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The European Commission announced on October 1, 2014, that it is to expand its investigation into tax rulings provided to companies by Gibraltar, as part of its ongoing in-depth investigation into the territory's corporate tax regime.
The purpose of its review is to determine whether Gibraltar's new corporate tax regime selectively favors certain categories of companies and therefore breaches European Union (EU) state aid rules. Its investigation into the corporate tax regime was first expanded to cover tax rulings in October 2013.
Gibraltar's tax system is levied on a territorial basis, under which only income deriving from or accruing in Gibraltar is taxable. Meanwhile, the option to secure a tax ruling was introduced in Section 42 of the Income Tax Act (ITA) of 2010, enabling firms to request an advance opinion on the tax liability of activities in Gibraltar.
The Commission has so far assessed 165 tax rulings granted by authorities between August 2013 and the introduction of the corporate tax regime in 2011.
The Commission said that, based on the information that has been provided, it appears that Gibraltar grants formal tax rulings "without performing an adequate evaluation of whether the companies' income has been accrued in or derived from outside Gibraltar." It said: "Even if the Gibraltar tax authorities are given considerable margin of manoeuvre under the ITA 2010, a misapplication of its provisions cannot be excluded at this stage."
The Commission said: "Potentially all assessed rulings may contain state aid, because none of them are based on sufficient information so as to ensure the level of taxation of the activities concerned is in line with the tax paid by other companies [that] generate income that is to be considered accrued in or derived from Gibraltar."
Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) stipulates that any aid granted by an EU member state or through state resources that distorts or threatens to distort competition by favoring certain undertakings or the provision of certain goods shall be deemed incompatible with the common market. For a measure to constitute illegitimate state aid under Article 107(1) it must meet all of the following conditions: it must be imputable to the state and financed through state resources; it must confer an advantage on its recipient; that advantage must be selective; and the measure must distort or threaten to distort competition and have the potential to affect trade between EU member states.
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