Monday, February 21, 2005

Exempt Company phase out details confirmed

* Spain welcomes move

The European Union executive has welcomed Britain’s decision to phase out by 2010 certain tax breaks offered by Gibraltar.

“The abolition of the Gibraltar Exempt Company Tax Regime is a further important step toward eliminating harmful tax practices that violate EC Treaty state aid rules,” Competition Commissioner Neelie Kroes said in a statement on Friday.

In Spain Alberto Navarro, secretary of state for European Affairs welcomed the news as positive and said that talks continue to resolve the issues arising in Gibraltar that affect Spain.

This brings a period of stability and augurs well for the current talks, he said.

The European Commission last month threatened Britain with court action if the government did not abolish Gibraltar’s tax scheme within one month.

The EU executive, which polices state aid and competition in the 25-member bloc, had suspected the tax scheme was a form of illegal subsidy that distorted competition. Under the regime, a firm registered in Gibraltar as an exempt company pays no income tax on its profits but instead pays only a fixed annual tax of between 225 pounds and 300 pounds.

The offshore centre offers investors an alternative to European low-tax centres such as Monaco or Luxembourg.

The Commission had wanted to open a state aid procedure against Britain, but refrained after Britain signalled it was ready gradually to eliminate the scheme.

The Exempt Company Tax scheme, which was found unlawful by a group of EU experts, is enjoyed by around 8,500 offshore firms.

This is the first time that the European 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.

The Gibraltar Government followed the EU Commission statement with the technical details. No 6 said that the terms had been the subject matter of intensive negotiations and agreement with the EC Commission. The Gibraltar Government therefore accepted these terms and has requested the UK Government (as the Member State responsible for Gibraltar’s external affairs), on behalf of the Gibraltar Government, to formally notify the EC Commission of the acceptance of the agreed appropriate measures, said No 6.

Technical Details

The terms of the agreed appropriate measures for the continued operation of the Exempt Status Company are as follows :

1. The total number of exempt companies will be of 8,464.
2. Existing exempt companies will be able to continue to benefit from their tax exempt status until 31 December 2010.
3. Existing exempt companies that change legal or beneficial ownership and/or activity between 19 February 2005 and 30 June 2006 will be able to benefit from their tax exempt status until 31 December 2007.
4. Existing exempt companies that change legal or beneficial ownership and/or activity after 30 June 2006 will lose their tax exempt status.
5. New exempt companies can be formed up to 30 June 2006. This will be on the following basis :
5.1 In 2005, the number of new exempt companies that can be formed shall not exceed 60% of the number of exempt companies leaving the regime in 2005, or in any event 823.
5.2 From 1 January to 30 June 2006, the number of new exempt companies that can be formed shall not exceed 50% of the number of exempt companies leaving the regime during that period, or in any event the number of exempt companies admitted in 2005.
6. New exempt companies will be able to continue to benefit from their tax exempt status until 31 December 2007.
7. Regular reports shall be submitted to the EC Commission certifying compliance with the above.

For the purposes of the foregoing, an existing exempt company is one which enjoys tax exempt status on or before 18 February 2005 and a new exempt company is one that acquires such tax exempt status between 19 February 2005 and 30 June 2006.

The exempt companies legislation will be repealed by 31 December 2010 and will shortly be amended to reflect the above terms. By 31 December 2010 alternative arrangements will be in place.

This public statement is being made in order to comply with a procedural requirement in EC state aid rules.

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