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Spain, EU, Win European Court Case Over Gibraltar Tax Order

Spain and the European Commission won appeals backing their opposition to changes to Gibraltar’s tax system they deemed to be illegal state aid for offshore companies.

“A tax system designed in such a way that offshore companies avoid taxation constitutes a state aid scheme that is incompatible with the internal market,” the European Union’s Court of Justice, the region’s highest court, said in an e-mailed statement on today’s ruling.

A lower EU tribunal in 2008 “erred in law” when it overturned the Brussels-based commission’s decision classifying a tax reform in Gibraltar as unlawful state aid, the top court ruled today. Gibraltar can’t be considered part of the U.K. for tax purposes, the lower tribunal said at the time, endorsing challenges by Gibraltar and the U.K.

The new system was meant to replace a 35 percent corporate tax rate with a payroll tax and a business property occupation tax. Gibraltar would have benefited from a much lower tax rate than in the U.K., where it was set at about 30 percent.

Tax-Based State Aid

“This ruling departs from how the rules on tax-based state aids have operated up to now,” the U.K. Treasury said in an e-mailed statement. “This is an internal taxation matter for the Government of Gibraltar. The Government of Gibraltar will wish to consider the possible implications, and we will consider the judgment in full with them.”

The commission, which checks that government aid doesn’t breach EU competition rules, decided in 2004 that the tax system the U.K. sought to establish in Gibraltar, a British territory in the south of Spain, was regionally selective by giving Gibraltarian companies tax breaks that U.K.-based companies couldn’t benefit from.

The system was also “materially selective,” the commission said, by giving some Gibraltarian companies tax benefits that others in the territory wouldn’t get, depending on the industry.

The Brussels-based EU regulator said the ruling “confirms that fiscal regimes engineered to give certain companies, in this case former offshore companies, an advantage, constitutes state aid to the beneficiaries which artificially and harmfully distorts competition.”

The U.K. and Gibraltar had argued that both regions are separate in terms of tax.

The cases are: C-106/09 P, C-107/09 P, Commission v. Government of Gibraltar and United Kingdom, Spain v. Government of Gibraltar and United Kingdom.

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