EC Welcomes Phased Closure Of Gibraltar's Exempt Company Regime

by Ulrika Lomas, for LawAndTax-News.com, Brussels

22 February 2005

In a misleadingly-worded statement likely to anger the Gibraltar government, the European Commission on Friday announced that it welcomed "the notification by the UK Government that it has formally accepted the Commission recommendation of 19 January 2005...to abolish the Exempt Company tax regime in Gibraltar by the end of 2010".

It went on to add that:

"The UK’s acceptance renders the abolition of the regime legally binding on the United Kingdom and will put an end to the last offshore scheme in Gibraltar. The Commission found that the scheme violated the EC Treaty’s ban on state aid liable to distort competition."

Despite the impression given by the EC with regard to the ending of the Exempt Company regime, the Gibraltar authorities were substantially involved in the negotiations, and in actual fact recently welcomed the compromise reached with the EC as the best solution available in the circumstances.

In a statement released last month, the Rock's government observed that under the terms of the EC's initial challenge to the jurisdiction's exempt status regime, launched in 2001, the closure of the tax-exempt company scheme would likely have been ordered within a year, long before the European Court of Justice had announced a decision regarding the proposed replacement to the exempt company regime, which has also been rejected by the Commission on state aid grounds.

However, under the Agreement negotiated with the Commission and approved in January, existing exempt companies can keep their exempt status until December 2010. By then the ECJ will have ruled in the other court case, and alternative arrangements will be in place. The agreement also uniquely allows new exempt status businesses until June 30, 2006.

Chief Minister Peter Caruana observed that: "Given the hostility to any such agreement by powerful sections of the EU Commission, and the extremely tough and difficult negotiation that has been required, this represents a reasonably good arrangement which avoids the worst consequences for Gibraltar. It is an excellent agreement which delivers absolute legal certainty to exempt companies compared to what the position would be if we had not reached any agreement."

He went on to add:

"This agreement does not deliver everything that we wanted, but it avoids the worst consequences and enables the Finance Centre, and other sectors of the economy to continue while the European Court rules in the regional selectivity case. We have thus been able to avoid the worst case scenario which would have required us to close the exempt status regime and not be able to replace it with anything competitive for the Finance Centre and other businesses."

The Chief Minister concluded by suggesting that: "The agreement is also a disappointment for those who were hoping to abuse EU State Aid procedures to put an end to our Finance Centre."

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