Fiscal regimes structured in such a way as to give certain companies advantages over others constitute state aid and are considered to be anti-competitive and illegal, the European Court of Justice has recently asserted.

Fiscal regimes structured to give certain companies advantages over others constitute state aid and are considered to be anti-competitive- Mariosa Vella Cardona

In August 2002, the United Kingdom notified the European Commission of the government of Gibraltar’s proposed reform of corporate tax. This tax reform foresaw the abolition of the classical corporate tax system where a percentage of benefits is taxed, and its replacement by a hybrid system. Under the latter system, companies domiciled in Gibraltar would have been subject to a yearly payroll tax of £3,000 per employee and to a business property occupation tax (BPOT). Total tax liability (payroll + BPOT) would have been capped at 15 per cent of profit. If a company makes no profit, there would have been no tax liability.

The Commission considered such a tax regime as being materially selective. In its view, the payroll tax and BPOT were inherently intended to favour offshore companies which have no real physical presence in Gibraltar and which therefore as a consequence would not incur corporate tax. The tax regime being applied was deemed by the European Commission to constitute illegal state aid in terms of EU law.

The government of Gibraltar and the United Kingdom filed an appeal from this decision to the then Court of First Instance (now known as the General Court). The latter court annulled the Commission’s decision. It maintained that in order to prove that the tax system at issue was selective the Commission should have demonstrated that certain elements constituted derogations from Gibraltar’s “normal” tax regime. General tax measures which apply across the board could not be considered as being selective because of their effects, the court maintained.

Both the European Commission and Spain filed an appeal from this ruling before the European Court of Justice. The latter court in turn overturned the judgment of the General Court. It maintained that the fact that a different tax burden results from the application of a “general” tax regime is sufficient on its own to establish the selectivity of a particular tax regime. This is the case where the criteria for assessment adopted by a tax system are such as to define the recipient undertakings, by virtue of certain properties peculiar to them, as a privileged category of undertakings.

The court pointed out that a particular feature of the tax regime under examination was the combination of the payroll tax and BPOT as the sole bases of assessment. This resulted in taxation according to the number of employees and the size of the business premises occupied. Due to the absence of other bases of assessment, the combination of these two “general” bases of assessment excluded from the outset any taxation of offshore companies since these type of companies have no employees and do not occupy business property.

This meant that other companies were being discriminated against despite the fact that Gibraltar was insisting that it was applying a “general” system of taxation. The fact that offshore companies would escape taxation by virtue of the new tax regime was seen by the court as an inevitable consequence of the fact that both corporate taxes were specifically designed so that offshore companies avoid taxation.

The impact of this judgment on the facts under examination may be said to be minimal. This is particularly due to the fact that Gibraltar has now introduced a different tax regime to the one which was analysed and ruled upon by the court. The European Court of Justice has nonetheless sent a clear message to all those member states which attempt at circumventing state aid rules through the application of tax regimes which are advantageous to a particular category of companies to the detriment of others. Such measures too can be considered as state aid and possibly illegal!

mariosa@vellacardona.com

Dr Cardona is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is the deputy chairman of the Malta Competition and Consumer Affairs Authority as well as a member of the National Commission for the Promotion of Equality.