, far from being dependent on
aid or incentives designed to boost economic develop-
ment, enjoys enviable financial health.

(79) As far as the selective nature of any aid is concerned, the
top-up tax on profits would be levied only on companies
providing certain financial services and utilities. Such
specificity cannot derive from or be justified by the
nature or general scheme of the system (14). Companies
in sectors where capital
is extremely mobile, which
employ very few staff, would basically incur only the
payroll tax, and as such their liability would be capped.
This would confer an advantage exclusively on such
firms, whose costs would be reduced and whose profit-
ability would be increased in relation to their competi-
tors.

(14) This exception was recognised by the Court

in Case 173/73

[1974] ECR 709.

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(80)

The Advocate General of the European Court of Justice
maintained (15) that all measures which involve a compe-
titive advantage, including a financial advantage, ‘limited
to companies which invest in a particular area of the
Member State are attributable to the State in question
and cannot therefore, by definition, in the scheme of the
fiscal system of the State, be understood as measures of
a general nature’. He also took the view that ‘the fact
that the measures at issue were adopted by regional
authorities with exclusive competence under national
law’ was ‘merely a matter of form’, and ‘not sufficient to
justify the preferential treatment reserved to companies
which fall within the scope’ of regional laws.

(81) Although the stated aim of the planned reform is to
adopt a new corporation tax scheme that does not
involve any element of State aid, it cannot be exempted
from the scope of Article 87 on the grounds that it is a
tax measure or pursues company-law objectives. The
main effects of the reform would be immediately to
distort competitive conditions in the area and to encou-
rage businesses to relocate. The scheme would signifi-
cantly benefit businesses located in Gibraltar since the
effective rate of taxation in that territory would be much
lower (or even non-existent) in comparison with the rate
applied in the United Kingdom. By establishing a clear
reduction in the
the businesses
concerned,
selectivity would distort
competition and affect trade between Member States.

tax burden for

such regional

(82)

the payroll

The technical mechanism of
tax can be
regarded as harmful within the meaning of point B of
the Code of Conduct, in addition to the fact that the
Gibraltar tax regime as it stands creates a tax burden
that is significantly lower than that generally imposed in
the United Kingdom. The reform would act as a disin-
centive to substantial economic presence in Gibraltar
and would thus be caught by the criterion for regarding
tax measures as harmful set out in point B.3 of the Code
of Conduct. The United Kingdom has not
so far
honoured the promises it made under the auspices of
the OECD with a view to removing Gibraltar from the
list of non-cooperating tax havens.

(83) Gibraltar's

economic approach is also harmful

to
Gibraltar itself, since it has given rise to an economy
that lacks sound foundations and is unsustainable in the
medium or long term. It has also deprived the neigh-
bouring region, Campo de Gibraltar, of potential devel-
opment opportunities. Campo de Gibraltar is currently
one of Spain's least developed regions. Gibraltar's relative
prosperity is due to a large extent to the underdevelop-
ment of the surrounding region.

(84)

This tax system is not only discriminatory and unfair but
it also encourages tax evasion and money laundering.

(15)

Joined Cases C-400/97, C-401/97 and C-402/97, [2000] ECR
I-1073.

Tax evasion stimulated by the possibility of money laun-
dering in Gibraltar is causing serious harm to Spain's
public finances, and such money laundering is facili-
tating the activities of organised criminal gangs. The
above-mentioned IMF report stresses that there are no
mandatory rules on combating money laundering in
Gibraltar.

(85)

(86)

(87)

The Spanish Confederation of Business Organisa-
tions

The Spanish Confederation of Business Organisations
endorses the Commission's preliminary analysis of the
reform set out in the invitation to comment and argues
that the reform could seriously harm the interests of
Spanish businesses.
Its additional comments can be
summarised as follows.

The tax burden would be much lower than that incurred
by businesses in metropolitan United Kingdom and in
Spain: total tax liability in Gibraltar would be capped at
15 %, whereas the rate of
taxation in the United
Kingdom and in Spain is at least 30 % and can be even
higher. Under the new scheme many firms in Gibraltar
would pay hardly any tax at all. The costs which benefi-
ciary firms would have to bear would be lower than
their competitors. The much lower
tax in
Gibraltar is highly discriminatory and undermines the
competitiveness both of Spanish businesses in the area
and UK businesses.

level of

The vast majority of businesses established in Gibraltar
are very small (usually run by a single person and occu-
pying small premises) and are engaged in asset manage-
ment activities, so that the only income they generate
consists of capital gains deriving from the assets they
manage. Given that the basis of the reform is taxation
according to the number of the company's employees
and the surface area of its premises, as well as the tax
exemption of capital gains, most firms established in
Gibraltar would not pay any corporation tax.

Comments from the United Kingdom on the third
party observations

(88)

The United Kingdom supports the observations of the
Åland Executive. In commenting on the observations of
the Spanish Government and the Spanish Confederation
of Business Organisations, the United Kingdom repeated
and cross-referred to some of the arguments it had made
in its response to the opening of procedure. The addi-
tional comments of
the United Kingdom can be
summarised as follows.

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(89)

for

for

January 2003 show,

to the
The reform will not cause ‘serious damage’
Spanish Public Exchequer. Underdevelopment
in the
Campo area does not stem from Gibraltar's fiscal system.
The opposite is true, since the region derives a consider-
income from Gibraltar. Employment
able amount of
figures
that
Spanish nationals lawfully employed in Gibraltar repre-
sent approximately 18 % of Gibraltar's workforce.
Gibraltar thus provides a substantial source of employ-
ment and income for Spanish workers coming from the
surrounding area, as well as considerable income for the
Campo area from Gibraltarians who spend in this
region. Spain is also the second largest exporter to
Gibraltar. Gibraltar is not as wealthy as implied and is
an Objective 2 region for the purposes of the European
Regional Development Fund.

instance,

(90) Differences in tax rates and tax bases between Member
States and between autonomous tax regions is a sover-
eign matter not within the scope of Article 87 of the EC
Treaty. The purpose of the State aid rules is to attack
advantages given by the State or through State resources
to certain specific enterprises. Lower tax rates applicable
generally within an autonomous tax territory do not
satisfy this material specificity requirement and therefore
do not constitute State aid. Competition between the tax
systems of autonomous tax regions may arise not only
from differences in tax rate, but also from differing
methods of calculating taxable income. Such differences
in method of calculation do not constitute State aid if
the tax system is applied in a genuinely non-discrimina-
tory manner inside the autonomous tax territory. It is
unclear how the reform could substantially harm the
Spanish economy by provoking the relocation of busi-
nesses to Gibraltar. The United Kingdom is not aware of
any Spanish company that has relocated to Gibraltar in
order to benefit from the alleged ‘favourable tax system’
provided by the present corporate tax regime. Indeed,
other EU countries, such as Greece and Ireland, and EU
such as Estonia, Hungary and
accession countries,
Cyprus, also have relatively ‘low’ general corporate tax
rates.

(91)

The criticism of the system as a combination of various
taxes is misconceived. The logic of the reformed system
is that employment and occupation constitute the tax
base, whilst profitability constitutes a lower threshold to
liability. The system simply abandons the taxation of
profit as the taxable event in the case of companies. The
criteria of employment and occupation apply horizon-
tally to all companies in all sectors. They do not benefit,
for example, larger companies over smaller companies
or vice versa. The dropping of the GBP 500 000 profit
tax limit removes all possibility that the reform could
benefit larger companies over smaller ones. The fact that

the registration fee is GBP 150 for non-profit-making
companies and GBP 300 for active companies does not
constitute State aid as the difference in registration fee of
GBP 150 must be considered to be de minimis.

(92) Although the reform may correctly be described as
‘zero-rate profit tax’ (due to the choice of employment
and occupation, and not profit, as tax bases), to describe
it as ‘zero rate tax’ is wrong. The accurate position is
that the essential element of the reform is the general
abolition of taxation of company profit (save for a top-
up taxation on financial services and utilities activities)
and its replacement with a payroll tax payable by all
companies.

(93) Neither of the top-up taxes (on financial services or utili-
ties) constitutes State aid. While material selectivity
could be argued, such taxes do not qualify as ‘advan-
in comparison with the general norm for the
tages’
purposes of the definition of aid; their purpose is quite
the contrary. For this reason, the claim that non-financial
service sectors are not covered by the top-up tax is
unfounded.

(94)

is

The suggestion that the reform represents an advantage
for Gibraltarian companies over United Kingdom
companies
incorrect and represents a misunder-
standing of the concept of regional specificity, of the
constitutional status of Gibraltar, and of its status for the
purposes of the EC Treaty. It is assumed that the Spanish
Government does not intend to maintain such an argu-
ment, which would prevent any effective decentralisation
of taxation powers by Member States, and which could
undermine,
inter alia, the tax autonomy of its Basque
provinces. The cases quoted by the Spanish Govern-
ment (16), in the context of regional specificity, have no
relevance as neither
involved situations where the
regions concerned had independent autonomy in the
fields where relief from the general fiscal system was
granted. The tax autonomy referred to in certain Basque
cases (17) is applied to grant tax rebates in relation to the
general Spanish tax system, while in Gibraltar's case its
autonomy is applied to create a fundamentally different
tax system to that of the United Kingdom.

(95)

The allegations relating to,
inter alia, tax evasion and
money laundering are unfounded and irrelevant to the
current State aid procedure. It would not therefore be
appropriate to make a detailed rebuttal. However,
Gibraltar observes high standards of supervision and
financial regulation,
in both the public and private
sectors. The Gibraltar Financial Services Commission is
an independent and respected body. This view has been
corroborated by several international bodies, which have
also commended Gibraltar's actions in combating money

(16) Commission Decision of February 13, 2001, N 147 A/2000
l'Outre-mer) and case 248/84

France (Loi d'orientation pour
Germany v Commission [1987] ECR 4013.
Joined cases T-127/99, T-129/99 and T-148/99 Diputación Foral de
Álava and others v Commission, p. 142.

(17)

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laundering. Gibraltar was one of the first jurisdictions
within the EU to implement the EU's Money Laundering
Directive on an all-crimes basis. A report of the Financial
Action Task Force (FATF), published in November 2002,
states that ‘Gibraltar has in place a robust arsenal of
legislation, regulations and administrative practices to
counter money laundering’ and is ‘close to complete
adherence with the FATF 40 Recommendations’ (18). An
IMF report from October 2001 judged that Gibraltar
was compliant with 66 out of 67 established interna-
tional standards on financial regulation, and concluded
that ‘supervision is generally effective and thorough …
ranks as a well-developed supervisor’ (19).
Gibraltar
Under OECD rules, Gibraltar has been classified as a
cooperative tax jurisdiction.

VI. ASSESSMENT

Existence of aid

(96)

satisfy the four

following criteria. First,

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

(97) According to point 16 of the Notice, the main criterion
in applying Article 87(1) EC to a tax measure is that it
‘provides
in the
in favour of certain undertakings
Member State an exception to the application of the tax
system. The common system should thus first be deter-
mined’. However, given that
the reform raises issues
both of material selectivity and of regional selectivity,
the Commission will first examine the regional selec-
tivity aspect. The question of material selectivity of the
different components of
the reform in the Gibraltar
context is examined separately below in paragraphs 128
to 152.

Regional selectivity

(98)

In its decision to open the formal State aid investigation
procedure (20), the Commission identified the ways in
which the reform as a whole provides for advantages to
Gibraltar companies compared with companies in the
United Kingdom. Neither the United Kingdom nor the
Government of Gibraltar has contested the factual basis
of
is therefore repeated and
refined below.

this comparison and it

(18) FATF Offshore Group of Banking Supervisors, Mutual Evaluation

(19)

Report (November 2002), p. 29.
IMF Report (October 2001) ‘Gibraltar: Assessment of the Regu-
lation and Supervision of Financial Services’, paragraph 9.

(20) See footnote 1.

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

(100) The differences between on the one hand, the United
Kingdom corporation tax regime and the company taxa-
tion 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. In addi-
tion, as described in paragraphs 128 to 152 below,
certain types of company will either escape tax or will
be taxed at a rate of 5 % of profits. These differences in
tax treatment
represent an advantage to companies
other than utility companies established in Gibraltar
compared with companies established in the United
Kingdom.

(101) Further advantages arise to companies in Gibraltar as
compared with those in the United Kingdom through
other differences in the tax regime. The Commission
notes that under the reform, capital gains are excluded
from any calculation of profit. In contrast, capital gains
are generally chargeable to corporation tax in the United
Kingdom. Similarly, the differences in capital allowance
In contrast to the 33 1/3 %
give rise to advantages.
and
expenditure on plant
capital
for
allowance
machinery, the United Kingdom tax regime provides for
an allowance of 25 % of the declining balance and has
no generally applicable first year allowances.

(102) As is evident from the previous paragraphs, the essence
of the Commission's view on the regional selectivity of
the Gibraltar tax reform proposals is that they provide,
in general, for a lower level of taxation than that applic-
able in the United Kingdom and that this difference
amounts to a selective advantage for companies active in
Gibraltar. This premise is consistent with point 16 of the
Notice. This states ‘[t]hat the main criterion in applying
is that it ‘provides in
Article 87(1) to a tax measure’
favour of certain undertakings in the Member State an
exception to the application of
the tax system’. As
pointed out in point 17 of the Notice, ‘the Commission's
decision-making practice
that only
measures whose scope extends to the entire territory of
the State escape the specificity criterion laid down in
Article 87(1)’ and ‘the Treaty itself qualifies as aid
measures which are intended to promote the economic

so far

shows

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development of a region’ (21). Even if they were to apply
automatically and equally to all economic operators
liable for tax in Gibraltar, without introducing any differ-
ence in treatment in favour of one or more sectors of
activity, which is not the case here, the abovementioned
tax reductions ‘are intended exclusively for companies
situated in a particular region of the Member State in
question and constitute for them an advantage which
companies intending to carry out similar economic
operations in other areas in the same State cannot
enjoy’ (22). In this case the abovementioned tax reduc-
tions do in fact
in
comparison with all firms active in the United Kingdom.

favour firms taxed in Gibraltar,

scope is limited to part of the territory of the State
subject to the rules on aid may constitute selective bene-
fits. It is clear that if the reference context for assessing
the territorial selectivity of a measure is the territory in
which it applies, measures that benefit all the firms in
territory would by definition become general
the
measures. The settled practice of
the Commission,
confirmed by the Court of
Justice, on the contrary
consists of classifying as aid tax schemes applicable in
particular regions or territories which are favourable in
comparison to the general
scheme of a Member
State (23).

(103) The United Kingdom, the Government of Gibraltar and
the Åland Executive disagree with the view that the
measure is selective, i.e. that it favours ‘certain firms or
certain products’. They argue that a distinction should be
drawn between cases in which the State grants tax bene-
fits of limited scope to part of national territory and
cases in which such benefits are granted by an infra-
State regional authority for the part of the territory that
falls within its jurisdiction:
the former are selective
because their scope is limited to some of the firms under
State jurisdiction, while the latter are general measures
since they apply to all firms under the jurisdiction of the
regional authority.

(104) The Commission considers first

that

In theory it

the element of
selectivity in the concept of aid is based on a compar-
ison between the advantageous treatment granted to
certain firms and the treatment that applies to other
firms in the same reference framework. The definition of
this framework takes on added importance in the case of
tax measures since the very existence of an advantage
can only be established in relation to taxation defined as
normal.
follows both from the general
scheme of the Treaty, which concerns aid granted by the
State or through State resources, and from the funda-
mental role the central authorities of the Member States
play in defining the political and economic environment
in which firms operate, thanks to the measures they
adopt, the services they provide and possibly the finan-
cial transfers they make, that the framework in which
such a comparison should be made is the economy of
the Member State. In this respect the text of the Treaty
itself, which classifies measures intended ‘to promote the
region
economic
(Article 87(3)(a) and (c)) as State aid that may be consid-
indicates that benefits whose
ered to be compatible,

development’

particular

of

a

(21) See in particular Commission Decision 93/337/EEC of 10 May
1993 concerning a scheme of tax concessions for investment in
the Basque country (OJ L 134, 3.6.1993, p. 25).

(22) Opinion of Mr Advocate General Saggio in Joined Cases C-400/97,

C-401/97 and C-402/97 [2000] ECR I-1073.

limited territorial

(105) Second, the United Kingdom's argument according to
scope become
which benefits of
general measures in the region concerned only because
they are established by the regional rather than by the
central authority, and that they apply throughout the
territory under the region's jurisdiction, cannot be recon-
ciled with the concept of aid. This concept is objective,
covering all aid that
that are
reduces
normally borne from the budget of one or more firms in
various forms, regardless of its purpose, justification or
objective or the status of the public authority that estab-
lishes it or whose budget bears the charge. A distinction
based solely on the body that decides the measure would
remove all effectiveness from Article 87 of the Treaty,
which seeks to cover the measures concerned exclusively
according to their effects on competition and Com-
munity trade (24). Such aid therefore cannot be treated
differently from measures which have the same objec-
tives, use the same resources and have the same

the charges

(23) See in particular, in the case of measures adopted by central autho-
rities, the Commission Decision of 21 May 1997, aid N 847/96,
on the creation of priority outermost regions and measures on
improved economic access in the French Overseas Territories (OJ
C 245, 12.8.1997), the Commission Decision of 16 December
1997, aid N 144/A/96, on the scheme of regional aid to invest-
ment and operating aid which amends the economic and tax
system of the Canary Islands (OJ C 65, 28.2.1998) and Commis-
sion Decision 2002/780/EC of 28 February 2001 on the aid
scheme ‘Investment allowance 1999’, which Germany is planning
to implement for certain undertakings in the new Länder, including
Berlin (OJ L 282, 19.10.2002, p. 15). See also Commission Deci-
sion 98/476/EC of 21 January 1998 on tax concessions under
Article 52(8) of the German Income Tax Act (Einkommensteuerge-
setz) (OJ L 212, 30.7.1998, p. 50), on which the Court of Justice
delivered judgment on 19 September 2000 in Case C-156/98
Germany v Commission [2000] ECR I-6857. In the case of measures
granted by
see Commission Decision
93/337/EEC of 10 May 1993 concerning a scheme of tax conces-
sions for investment in the Basque country and Commission Deci-
sion 2003/442/EC of 11 December 2002 on the part of the
scheme adapting the national tax system to the specific characteris-
tics of the Autonomous Region of the Azores which concerns
reductions in the rates of income and corporation tax (OJ L 150,
18.6.2003, p. 52).

authorities,

regional

(24) Case 173/73 Italy v Commission [1974] ECR 713, Case 323/82
Intermills v Commission [1984] ECR 3809 and Case C-248/84
Germany v Commission [1987] ECR 4013.

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effects on trade and competition, according only to the
formal criterion of the degree of autonomy of the infra-
State authority that establishes it. According to the
abovementioned conclusions of Mr Advocate General
Saggio in Joined Cases C-400/97, C-401/97 and C-402/
97, ‘the fact that the measures at issue were adopted by
regional authorities with exclusive competence under
national law is (...) merely a matter of form, which is not
sufficient to justify the preferential treatment reserved to
companies which fall under the provincial laws. If this
were not the case, the State could easily avoid the appli-
cation, in part of its own territory, of provisions of Com-
munity law on State aid simply by making changes to
the internal allocation of competence on certain matters,
thus raising the general nature, for that territory, of the
measure in question’.

(106) The Commission points out that the use of a purely
institutional criterion to differentiate ‘aid’ from ‘general
measures’ would inevitably lead to differences in treat-
ment in the application of the rules on aid to Member
States, according to whether they had adopted a centra-
lised or decentralised model of allocating tax competence
(or other competence, such as in the area of social
security).
the United Kingdom's argument were
accepted, Member States whose internal administrative
organisation allowed certain regional authorities below
State level to make changes to the general tax system in
the form of tax benefits applicable to firms that operated
in the respective regions would escape the rules on
regional aid in relation to those regions and measures.

If

(107) The Commission considers that if measures completely
identical in their objectives, technique and effects were
not subject to the same rules it would be contrary to
equal treatment and would create serious distortions in
the functioning of the common market. The existence of
the rules on aid to regional tax benefits should be based
on objective criteria and cannot depend on a purely
institutional factor such as the application at a particular
time of more or less extensive tax autonomy in favour
of an infra-State authority of more or less broad terri-
torial scope. If this technique were generalised it would
undermine equality in applying the rules on State aid
and therefore render them ineffective.

(108)

In the Commission's approach the tax autonomy of the
regional authority that grants the benefits has never
been considered as a factor that would make it possible
In Decision
not

regard measures

aid.

to

as

93/337/EEC (25), recognition that ‘the competent institu-
tions in each of the three Basque provinces may, under
certain conditions, maintain, establish and regulate the
tax system within their territory’ did not prevent the
Commission from finding that the tax benefits in ques-
tion created by the three provinces were covered by
Article 87(1) and from declaring them incompatible
because they did not comply with the rules on regional
and sectoral aid (26). Other cases concerning measures
adopted by the authorities of the Basque provinces were
decided on grounds of material selectivity (27). The issue
of regional selectivity was not addressed by the Com-
munity Courts when assessing the validity of such deci-
sions (28) since the Commission had not relied upon this
criterion in its decision:
the comments of United
Kingdom and the Government of Gibraltar on territorial
competence are therefore not relevant.
In subsequent
decisions on tax concession schemes implemented by
autonomous
the Commission, while
taking the view that the measures examined constituted
aid because of their material selectivity, expressly left
open the possibility of examining their territorial selec-
tivity (29). In a recent decision concerning tax advantages
granted by the authorities of the Azores region,
the
Commission came to the conclusion that the measures
at stake were selective although they applied to all
undertakings active in that region (30).

tax authorities

(109) Lastly, the Commission would stress that classing these
into question the tax
measures as aid does not call
autonomy of Gibraltar,
resulting from the relevant
constitutional arrangements and practice. It seeks merely
in cases where Gibraltar exercises its
to ensure that,
autonomy by reducing the amount of
tax levied at
national level, the tax benefits granted thereby comply
with the Community rules on regional aid and the other
equality
applicable
throughout Community territory. It is without prejudice
to the possibility that such benefits are compatible with
the common market.

frameworks on the

basis of

(25) Cited above.
(26) See in this respect the judgment of the Court in Joined Cases T-
127/99, T-129/99 and T-148/99 Territorio Histórico de Álava and
Others v Commission [2002] ECR II-1275, paragraph 237.

(27) See,

for

instance, Commission Decision 2000/795/EC of
22 December 1999 on the State aid implemented by Spain for
Ramondín SA and Ramondín Cápsulas SA (OJ L 318, 16.12.2000,
p. 36).

(28) See Joined Cases T-92/00 and T-103/00, cited above, concerning

Decision 2000/795/EC.

in

(29) See

particular Commission Decision

2003/28/EC of
20 December 2001 on a State aid scheme implemented by Spain
in 1993 for certain newly established firms in Álava (Spain) (OJ
L 17, 22.1.2003, p. 20), Commission Decision 2003/86/EC of
20 December 2001 on a State aid scheme implemented by Spain
in 1993 for certain newly established firms in Vizcaya (Spain) (OJ
L 40, 14.2.2003, p. 11) and Commission Decision 2003/192/EC
of 20 December 2001 on a State aid scheme implemented by
Spain in 1993 for certain newly established firms in Guipúzcoa
(Spain) (OJ L 77, 24.3.2003, p. 1).
(30) See Decision 2003/442/EC, cited above.

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(110) Nor can the Commission take the view that the above-
mentioned tax reductions are justified by the nature or
the general scheme of the tax system, or that because of
their economic rationality they are necessary or func-
tional in relation to the effectiveness of that system. In
particular,
in so far as these reductions do not derive
from applying principles such as proportionality or
progressive taxation, since on the contrary they generally
favour firms in a specific region regardless of their finan-
cial situation and cannot be considered to be inherent in
the tax system.

since this element is at the disposal of Member States, it
would be impossible to establish a clear distinction in
this respect and this would lead to unequal treatment of
similar situations. Such a result would also run against
the principle that, in order to assess the State aid char-
acter of a given measure, one must have regard to its
effects.

the fact

(111) The United Kingdom and the Government of Gibraltar
advance a number of arguments in support of their view
that
the proposed reform provides in
general for lower company taxation in Gibraltar than in
the United Kingdom does not of itself give rise to State
aid within the meaning of Article 87(1) of the EC Treaty.
Those arguments are examined below.

that

(112) To suggest

that State aid is only present

if State
resources are used through a tax foregone and that in
the Gibraltar case, no tax is foregone as there is no
United Kingdom rate of tax for an activity which would
also apply in Gibraltar is also an argument about the
form of the measure. Equally formalistic, in the sense of
Advocate General Saggio, is the argument to the effect
that even if the alleged aid measure were abolished, the
United Kingdom standard or normal rate would not
apply and that therefore any comparison where the tax
system is devised locally is not meaningful
for the
purposes of State aid. Given that the same result can be
achieved by different legal techniques — by providing
for an explicit derogation to a system that would other-
wise apply or by establishing formally separate systems
that apply to similar situations — the selectivity of a
measure cannot be established solely by reference to a
‘but for’ test, comparing the situation resulting from the
relevant measure with the situation which would exist
‘but for’ that measure. On the contrary, it is necessary to
compare the measure at hand with other measures
which apply to similar situations, in this case company
taxation in the United Kingdom. Although the assess-
ment of a measure under State aid rules does not depend
on the nature of the measures previously in force, it can
the tax system currently applied in
be noted that
Gibraltar
the United
the model of
Kingdom, with the exception of the advantages granted
to the offshore economy.

largely follows

(114) The United Kingdom states that there is no common
system of reference to which the Gibraltar companies
would be subject in the case that the measure would be
abolished. This is a circular reasoning, as the absence of
a common system is a consequence of granting fiscal
autonomy and the very existence of a specific tax juris-
diction in a given region is the result of a choice made
by the relevant Member State. Whenever a central
government decides to give up its power to establish a
uniform taxation framework for enterprises and allows a
sub-national entity to reduce the tax rate or to introduce
another taxation system that is more advantageous, the
result of this decentralisation of power is a derogation
from a common system of reference. De facto, providing
directly for a reduction of the tax rate, or granting to a
territory the possibility to reduce a common tax rate, or
exempting a territory from a common system and
granting to it a power to establish a more advantageous
taxation system comes to the same result;
it allows
companies in a certain region to pay lower taxes while
State resources are foregone.

(115) The Commission cannot accept

the United Kingdom
suggestion that a tax jurisdiction not covering the whole
Member State would be prevented from adopting any
tax rate except the one applicable in the other tax juris-
diction in the State. As mentioned above, the key to any
State aid analysis of tax measures is to establish the
common system applicable,
the United
Kingdom tax system. In this context it should be noted
that the present decision does not concern a mechanism
that would allow all local authorities of a particular level
(regions, territories or others) to introduce and levy local
taxes. On the contrary, the case in point involves a
reduction applicable solely in Gibraltar. In any event, the
fact that a fiscal advantage constitutes State aid does not
mean that
it cannot be held compatible with the
common market.

in this case,

(113)

In the same way, the arguments of the Gibraltar Govern-
(or secondary) powers to
ment contrasting regional
reduce a national tax rate with its own,
independent
powers over the entire tax system concern the internal
competences of the United Kingdom and its territories.
In any event, the extent of the tax autonomy conferred
upon a given territory cannot be the decisive factor,

(116) The argument that imposing a higher rate of taxation in
a given region would automatically have as a conse-
quence that lower tax rates applied in the rest of the
State become State aid has nothing to do with the
present case, does not follow from the reasoning of the
Commission and is not accurate. In such a case, there
would be a common system applied in all regions but
one. By definition, such a system would not constitute
State aid. Obviously, the derogation resulting from the

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higher rate applied in a given region would not consti-
tute an advantage and therefore would not be qualified
as State aid either. This shows again that it remains
possible for a Member State to grant fiscal autonomy to
certain regions without necessarily granting State aid to
given companies.

(117) The parallels that the United Kingdom draws with the
WTO agreement on subsidies are not relevant, as the
legal order within the European Union is quite distinct
from any international law provided for by WTO agree-
ments, the regime of State aid control in a single market
must obviously be stricter than rules applicable to subsi-
dies laid down in a world agreement and the fact that a
measure might not be considered to be a ‘specific
subsidy’ under the Agreement on subsidies cannot cut
down the scope of the definition of aid in Article 87(1)
of the EC Treaty (31).

(118) As for the consequences, in terms of State aid, of any
future decision by the United Kingdom to share sover-
arguments
eignty over Gibraltar with Spain,
advanced are purely hypothetical in nature and refer to a
situation which, in any event, should be dealt with by
specific arrangements concerning the application of EC
law. The current facts of the case do not accord with the
forward by the United Kingdom and
hypothesis put
therefore have no relevance in ascertaining the existence,
or otherwise, of State aid.

the

(119) The United Kingdom objects to the comparison made by
the Commission of the different exemptions and allow-
ances available in Gibraltar with those in the United
Kingdom. The grounds for this objection are that where
the tax systems or the tax bases are different, meaningful
comparisons cannot be made. However, contrary to that
which the United Kingdom asserts, meaningful compari-
sons can be made as set out in paragraph 100 above.
The differences identified constitute further elements of
an analysis which demonstrates that when compared
with the United Kingdom tax system (the common
system applicable), undertakings in Gibraltar in general
enjoy a lower fiscal pressure.

tax

autonomous

(120) The United Kingdom invokes the subsidiarity principle
in order to argue that if a Member State can function
with two or more
jurisdictions
competing for corporate tax revenue within its territory
without suffering significant distortive effects on compe-
tition, it does not under the subsidiarity principle of the
EC Treaty become a Community task to intervene in the
constitutional arrangements of the Member State. This
argument is based both on a false premise that there are
no significant distortive effects (or that such effects are
contained entirely within the United Kingdom and

(31) Cases C-351/98 Spain v Commission [2002] ECR I-8031, point 44,
and C-409/00 Spain v Commission [2003] ECR I-1487, point 56.

Gibraltar without any spillover
into other Member
States) and on a misunderstanding of the subsidiarity
principle. Article 5 of the EC Treaty is quite explicit that
the principle of subsidiarity only applies in those areas
which do not
fall within the Community's exclusive
competence. Since the control of State aid is an area of
exclusive Commission competence, the subsidiarity prin-
ciple does not apply.
In examining the proposed
reforms, including the question of regional selectivity, as
in any State aid investigation into fiscal measures, the
Commission is not pursuing tax uniformity but
is
merely fulfilling its Treaty obligation to control State aid.

(121) Contrary to what the United Kingdom asserts, the prin-
ciple that a Member State cannot plead its own national
law to avoid its Community law obligations is indeed
relevant to the issue of selectivity. As already established,
the way in which a Member State is organised for the
purposes of taxation is a matter of form: it cannot plead
the existence of autonomous tax regions, however exten-
sive their powers might be, in order to escape the appli-
cation of the rules on State aid. This does not, neverthe-
less, interfere with the possibilities of Member States to
decentralise their powers. The issue concerns the exer-
cise of those decentralised powers. Member States and
the bodies to which powers have been devolved must
ensure that Community law, including that on State aid,
is upheld. More concretely, where tax powers are
system remains,
devolved but
a
Member States must ensure that
reductions in tax,
insofar as they constitute aid, are compatible with the
common market.

reference

central

(122) The United Kingdom argues, inter alia, that Gibraltar: is
not part of the United Kingdom; has its own distinct
institutions and constitutional order; and is autonomous,
self-governing and economically self-sufficient.

to ensure

including the power

(123) The Commission accepts that Gibraltar does not form
part of the United Kingdom for domestic law purposes
and has distinct
institutions, although the United
Kingdom authorities retain certain competences and
prerogatives,
that
measures adopted by Gibraltar in domestic matters do
not conflict with the United Kingdom's obligations
under the EC Treaty. However, as in the case of other
autonomous regions, this fact does not alter the assess-
ment of the measures adopted by the Gibraltar authori-
ties. Gibraltar is part of the Community by virtue of its
links with the United Kingdom. All Community rules
apply to Gibraltar, subject to the exceptions resulting
from Article 28 of
the Act of Accession, since the
United Kingdom became a Member State and because of
this membership. As a consequence, British dependent

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territories citizens who acquire their citizenship from a
connection with Gibraltar are citizens of
the Union.
These citizens and companies registered in Gibraltar
enjoy the rights and freedom recognised by the Treaty,
including freedom to provide services, freedom of estab-
lishment and free movement of capital, which are rele-
vant for the economic activities of the beneficiaries. The
United Kingdom is responsible for ensuring respect for
Community law in Gibraltar, which for these purposes is
treated as a part of its territory (32). Gibraltar must there-
fore be considered to form part of the United Kingdom
for the purposes of the rules on State aid, including the
application of Articles 87 and 88 to fiscal measures.

(124) Whilst it may be true that EC law applies to Gibraltar by
virtue of Article 299(4) of the EC Treaty rather than
Article 299(1), that fact does not afford Gibraltar special
status for the purposes of the application of the rules on
State aid in general and on regional State aid in particu-
lar. Paragraphs 1, 2 and 4 of Article 299 all provide that
the provisions of the Treaty shall apply and no difference
can be detected between the legal regime of the different
territories enumerated in each paragraph, subject
to
specific and express derogations. As explained above, the
Act of Accession does not exclude Gibraltar from the
application of State aid rules. The way in which EU law
is given effect in Gibraltar, including the transposition of
directives and the establishment of competent authori-
ties,
for the purposes of establishing
whether or not the reform constitutes State aid. The
manner in which a Member State gives effect to EU law
is purely matter of the internal division of competences
within the State. The fact that a measure is adopted at a
sub-national level does not in any way affect the applica-
tion of Article 87 of the EC Treaty (33).

is not relevant

that

(125) Finally, the fact that the budget of a given territory is
self-sufficient is not immediately relevant for the assess-
ment under State aid rules of the measures adopted by
the authorities of
territory. Such an assessment
must be based on the effects of the measures for the
benefiting undertakings and not on the situation of the
granting authority. In particular, a small territory like
Gibraltar may well become self-sufficient precisely as a
result of its ability to apply lower taxes and to attract
business, in particular off-shore activities. In any event, it
is common ground that Gibraltar depends on the United
Kingdom,
including
membership of the European Union, for its defence and
for its monetary policy. It thus benefits from a number
of services provided by the United Kingdom. In addition,
it appears from the institutional arrangements in place
that financial responsibility for Gibraltar falls in the last
resort to the United Kingdom.

for its foreign policy,

inter alia,

(126) As for the Åland Executive's comments to the effect that
a general tax measure within a self-governing region is

not selective, they rely on similar arguments to those
advanced by the United Kingdom and the Government
of Gibraltar. The Commission refers to its reasoning
developed above, and in particular in paragraphs 104 to
109. The Commission further notes that in the case of
Åland Islands captive insurance companies it was able to
establish the material selectivity of the measure. It was
not therefore necessary for the purposes of reaching a
final negative decision on the measure to rely on its
regional selectivity.

(127) The Commission therefore concludes that by providing
for a system of corporate taxation under which enter-
prises in Gibraltar are taxed, in general, at a lower rate
than those in the United Kingdom, the reform confers a
selective advantage on enterprises in Gibraltar.

Material selectivity

The requirement to make a profit before incurring a
tax liability

(128) One consequence of

the limitation of

the combined
liability for payroll tax and business property occupation
tax to 15 % of profits is that regardless of their payroll
and occupation of business property, companies that
make no profit are not taxed. This in effect acts as an
exemption for unprofitable companies and constitutes
an advantage which relieves such companies of the liabi-
lity for payroll tax and business property occupation tax
which would normally be borne by their budgets.

(129) This exemption from the payroll and business property
occupation taxes is selective as it applies only to those
companies that make no profit. In addition to enter-
prises in difficulty and those whose principal source of
income is derived from capital gains, 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
additional
are
where
eliminated
payments
other
to
shareholder-employees
employees. The Commission cannot accept the United
Kingdom's arguments to the effect
the inherent
quantitative limitation in the system which exempts
unprofitable companies applies in the same way to all
companies regardless of their size or sector and is there-
fore not selective. Although apparently general, certain
definable categories of companies benefiting from the
exemption from tax can in fact be identified, as will be
shown later.

through
or

profits
to

that

(32) Case C-218/02 Commission v United Kingdom,

judgment of
29 January 2004 not yet reported, point 15 of the grounds and
point 1 of the operative part.

(33) Case 248/84 Germany v Commission ECR [1987] 4013, p. 17.

(130) Nor can the Commission accept the United Kingdom's
arguments that even if the exemption for unprofitable
companies were selective, it is justified by the nature or
scheme of the corporate tax system.

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(131) While exemption of non-profitable companies is an
intrinsic feature of a system based on taxation of profits,
this is not the case when the tax is levied on the number
of employees or on the business use of property. Such
systems have been conceived in a way that establishes
an entirely different basis for corporate entities to be
taxed. For example, it is in the internal logic of a payroll
tax system that each and every employee should result
in a corresponding payroll tax liability for the enterprise
that employs them. In this sense, the parallel drawn by
the Commission with social security contributions is
the fact, as the United Kingdom
valid, regardless of
from a tax
their purpose is different
observes,
measure. Even if a payroll tax were introduced as a
proxy for a profit tax (this is not an argument put
forward by the United Kingdom), it would still be within
the logic of a payroll tax system for unprofitable compa-
nies to be liable to the tax. The use of payroll as a proxy
for profitability removes the need to ascertain profits or
overcomes difficulties in doing so. This is not the situa-
tion in Gibraltar, where under the reform, measurement
of company profits is a feature of the rules for both the
payroll tax and the top-up tax.

that

(132) The United Kingdom states that the system is based on
the profitable use of labour and as such coherent. This
suggests the existence of a hybrid system, where two
different tax bases are used according to the situation of
the companies. Under these circumstances,
it becomes
impossible to detect the nature and general scheme of
the system and to apply this justification. In particular, it
cannot be considered that any given feature of such a
system forms part of
the general scheme, since this
would amount to accepting an automatic justification
for such a system.

(133) The Commission therefore concludes that the exemption
of unprofitable companies from payroll tax and business
property occupation tax through the operation of the 15
% cap is selective and,
the other conditions are
if
fulfilled, may constitute State aid to those companies
that benefit from it. It cannot be justified by the nature
or general scheme of the proposed tax system. This is
without prejudice to the assessment of the compatibility
of such a measure.

The 15 % cap on liability to payroll tax and business
property occupation tax

(134) A second consequence of the limitation of the combined
liability for payroll tax and business property occupation
tax to 15 % of profits is that profitable companies
whose tax liability would otherwise exceed this threshold
are relieved of tax they would have to pay in excess of
this threshold. This tax reduction constitutes an advan-
tage to those companies that benefit from it by relieving

them of a charge that would normally be borne by their
budgets.

(135) The 15 % cap is also selective, as only a limited number
of companies will enjoy a reduction in their tax liability
through its application. Although the United Kingdom
and Gibraltar no longer claim that as few as 10 enter-
prises will benefit from the cap, it nevertheless limits the
scope of application of the payroll tax and the business
property tax. The beneficiaries will be labour intensive
companies, that is those which, for the tax year in ques-
tion, have low profits in relation to their number of
employees and occupation of business property. The
application of a pure payroll and business property tax
system might imply a very high level of taxation for
such companies.

(136) The Commission notes

the United Kingdom's and
Gibraltar's arguments that a specific group of companies
cannot be identified and that the rules are generally
applicable to all companies in Gibraltar. However, this
does not prevent the 15 % cap from being de facto selec-
tive in the manner described in the previous paragraph.
In this respect, the references made to point 14 of the
Notice by the United Kingdom and Gibraltar are not
relevant since it does not exclude the possibility that
apparently general measures may constitute state aid. In
particular point 14 covers, for example, tax incentives
for specific investment and measures designed to reduce
the taxation of labour ‘for all firms’, which is not the
case with the 15 % cap, benefiting only companies that
make relatively small profit as compared to their
number of employees. In addition, the 15 % cap is not a
purely technical measure in the sense of the first indent
of point 13 of the Notice. Whilst conventional systems
of corporation tax limit the proportion of profits paid in
taxes through the setting of the rates of tax (banded
systems include a top or maximum tax rate), the equiva-
lent technical measure in a payroll tax system is the rate
of tax per employee,
in the Gibraltar case, set at a
uniform rate of GBP 3 000. The introduction in a
payroll and property tax system of a cap linked to a
different criterion, namely the level of profits, cannot be
compared with the application of variable rates in a
progressive system of profit taxation, which is justified
by the nature and general scheme of the system (point
24 of the Notice). Nor is the 15 % cap a measure
in the
pursuing a general economic policy objective,
sense of the second indent of point 13 of the Notice, as
it does not reduce the tax burden related to certain
production costs for the whole economy of Gibraltar,
but it only benefits a limited number of undertakings.
Furthermore, the cap is not directly linked to the labour
or business property costs but rather to the profitability
of companies. The latter is an element external to a
payroll and business property tax.

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(137) The Commission does not accept the United Kingdom's
argument that if the 15 % cap is selective, it is justified
by the nature and or general scheme of the system of
which it is part. There is nothing intrinsic in a system of
taxation of the profitable use of labour and property
which requires a limit on the proportion of profits
which a company must pay as a result of its use of those
taxable factors. The inherent logic of such a system is
that the more people a company employs and the more
property it occupies, the greater the tax liability. The
arguments put
forward by the United Kingdom are
essentially economic in nature. They are not related to
the internal logic of the proposed system.

(138) The United Kingdom suggests

that

the Gibraltar
economy is more vulnerable than most
to shocks
created by tax competition and that companies may not
be able to afford to leave a large Member State as easily
the
they can move out of Gibraltar. However,
as
Commission notes that little evidence has been adduced
to support this hypothesis, which, if true, suggests that
the 15 % cap is part of a strategy designed to retain if
not attract mobile capital to Gibraltar, which given the
is likely to be
physical constraints of
targeted at financial and other services. Similarly, the
argument that a regressive element is not required in the
taxation of utilities, which occupy monopoly or quasi-
monopoly positions in the Gibraltar market,
indicates
that mobile capital is the target of the 15 % cap.

the territory,

(139) As for the suggestion that without a regressive element,
a labour tax could trigger mass layoffs and instability in
times of cyclical market fluctuations, the Commission
would simply note that this is an inherent feature of
such a system. In any event, at GBP 3 000 per employee,
the payroll tax would represent only a small proportion
of the overall unit labour costs (34). Therefore the incen-
tive to shed labour in order to control costs will exist to
a similar extent with or without a payroll tax.

(140) The Commission also notes the impact of the 15 % cap
on the offshore and onshore sectors of the Gibraltar
economy. The offshore sector comprises exempt compa-
nies and qualifying companies, the legislation for which
will be repealed as part of the reform. Exempt compa-
nies tend not to have a physical presence in Gibraltar
(no employees or premises) and pay a fixed tax of
between GBP 200 and GBP 300 per annum. In contrast,
qualifying companies have a physical presence
in
Gibraltar (they are significant employers) and negotiate
their rate of tax with the authorities. The vast majority

(34) The Gibraltar Government website (www.gibraltar.gov.gi) states
that ‘wages [in Gibraltar] are broadly in line with the United
Kingdom’. Average full-time wages in the United Kingdom are
around GBP 24 000 (source: New Earnings Survey 2002, http://
www.statistics.gov.uk/pdfdir/nes1002.pdf).
to
employers include other costs (e.g. social security contributions).

Labour

costs

of qualifying companies pay corporation tax at a rate of
between 2 % and 10 % of profits. The 15 % cap there-
fore limits any increase that qualifying companies would
face on implementation of the reform. In contrast, the
onshore economy (other than utilities) would see their
rate of tax fall from the current standard corporation tax
rate of 35 %. The Government of Gibraltar also appears
to admit that the reform as a whole (which includes the
15 % cap) has been designed to suit the particular tax
‘needs and preferences’ of sectors within the offshore
industry (35). The Commission also
financial
observes that, in dropping the original plan for a GBP
500 000 cap on tax liability, the United Kingdom has
indicated that Gibraltar will, as a consequence, reduce
the top-up tax on financial services from 8 % to between
4 and 6 %. This suggests that capping tax liability is
intended to favour financial services companies, many of
which are qualifying companies, the principal source of
employment in the Gibraltar ‘Finance Centre’.

services

(141) The Commission therefore concludes that in the circum-
stances of the present case the 15 % cap is selective and,
if the other conditions are fulfilled, may constitute State
aid to those companies that benefit from its application.
It cannot be justified by the nature or general scheme of
the proposed tax system. This is without prejudice to the
assessment of the compatibility of such a measure.

The proposed application of the payroll tax and of
the business property occupation tax to the
Gibraltar economy

(142) Point 13 of the Notice states that ‘[t]ax measures which
are open to all economic agents operating within a
Member State are in principle general measures. They
must be effectively open to all firms on an equal access
basis, and they may not de facto be reduced in scope
through, for example, the discretionary power of the
State to grant them or through other factors that restrict
their practical effect. However, this condition does not
restrict the power of Member States to decide on the
economic policy which they consider most appropriate
and, in particular, to spread the tax burden as they see
fit across the different factors of production. Provided
that they apply without distinction to all firms and to
the production of all goods, the following measures do
not constitute State aid:

— tax measures of a purely technical nature (for
example, setting the rate of taxation, depreciation
rules and rules on loss carry-overs; provisions to
prevent double taxation or tax avoidance),

(35) Government of Gibraltar Press Release 008/2003, 14 January

2003.

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— measures pursuing general economic policy objec-
tives through a reduction of the tax burden related
to certain production costs (research and develop-
ment (R & D), the environment, training, employ-
ment).’

This situation is to be distinguished from a system
where a payroll tax or a business property tax is added
on top of a general profit tax, which ensures a wide
taxation of all sectors of the economy, and represents
thus a minor aspect of the taxation of enterprises.

(143) Without prejudice to the considerations with regard to
the effects of the reform proposals (as a whole) in para-
graphs 147 to 152 or those concerning regional selec-
tivity in paragraphs 98 to 127, a payroll tax under
which all undertakings are liable in the amount of a
fixed sum per employee per year can at least under
certain circumstances be considered as selective when it
is applied in the absence of a general system of taxation
of company profits and replaces such a system. This is
the case when one takes into account
the specific
features of the Gibraltar economy and in particular the
existence of a large offshore sector without any fiscal
presence, which would escape any taxation under the
payroll and property tax system. Even though such a
system formally applies without discrimination to all
enterprises, de facto it benefits the current
‘exempt
companies’ that do not have any employees in Gibraltar.
It constitutes a specific advantage in favour of these
undertakings with no real presence in Gibraltar, who as
a consequence do not incur corporate tax. This advan-
tage is not effectively open to all firms on an equal basis
in the sense of the second sentence of point 13 of the
Notice. Indeed, the practical effect of the advantage is
restricted to certain enterprises. In addition, the payroll
tax proposed by Gibraltar essentially does not constitute
a tax measure of a purely technical nature in the sense
of the first indent of point 13 of the Notice, because it is
not a technical adjustment of a general system, but it
concerns the tax base. In this specific case the exemption
does not represent a measure pursuing general economic
policy in the sense of the second indent of point 13 of
the Notice as it does not reduce any production costs,
but rather increases the labour costs. The same reasoning
applies equally to a business property occupation tax
applied in the absence of a general system of taxation of
company profits and replacing such a system, under
which each undertaking's liability for tax is set at a rate
equivalent to the same fixed percentage of its liability to
general property rates. Such a measure also advantages
the current ‘exempt companies’ that normally have no
physical presence in Gibraltar. Accordingly, the Commis-
sion concludes that, in the circumstances of the present
case and taking into account the existence of a large
offshore economy in Gibraltar the proposed system is
materially selective aid.

(144)

In addition such a system, targeting only the number of
employees or the commercial use of real estate in a
context where a large number of companies have no
employees and no real estate, does not enjoy the same
general character as the taxation of companies' profits,
which aim at taxing the result of the economic activity
as a whole. It may therefore be considered as selective at
least in circumstances such as those in the present case.

The registration fee

(145) Whilst it may be true, as Spain suggests, that the regis-
tration fee provisions discriminate in favour of compa-
nies that do not generate income, this discrimination is
not a source of State aid. As the United Kingdom points
out, the GBP 150 (about EUR 225) difference in registra-
tion fee between the two classes of company falls well
below the de minimis threshold (36) of EUR 100 000 over
a three year period. Provided that all relevant conditions
are complied with, the difference in registration fee is
therefore de minimis and does not constitute State aid.

The top-up taxes on financial services and utilities
activities

(146) Spain suggests that the absence of top-up taxation on
sectors other than financial services and utilities confers
in such sectors. The
an advantage on companies
Commission does not share this view. Whilst it may be
the case that where the State confers a benefit on an
identifiable group of companies, this may prima facie
constitute State aid, the same is not true where the State
creates a disadvantage. Where the State imposes an
exceptional
fiscal burden on companies, such as a
penalty tax, it can only be State aid if it can be demon-
strated as occasioning a corresponding advantage for
identifiable business competitors of those which have to
bear
the United
Kingdom suggests, the purpose of the top-up taxes is
not relevant in establishing whether they are a source of
State aid. Nevertheless, the Commission concludes that
the immediate effect of the top-up taxes, taken in isola-
tion,
is to create a disadvantage for the companies
affected. This conclusion is without prejudice to the
consideration of this top-up tax as part of a system
which de facto foresees different
taxation rates for
different kinds of undertakings.

the detriment. Contrary to what

The advantages arising for certain sectors of the
economy from the proposed tax system as a whole

(147) Table 1 below sets out data (37) on various categories of
company in Gibraltar and their level of liability for tax,
measured on profits, as a result of the proposed reform.
It must be noted that, although in some cases the tax
liability of any given company will also be determined
by the number of employees or by the commercial use
of property, the combined effect of the various caps and
top-ups amounts to setting different overall level of taxa-
tion, measured on profits, for different sectors of the
economy.

(36) See Commission Regulation (EC) No 69/2001 on de minimis aid

(OJ L 10, 13.1.2001, p. 30).

(37) Figures for the number of companies are approximate. Source:
information supplied by the United Kingdom and/or Gibraltar in
the course of this investigation and the investigations into exempt
and qualifying companies.

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Table 1: Data on Gibraltar companies

Tax rate

Number

Current

Post-reform

All companies (breakdown by sector)

29 000

Financial services

Utilities

Other

179

23

0-35 %

5-15 % (3)

35 %

35 %

28 798

0-35 %

0-15 %

All companies (breakdown by income)

29 000

With income

No income

Companies with income (breakdown by status)

Non-exempt

Exempt

Non-exempt with income (breakdown by profit)

Make profit

No profit

10 400

0-35 %

0-15 % (1)

18 600

10 400

1 400

9 000

1 400

540

500

—

—

0-35 %

0-15 % (1)

0 %

0-5 % (2) (3)

0-35 %

0-15 % (1)

—

—

Non-exempt with income (breakdown by status)

1 400

Qualifying

Non-qualifying

Utilities

Exempt with income (breakdown by sector)

Financial services

Non-financial services

Notes:

140

2-10 % (4)

0-15 %

1 260

35 % (5)

0-15 %

23

9 000

70

8 930

35 %

35 %

0 %

0 %

5 % (2) (3)

0 % (2)

(1) Assuming that the financial services top-up tax would be set at 5 %.
(2)
(3) Assuming that exempt companies have no physical presence in Gibraltar and would therefore have no liability for payroll or

Ignoring utilities, which would be taxed at 35 %.

business property occupation tax.

(4) The majority of qualifying companies. A few have tax rates outside this range.
(5) Assuming they are taxed at the full, standard corporation tax rate.

(148) Table 1 shows how certain clearly defined sectors in the Gibraltar economy would be affected on
implementation of the reform in terms of taxation. Although the Commission acknowledges that
under the reform, the formal distinction between the offshore and onshore economy will be abol-
ished, the comparison of taxation serves to illustrate the inherently selective nature of the tax system
proposed. Different kinds of companies will be subject to different taxation rates, which is a further
element confirming that the proposed system grants selective advantages to those sectors that
benefit from lower rates.

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(149) The offshore sector in Gibraltar is currently the subject
to two parallel State aid investigations into exempt
companies and qualifying companies. In this respect, the
Commission has considered that by exempting them
from tax, the Gibraltar authorities grant State aid to
exempt companies (38). Similarly, in a decision adopted
on the same day as the present one, the Commission has
established that by providing for a low rate of
tax
compared with the standard rate of corporation tax, the
Gibraltar authorities grant State aid to qualifying compa-
nies (39).

(150)

they have neither

It is clear from Table 1 that on implementation of the
reform, exempt companies outside the financial services
sector will continue to be taxed at an effective rate of
zero. The reason for this is that exempt companies tend
not to have a physical presence in Gibraltar. Accord-
employees nor business
ingly,
premises in Gibraltar and therefore will
incur liability
neither for the payroll tax nor for the business property
occupation tax. Their privileged position of zero tax is
preserved by the reform, which in effect, continues to
grant them State aid. Exempt companies in the financial
services sector will experience the imposition of tax of 5
% on implementation of the reform. However, even if
they are taxed for the first time, their privileged position
in the Gibraltar economy will be largely maintained
since 5 % of profits will be the limit of their tax liability.
In contrast, the rest of the Gibraltar economy will be
subject to an upper limit of either 15 % or 35 %.

(151) The Commission concludes that the reform perpetuates
the existing situation in which exempt companies are
the beneficiaries of State aid. More generally, the system
provides for different levels of profits taxation in respect
to different sectors of the economy and thereby grants a
selective advantage to undertakings belonging to the
sectors where lower rates apply. For this reason too, the
notified scheme is materially selective.

(152) The notified measures therefore entail both a regional
and a material selectivity and the latter follows both
from a number of specific features of
the proposed
system and from the analysis of that system as a whole.

Advantage granted by the State or through State
resources

(153) The grant of the tax exemptions and reductions assessed
in detail in paragraphs 98 to 152 above involves a loss
of tax revenue which, according to point 10 of the
Notice, is equivalent to the use of State resources in the
form of fiscal expenditure. As confirmed by the Court

(38) Case E7/2002, appropriate measures proposed by letter C(2002)

4481 final of 27 November 2002.

(39) Case C-52/2001.

Justice,

of
this principle also applies to advantages
granted by regional or local bodies of Member States (40).
The argument that no tax revenue is foregone because
United Kingdom taxes would not apply to Gibraltar has
already been discussed above. It therefore follows that
the advantage is granted by the State and through State
resources.

Effect on trade and distortion of competition

(154) Gibraltar is an open market economy. Many of

an

other

undertaking

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. This is
particularly true in the sector of services, where the rele-
vant provisions of Community law fully apply to
Gibraltar. The Court of Justice has repeatedly ruled that
when aid granted by the State strengthens the position
undertakings
vis-à-vis
of
competing in intra-Community trade, the latter must be
regarded as affected by that aid. For that purpose, it is
not necessary for the recipient undertaking itself
to
export its products. Where a Member State grants aid to
that
an undertaking, domestic production may for
reason be maintained or increased with the result that
undertakings established in other Member States have
less chance of exporting their products to the market in
that Member State. Similarly, where a Member State
grants aid to undertakings operating in the service and
distribution industries, it is not necessary for the reci-
pient undertakings themselves to carry on their business
outside the Member State for the aid to have an effect
on Community trade, especially in the case of undertak-
ings established close to the frontier between two
Member States. The relatively small amount of aid, or
the relatively small
the undertaking which
receives it, does not as such exclude the possibility that
intra-Community trade might be affected (41). Therefore
to the extent
that Gibraltar companies operating in
sectors in which there is intra-Community trade benefit
from this exemption,
it affects trade between Member
States, distorting or threatening to distort competition.

size of

General remarks

(155) The United Kingdom, the Government of Gibraltar and
Spain each make observations about the compliance of
the reform with the criteria set out in the Code of
Conduct and with other international norms. However,
as observed by the Government of Gibraltar, the assess-
ment of a measure as harmful (or otherwise, as is the
case with the reform (42)) under the Code has no direct

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

17.

(41) 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 to 42, and Case C-310/99 Italy v Commis-
sion [2002] ECR I-2289, paragraphs 84 to 86.

(42) See conclusions of the meeting of the Council of Economic and

Finance Ministers, 3.6.2003.

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bearing on its evaluation for State aid purposes under
Article 87 of
the allegations
the EC Treaty. Equally,
made by Spain and rebutted by the United Kingdom
relating to tax evasion and money laundering are, as the
United Kingdom points out, not relevant to the State aid
investigation.

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

in its State aid actions,

(156) The Commission rejects the comment from the Govern-
ment of Gibraltar that
the
Commission has not respected equality of treatment. No
specific evidence has been adduced in support of this
suggestion.
In any event, when investigating possible
State aid within the meaning of Article 87 of the EC
Treaty,
the Commission is obliged to look at each
measure solely on its own merits. Although the Govern-
ment of Gibraltar suggests that measures under Arti-
cles 95 to 97 of the EC Treaty constitute the appropriate
course of action, the Commission notes that point 15 of
the Notice must be read in conjunction with point 6
which clearly refers to possible courses of action in rela-
tax measures within
tion to the effects of general
Member States. Implicit in this suggestion is a demand
for Gibraltar to be treated as if it were a Member State
in its own right, in the same way that the Åland Execu-
tive claims that direct taxation measures adopted by self-
governing regions should be assessed as if they were
adopted by a Member State. However, there is no basis
in the EC Treaty for such a claim.

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

(162) 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 usually be borne by their budgets in the
normal course of their business. This relief is not linked
either to investment or to job creation and therefore
constitutes operating aid, the benefits of which will cease
as soon as it is withdrawn. According to the constant
practice of the Commission, such aid cannot be consid-
ered to facilitate the development of certain economic
activities or of certain economic areas.
In addition,
Gibraltar is not included in the regional aid map for the
United Kingdom (44).

Compatibility

VII. CONCLUSIONS

(157) Neither the United Kingdom nor the Government of
Gibraltar has attempted to argue that if it constitutes aid,
the reform can be considered to be compatible with the
common market. The Commission therefore maintains
its position set out in its assessment of compatibility in
is
the opening of
repeated and refined as follows.

the procedure. That assessment

(163) The Commission concludes that the reform constitutes a
scheme of State aid within the meaning of Article 87(1)
of the EC Treaty. None of the derogations provided for
in Article 87(2) or Article 87(3) apply. Therefore the
United Kingdom is not authorised to implement the
reform.

(158) None of the exceptions under Article 87(2) of the EC
Treaty can be applied in this case as the reform is not
aimed at the objectives listed in that provision.

HAS ADOPTED THIS DECISION:

(159) Under Article 87(3)(a), an aid measure 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
serious underemployment. Such areas are
there is
defined by the United Kingdom's regional aid map for
the period 2000 to 2006, as approved by the Commis-
sion under State aid number No 265/00 (43). Since
Gibraltar is not such an area, this provision does not
apply.

Article 1

The proposals notified by the United Kingdom for the reform
of the system of corporate taxation in Gibraltar constitute a
scheme of State aid that is incompatible with the common
market.

Those proposals may accordingly not be implemented.

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

(44) See previous footnote.

L 85/26

EN

Official Journal of the European Union

2.4.2005

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

Article 2

Done at Brussels, 30 March 2004.

For the Commission

Mario MONTI

Member of the Commission