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Gibraltar Awaits European Court Decision On Tax Regime

by Jason Gorringe,, London

19 March 2007

Gibraltar's Chief Minister Peter Caruana travelled to Luxembourg last week where he gave oral evidence at the court hearing of Gibraltar’s tax case against the European Commission in the European Courts.

In this case the Gibraltar Government and the UK Government are challenging an EU Commission decision to the effect that under EU law Gibraltar is not entitled to have a tax regime different to the UK’s.

“This oral hearing is very much the final stage of this litigation," Caruana commented.

"Under the EU court system the exchange of written arguments is the main part of the procedure. The oral hearing is quite brief. It’s a different system to ours. During the written argument stages Gibraltar has formulated and submitted an impressive array of arguments, all of which are supported by the recent landmark ruling by the European Court of Justice in the Azores case. We are thus confident in the merits of our case," he explained.

In the Azores case the ECJ had to determine the principles that apply in deciding whether a tax regime is in breach of state aid rules on grounds of Regional Selectivity. Portugal had permitted the legislative assembly of the Azores to cut rates of income tax by as much as 30% in 1999 in recognition of the unique structural difficulties of its economy. However, under European Union state aid rules, member states are only permitted to grant special tax regimes to certain regions or industries if they are proportionate and in keeping with the current tax system in place in that country, in the interests of maintaining a level tax playing field.

But according to Gibraltar, the ECJ's decision "fully vindicates" its own arguments before the Court as to why it is entitled to have a separate and different tax regime to that of the UK.

"The judgment confirms that the principles to be applied in deciding this issue, are the very principles upon which the Gibraltar Government’s case is based and pleaded," a government statement argued following the Azores case judgment in September last year.

"The Government is encouraged, in particular, by the fact that at para.68 of the judgment, the Court sets out the principles to be applied by upholding the UK Government’s arguments. Those arguments are the same ones as both the Gibraltar and UK Governments are making in the Gibraltar case. This judgment is therefore extremely helpful to our case," the statement added.

Gibraltar has been attempting to overhaul its company taxation system by introducing a new regime which will replace the mainstream 35% corporate tax and tax-exempt company forms with a payroll tax and a business property occupation tax, both of which will be capped at 15% of profit.

However, this plan has been blocked by the EU’s decision that the jurisdiction effectively constitutes part of the UK, and therefore such a tax regime would breach EU state aid rules.

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