Commissioner Margrethe Vestager, in charge of competition policy, said "Our investigation has found that Gibraltar gave unfair and selective tax benefits to several multinational companies, through a corporate tax exemption scheme and through five tax rulings. This preferential tax treatment is illegal under EU State aid rules and Gibraltar must now recover the unpaid taxes. At the same time, I very much welcome the significant actions taken by Gibraltar to remove the illegal tax exemptions, streamline its tax ruling practice, and reinforce its transfer pricing rules – this should help ensure that these issues remain in the past."
In October 2013, the Commission opened an in-depth investigation into Gibraltar's corporate tax regime, to verify whether the corporate tax exemption regime applied between 2011 and 2013 for interest (mainly arising from intra-group loans) and royalty income selectively favoured certain categories of companies, in breach of EU State aid rules.
In October 2014, the Commission extended its State aid investigation to also cover Gibraltar's tax rulings practice, with a particular focus on 165 tax rulings granted between 2011 and 2013. The Commission had concerns that these tax rulings involved State aid because they were not based on sufficient information to ensure that the companies concerned by the rulings were taxed on equal terms with other companies generating or deriving income from Gibraltar.
EU State aid rules prevent Member States from giving unfair tax benefits only to selected companies. Member States cannot treat certain companies better than others. This distorts competition and is illegal under EU State aid rules.
The Commission has found that both Gibraltar's corporate tax exemption regime for interest and royalties from 2011 to 2013, as well as five individual tax rulings, provide such selective tax benefits and are illegal under EU State aid rules.
Corporate tax exemptions for interest and royalty income
According to the territorial tax system applicable in Gibraltar, companies should pay corporate taxes on income accrued in or derived from Gibraltar. However, the Commission's investigation found that companies in receipt of interests or royalties were exempted from taxation in Gibraltar without a valid justification.
This measure significantly favoured a set of companies belonging to multinational groups entrusted with certain functions (such as the granting of intra-group loans or the right to use intellectual property rights). As a result, the Commission concluded that the exemption was designed to attract multinational companies to Gibraltar and that it effectively reduced the corporate income tax of a limited number of companies belonging to multinational groups.
This selective tax treatment in favour of multinational companies granted these companies an advantage vis-a-vis other companies and distorted competition within the EU's Single Market, in breach of EU State aid rules. The Commission therefore concluded that the tax exemption for companies in receipt of interest and royalties, as applied in Gibraltar between 2011 and 2013, is illegal under EU State aid rules and must be recovered from the companies.
The Commission welcomes the fact that Gibraltar has alreadyabolished the illegal tax exemption – in July 2013 for interest income and in January 2014 for royalties income.
Gibraltar's tax rulings practice between 2011 and 2013
After carefully reviewing 165 tax rulings granted by Gibraltar, the Commission concluded that five of these tax rulings granted by the tax authorities of Gibraltar to large multinational companies in 2011 and 2012 involved illegal State aid.
The five contested tax rulings concern the tax treatment in Gibraltar of certain income generated by Dutch limited partnerships. According to the tax legislation applicable in both Gibraltar and the Netherlands, the profits made by a limited partnership in the Netherlands should be taxed at the level of the partners. In the five cases at hand, the partners of the Dutch parnerships were resident for tax purposes in Gibraltar and should have been taxed there.
However, under the five contested tax rulings, the companies were not taxed on the royalty and interest income generated at the level of the Dutch partnerships , contrary to other companies in receipt of other type of income.
These rulings continued to apply and to exempt interest and royalties from taxation even after Gibraltar adopted legislative amendments to bring this income within the scope of taxation in 2013 (passive interest) and 2014 (royalties).
Since the exemptions in question gave their beneficiaries an undue and selective advantage, the Commission concluded that the five tax rulings concerned were illegal under EU State aid rules and that this advantage must be recovered.
In contrast, following an in-depth analysis of each addressee's situation, the Commission did not identify any selective advantage in relation to the other 160 rulings investigated and therefore found that these rulings do not break EU State aid rules.
Furthermore, during the Commission's investigation, Gibraltar amended its tax rules to enhance its tax ruling procedure, reinforce its transfer pricing rules, enhance taxpayers' obligations (e.g. filing of annual returns, providing meaningful information in applications for rulings) and improve transparency on how it implements its territorial system of taxation. The Commission welcomes these improved rules, which entered into effect in October 2018.
As a matter of principle, EU State aid rules require that incompatible State aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU State aid rules and recovery does not penalise the company in question. It simply restores equal treatment with other companies.
Gibraltar must now recover unpaid taxes from:
- the companies that benefitted from Gibraltar's corporate tax exemption regime for interest and royalties between 2011 and 2013. The individual companies that have benefitted from the exemption regime and the precise amounts of tax to be recovered from each company must now be determined by the Gibraltar tax authorities, on the basis of the methodology established in the Commission decision.
- the companies that benefitted from the illegal tax treatment under the five tax rulings are: (i) Ash (Gibraltar) One Ltd; (ii) Ash (Gibraltar) Two Ltd; (iii) Heidrick & Struggles (Gibraltar) Holdings Ltd; Heidrick & Struggles (Gibraltar) Ltd; and (v) MJN Holdings (Gibraltar) Ltd; these companies must also start to pay taxes on their profits in Gibraltar like any other company. The recovery amounts will depend on the fiscal situation of each beneficiary and must now be determined by the Gibraltar tax authorities, on the basis of the methodology established in the Commission decision.
The Commission estimates, based on currently available information, that the total unpaid tax amounts to around €100 million in total.
Background on Gibraltar's tax system
Gibraltar is autonomous with respect to tax matters and therefore has an income tax legislation separate from the United Kingdom.
The Income Tax Act 2010 (“ITA 2010”), which entered into force on 1 January 2011, is a territorially-based tax system (i.e. only income accrued in or derived from Gibraltar is taxable). The ITA 2010 did not provide for the taxation of (passive) inter-company loan interest and royalties. However, in 2013, Gibraltar introduced amendments which, as of 1 July 2013 (for interest) and 1 January 2014 (for royalties), subjected such income to corporate income tax.
The Commission has examined the Gibraltar corporate tax system on various occasions in the past. In 1999 the Commission started an investigation of a specific tax regime exempting from corporate income tax companies without any trade or business in Gibraltar and not owned by Gibraltar residents. Companies that fulfilled these conditions, but had a physical presence in Gibraltar, paid between 2-10% tax on profits. Gibraltar subsequently abolished this scheme which was considered to favour offshore companies.
In August 2002, the UK notified plans for a corporate tax reform, applicable to all companies in Gibraltar and consisting of a payroll tax, a business property occupation tax and a registration fee. In March 2004, the Commission found that the proposed tax reform selectively favoured certain categories of companies in breach of EU State aid rules. In November 2011, the EU Court of Justice upheld the Commission's decision, concluding that the combined effect of the tax measures would create a selective advantage for "offshore companies", which have no employees and do not occupy business property in Gibraltar.
Background on the Commission's State aid investigations on tax
Under Article 355(3) of the Treaty on the Functioning of the European Union, the provisions of the Treaties, including State aid rules, are applicable to Gibraltar.
As long as the UK is an EU Member State, it has all the rights and obligations of the membership. In particular, EU competition law, including EU State aid rules, continue to apply in full to the United Kingdom and in the United Kingdom until it is no longer a member of the EU. Once the UK ceases to be a member of the EU, the application of EU State aid rules in the UK will be regulated by the Withdrawal Agreement that has been agreed at negotiators' level and endorsed by the European Council on 25 November but still needs to be concluded by the Union and ratified by the UK before it can enter into force.
Tax rulings as such are not a problem under EU State aid rules if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective advantage to specific companies can distort competition within the EU's Single Market, in breach of EU State aid rules.
Since June 2013, the Commission has been investigating individual tax rulings of Member States under EU State aid rules. It extended this information inquiry to all Member States in December 2014.
The following investigations concerning tax rulings have already been concluded by the Commission:
- In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. As a result of these decisions, Luxembourg recovered €23.1 million from Fiat and the Netherlands recovered €25.7 million from Starbucks.
- In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, under its "excess profit" tax scheme are illegal under EU State aid rules. The total amount of aid to be recovered from 35 companies is estimated at approximately €900 million, including interest. Belgium has already recovered over 90% of the aid.
- In August 2016, the Commission concluded that Ireland granted undue tax benefits to Apple, which led to a recovery by Ireland of €14.3 billion.
- In October 2017, the Commission concluded that Luxembourg granted undue tax benefits to Amazon, which led to a recovery by Luxembourg of €282.7 million.
- In June 2018, the Commission concluded that Luxembourg granted undue tax benefits to Engie of around €120 million. The recovery procedure is still ongoing.
- In September 2018, the Commission found that the non-taxation of certain McDonald's profits in Luxembourg did not lead to illegal State aid, as it is in line with national tax laws and the Luxembourg-US Double Taxation Treaty.
The Commission also has an ongoing in-depth investigation concerning tax rulings issued by the Netherlands in favour of Inter IKEA and an investigation concerning a tax scheme for multinationals in the United Kingdom.
The non-confidential version of the decision will be made available under the case number SA.34914 in the State Aid Register on the Commision's competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.