Saturday, January 22, 2005

Commission requests phasing out of Tax benefits for Gibraltar Exempt companies

State aid

European Commission has formally requested the United Kingdom to abolish the Exempt Company tax regime in Gibraltar by the end of 2010 at the latest because the scheme violates the EC Treaty’s ban on state aid liable to distort competition, an EC spokesman said yesterday. By this request, which takes the form of a “recommendation” and follows extensive negotiations, the Commission intends to put a definitive end to the last offshore tax regime in Gibraltar.

A European Commission spokesman said:

The United Kingdom has one month to formally accept these appropriate measures, failing which the Commission may open a formal state aids investigation. Under the regime, an Exempt Company pays no income tax on its profits but instead pays only a low, fixed annual tax.

A company registered in Gibraltar as an Exempt Company is subject to a fixed annual tax of between £225 and £300 (around 350-500 euros). It is exempt from any further taxation in Gibraltar. An Exempt Company may not conduct any trade or business within Gibraltar. No Gibraltarian or Gibraltar resident may have a beneficial interest in the shares of an Exempt Company.

The Exempt Companies scheme fulfils the four relevant criteria for being state aid. Companies subject to the general company taxation regime in Gibraltar pay a standard rate of tax on profits of 35%, so that companies benefiting from the Exempt Companies scheme are granted a clear advantage. This advantage is clearly selective, is financed from state resources, and is liable to distort competition. The regime satisfies none of the criteria set out in the EC Treaty (Articles 87(2) and 87(3)) under which state aid may be authorised.

In November 2002 the Commission first proposed that the United Kingdom put in place appropriate measures to repeal the scheme, but in February 2003 the United Kingdom refused these measures. Under the Commission’s new recommendation:

• the number of beneficiaries of the scheme shall be capped at the level of 8 464, i.e. the number of beneficiaries on 31 December 2003

• existing beneficiaries at the date of acceptance of the appropriate measures shall be allowed to have their benefits ‘grandfathered’ until 31 December 2010. However, if these beneficiaries changed ownership/activity before 30 June 2006, their benefits would 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 shall be limited to 60% of the companies leaving the scheme in 2005 (up to a limit of 823) and 50% for the first half of 2006 (up to a limit of the number of new entrants in 2005). No new entrants shall be allowed after 30 June 2006. New entrants shall have their benefits grandfathered until 31 December 2007.

Compared with the November 2002 recommendation, the new measure provides for strict limits on existing beneficiary companies changing ownership or engaging in new activities. This is the first time that the Commission has introduced such limits in a state aid case. New entrants will only be accepted for a short period (less than 18 months) and in very limited number. Moreover, their benefits will be limited to December 2007, instead of December 2010 for existing beneficiaries. Implementation of these appropriate measures will limit the distortion of competition to its current level and progressively reduce it by cutting the number of beneficiaries of the scheme and limiting the scope of their activities.

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