In a statement released on Wednesday, the EC announced that:

'The Commission has today adopted a recommendation to the United Kingdom for the abolition or reform of the Exempt Company regime in Gibraltar. Under the regime, an Exempt Company pays no income tax on its profits. Instead, it is subject to a low, fixed annual tax. The Commission has decided that this tax exemption constitutes state aid favouring Exempt companies and should therefore be phased out by the end of 2005 at the latest.'

The Commission statement went on to add that: 'The United Kingdom should also make a public statement on the steps it will take to repeal or reform the regime by the end of January 2003.'

Speaking to the national and international media in the wake of the announcement, the UK government remained cautious, explaining that: 'We will remain in close touch with the Commission and the government of Gibraltar on this issue, and we will study the Commission's letter carefully and respond.'

The Gibraltar government, meanwhile told local news provider, Iberia News that the EC demand had been on the cards since it was announced that: 'the Commission was starting its investigation again under the correct 'existing aid' procedure'.