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Brussels, 18th February 2005

State aid: Commission welcomes phasing out of tax benefits for Offshore Exempt Companies in Gibraltar

The European Commission has welcomed the notification by the UK Government that it has formally accepted the Commission recommendation of 19 January 2005 (see IP/05/80) to abolish the Exempt Company tax regime in Gibraltar by the end of 2010. 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

Competition Commissioner Neelie Kroes commented “The abolition of the Gibraltar Exept Company tax regime is a further important step towards eliminating harmful tax practices that violate EC Treaty state aid rules”.

The United Kingdom acceptance means that:

  • the number of beneficiaries of the scheme is capped at 8 464, i.e. the number of beneficiaries on 31 December 2003;
  • existing beneficiaries on 18 February will be allowed to have their benefits ‘grandfathered’ until 31 December 2010. However, if these beneficiaries change ownership/activity before 30 June 2006, their benefits will be grandfathered only until 31 December 2007;
  • if a change of ownership/activity takes place after 30 June 2006, benefits would cease immediately;
  • the number of new entrants to the scheme will be limited to 60% of the companies leaving the scheme in 2005 (up to a limit of 823[1]) and 50% for the first half of 2006 (up to a limit of the number of new entrants in 2005). No new entrants will be allowed after 30 June 2006. New entrants will have their benefits grandfathered until 31 December 2007.

This is the first time that the Commission has imposed such strict limits on existing beneficiary companies changing ownership or engaging in new activities. New entrants will only be accepted for a short period (16 months and 10 days) and in very limited number. Moreover, their benefits will be limited to December 2007, instead of December 2010 for existing beneficiaries. The UK’s implementation of these measures will immediately limit the distortion of competition to its current level and then progressively reduce it by reducing the number of beneficiaries of the scheme and limiting the scope of their activities.

[1] This corresponds to 60% of 1371 which is the average number of companies leaving the regime each year.

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