The income which is chargeable to tax is specified exhaustively in Tables A, B and C of Schedule 1 to ITA 2010. This applies to both legal and natural persons. When ITA 2010 was enacted, Tables A, B and C specified the following categories of income:

• Table A: trade, business, profession, vocation and real property,

• Table B: employment and self-employment,

• Table C: other income (dividends11, fund income, income from rights, pensions and a general ‘Sweeping Up Class’ in relation to items of income caught under the anti-avoidance provisions in section 40 of and Schedule 4 to ITA 2010).

Pursuant to Table C of Schedule 1 to ITA 2010, dividends paid or payable by a company to another company are not subject to tax. That is the general rule irrespective of the location of the company and regardless of the activity of the companies involved (holding companies or active trading companies). The same applies to dividends received by a permanent establishment (situated in Gibraltar) of a non-resident company.

The Gibraltar Commissioner of Income Tax is entitled to grant tax rulings under his general duty to ensure the due administration of the Income Tax Act and his responsibility for the assessment and collection of income tax in Gibraltar. Such general powers follow from section 2(1) and (2) of ITA 2010.

With respect to the tax rulings listed in the Decision to Extend Proceedings, in most cases, requests for tax rulings seek confirmation of whether or not a resident company is liable to tax in Gibraltar as a result of the basic legal taxation principles, i.e. accrual and derivation of income in accordance with the territorial system.

In addition, section 42 of ITA 2010 provides for a specific procedure for clearance in relation to anti-avoidance issues. Such rulings can only be granted for the purpose of determining whether certain transactions or arrangements are taxable in accordance with section 40 of or Schedule 4 to ITA 2010, i.e. for determining whether or not an arrangement is artificial or fictitious for the purposes of eliminating or reducing the amount of taxation payable.

In the First Opening Decision, the Commission took the preliminary view that the tax exemption for passive (inter-company loan) interest and royalty income resulting from ITA 2010 constitutes State aid for the purposes of Article 107(1) of the Treaty and expressed doubts as to its compatibility with the internal market.

With respect to the material selectivity of the measure, the Commission found that the passive income (interest, royalty and dividend) exemption was prima facie selective. However, with regard to dividends it found that the exemption was justified by the logic of preventing double taxation. By contrast, the Commission did not identify any justification for the exemption for passive interest or royalty income. In particular, it did not agree that the exemption for foreign source passive interest followed from the logic of the territorial system of taxation. Nor did it accept the argument that the exemption for domestic source passive interest would be justified by manageability concerns (excessive costs of collecting the tax). Finally, with regard to the royalty exemption, the Commission did not accept the need to make the Gibraltar tax system simple and effective as a valid justification for the exemption.

On a preliminary basis, the Commission also concluded that the measure was financed through State resources, that it conferred an economic advantage to undertakings, that it affected trade between Member States and that it threatened to distort competition by favouring certain undertakings. Accordingly, it took the view that the tax exemption for passive interest and royalties constituted State aid for the purposes of Article 107(1) of the Treaty.

The Commission also concluded that such aid constituted ‘new aid’ as the exemption for passive interest under ITA 1952 was not granted automatically and required an assessment of territoriality. In addition, ITA 2010 introduced an exemption for royalties, which did not previously exist under ITA 1952. In this regard, the Commission noted that the application of the territorial system meant that all royalty income received by a Gibraltar company accrues in and is derived from Gibraltar.

Finally, the Commission expressed its doubts as to the compatibility of the exemption rule for the passive (inter-company loan) interest and royalty income with the internal market. In particular, it did not identify any possible compatibility grounds under Article 107(2) or (3) of the Treaty.

With the Decision to Extend Proceedings, the Commission decided to extend the formal investigation procedure to cover 165 tax rulings granted by the Gibraltar tax authorities between the period from 2011 to August 2013 (out of a total of 340 rulings granted during that period).

The Commission considered that the four conditions for qualifying a measure as State aid were in principle met. In particular, it concluded on a preliminary basis that the tax ruling measures were materially selective as the Gibraltar tax authorities generally refrained from conducting a proper assessment of the company's tax obligations, in exercise of their discretionary powers. In the Commission's view, such a course of conduct was made possible because the legal provisions were formulated in a vague manner. The Commission also took the preliminary view that, in some cases, the Gibraltar tax authorities issued tax rulings that were inconsistent with the applicable tax provisions.

To support its preliminary views on the selective nature of the tax ruling measures due to the existence of discretionary practices, the misapplication of the rules or the absence of proper verification as to where activities are effectively performed, the Commission outlined seven typical categories of cases on the basis of different types of ruling, activity or income.

As a preliminary conclusion, the Commission also found that the tax ruling measures were granted through State resources, that they conferred an economic advantage to undertakings, that they affected trade between Member States and that they threatened to distort competition by favouring certain undertakings. It expressed its doubts as to the compatibility of those measures with the internal market. Accordingly, it took the preliminary view that the tax ruling measures constituted State aid for the purposes of Article 107(1) of the Treaty. It also considered that such State aid constituted ‘new aid’.

The extended proceedings related not only to the 165 individual rulings but also more generally to the tax ruling practice under ITA 2010, which seemed to misapply the provisions of ITA 2010 on a recurrent basis.

With regard to the compatibility of the 165 tax rulings and the general tax ruling practice with the internal market, the Commission did not identify any possible grounds for compatibility based on the exceptions laid down in Article 107(2) and (3) of the Treaty.

In conclusion, the Commission expressed the preliminary view that the 165 tax rulings listed in the Annex to the Decision to Extend Proceedings and the tax rulings practice of Gibraltar constitute State aid for the purposes of Article 107(1) of the Treaty and expressed doubts about their compatibility with the internal market. It also invited the United Kingdom and the Gibraltar authorities to provide it with evidence of ex post controls. Finally, it invited the United Kingdom to explain whether and on what grounds the tax ruling practice or any of the 165 tax rulings assessed could be found compatible.

1. (1)

   ITA 2010 applies the territorial principle according to which the profits of companies are taxed in Gibraltar only if the income ‘accrues in or is derived from’ Gibraltar. This was also the situation under ITA 1952;

2. (2)

   the exemption for passive interest and royalty income cannot be considered selective as these provisions are open to all companies and apply generally to all sectors of industry, finance and commerce. The availability of the exemption is not limited in any way, either to any category of company or to any kind of activity. The fact that some companies benefit from a tax rule more than others does not make it selective. In addition, no particular group of companies benefiting from the measure can be identified. There are no other companies in similar factual or legal situations in Gibraltar to which these measures would not apply;

3. (3)

   it is incorrect to say that the exemption selectively favours in particular companies receiving royalties for intellectual property rights and intra-group interest paid by non-Gibraltar companies. There is nothing in the tax system which leads to any particular proportion of non-Gibraltar companies, or which gives any privilege to companies lending to foreign companies;

4. (4)

   the reference to ‘offshore companies’ in recital 37 of the First Opening Decision is too ambiguous and unrelated to the tax treatment of passive income. In addition, the argument that the measure re-establishes the previous regime of exempt companies is irrelevant as it does not influence the selectivity assessment of the exemption;

5. (5)

   as regards de facto selectivity, no identifiable group or category of companies could be identified as beneficiaries. The way a given rule operates in practice from time to time does not make it selective unless the terms of the measure, or some identifiable and stable feature of the specific circumstances to which it applies, cause it to benefit only a limited category of companies. In the case in hand, the number of companies actually or potentially benefiting from the provisions is not limited in any way, in law or in fact. The provision is therefore not selective;

6. (6)

   the exemption for passive interest and royalty income is justified by the nature and general scheme of the Gibraltar tax system. First, the non-taxation of foreign-source passive interest is the logical consequence of the territoriality principle, which is based on the aim of avoiding double taxation. Second, the exemption for Gibraltar-source interest and royalties is justified by the logic of any tax system considering that cost of collection must not exceed expected revenue;

7. (7)
   if the Commission was to conclude that the treatment of foreign source loan interest is selective, it would have to be considered as ‘existing’ aid. The new aid element could only concern passive interest amounts ‘that were taxable before the entry into force of ITA 2010’ whereas under ITA 1952, foreign source loan interest was not taxable because of the ‘situs of the loan’ rule22. This means that de facto the ‘situs’ of foreign-source inter-company loan interest has remained the same as under the previous legislation. Accordingly, it was legally incorrect for the Commission to initiate a formal investigation procedure on this particular aspect of the Gibraltar tax system;
8. (8)

   the Government of Gibraltar introduced legislation, with effect from 1 July 2013, so that all inter-company loan interest income exceeding GBP 100 000 per annum, both domestic and foreign-sourced, are subject to tax. Reference was also made to further legislation enacted on 24 December 2013 with effect from 1 January 2014 making royalties also liable to tax;

9. (9)

   in addition, if the Commission concluded that the tax treatment of interest and royalties was ‘new’ aid, the UK's understanding of Gibraltar's view is that recovery affecting the relevant periods would be difficult or impossible for practical reasons;

10. (10)
    finally, the Commission has departed from the normal practice under Council Regulation (EU) 2015/158923 (‘the Procedural Regulation’) as it has initiated a formal investigation on a particular aspect of the Gibraltar tax system in parallel with a continued preliminary examination regarding the same tax system.

1. (1)

   there is no evidence that any tax rulings would be selective. The tax ruling practice in Gibraltar has never involved any element of individual or special treatment or any element of negotiation, or any influence or consideration except those resulting from the terms of the tax law applicable in Gibraltar. A tax ruling is simply a statement by the Gibraltar Commissioner of Income Tax that, on the basis of the facts explained to the Commissioner, and on the normal and correct interpretation of the legislation applicable, the company in question is not liable to income tax on the income or revenues described. There is no evidence that any of the rulings departed in any way from the normal and correct interpretation of the tax legislation. In addition, the tax authorities exercise no discretionary powers, nor is there any evidence that they have ever consciously or deliberately refrained from making proper assessments, or deliberately deviated from the applicable national tax legislation. The seven categories of ruling identified by the Commission in the First Opening Decision are not selective when compared with other tax rulings as none of the rulings deviates from the applicable national tax provisions;

2. (2)

   there is no evidence that any of the tax rulings distorted competition. A measure can distort competition only in the sector in which it applies, or in some closely related sector. The tax rulings with which the decision is concerned apply in a large number of different sectors. The Commission has not suggested that any individual ruling distorted competition in the sector in which it applied, but merely indicates that there is an effect on trade between Member States that threatens to distort competition, without considering whether any ruling has done so;

3. (3)

   there is clear evidence that the rulings referred to in the Decision to Extend Proceedings are only part of a consistent practice which began long before the UK joined the Union. The practice was based on section 3(1) of ITA 1952, now reproduced in virtually identical form in section 2(1) and (2) of ITA 2010. Therefore, if there were found to be any element of State aid, it would necessarily be ‘existing’ aid, and not ‘new’ aid;

4. (4)

   the Decision to Extend Proceedings is based on an incorrect understanding of significant facts. The Commission was informed, unfortunately incorrectly, by the UK authorities on behalf of the Government of Gibraltar that the procedure allowing the Gibraltar Commissioner to grant tax rulings confirming whether or not a resident company is liable to tax in Gibraltar is set out in section 42 of ITA 2010, which was introduced by that Act and did not exist under ITA 1952, instead of being told that section 42 merely introduced an explicit legislative basis for a certain type of ruling that is not relevant to the case in hand and that rulings on the application of the territorial system have been given since 1952, under section 3(1) of ITA 1952 or section 2(1) and (2) of ITA 2010. Although that misunderstanding is due to incorrect information provided by the UK authorities, the United Kingdom considers that it was presumably this incorrect information that led the Commission to assume it might be possible to regard tax rulings given since 2010 as ‘new aid’;

5. (5)

   the Decision to Extend Proceedings suggests that the Commission considers that the practice could be a ‘scheme’ of aid and involves one or more individual State aids. There is no evidence to support either view. Such uncertainty questions the Decision procedurally, at least in part, since the scheme character of the practice of rulings cannot be dealt with by the chosen procedure, as it is evidently existing aid, if it is concluded to be aid at all. In addition, there is no evidence that suggests that tax rulings were intended to be anything except the normal and correct interpretation and application of the tax law in force;

6. (6)

   the Decision to Extend Proceedings was adopted before the Commission had all the information to be able to fully assess the position with respect to tax rulings. In particular, there had been only two exchanges between the Commission and the United Kingdom on the tax ruling practice before the Commission took the Decision to Extend Proceedings. During that period, the Commission never suggested on what basis any tax ruling could be regarded as distorting competition in any way.

The Commission received comments from four interested parties — Gibraltar, Spain, Germany and the Spanish Confederation of Business Organisations (CEOE).

The Commission received comments from six interested parties — Gibraltar, Spain, the Gibraltar Society of Accountants and three companies listed as possible recipients of tax rulings in the Decision to Extend Proceedings.

1. (1)

   no evidence has been given showing distortion of competition or effect on trade;

2. (2)

   the exemption for dividends is justified in order to avoid double taxation and is a direct result of the territoriality principle;

3. (3)

   following the June 2013 amendment, all companies registered in Gibraltar in receipt of passive interest income are subject to income tax and required to file a tax return;

4. (4)

   with respect to the GBP 100 000 threshold imposed by the legislation, the Gibraltar tax authorities have conducted an analysis which has shown that only 1 % of inter-company loan interest income will fall below the threshold and will therefore not be subject to taxation. The results of the analysis were presented to the Code of Conduct Group and to the Commission prior to enactment of the 2013 amendment in order to explain the reasons for introducing the limit and to quantify any possible tax leakage;

5. (5)

   regarding the Spanish comments that the exemption for royalty income selectively favours a group of companies in receipt of royalties, no such sector or grouping exists. All companies receiving royalties are treated the same;

6. (6)

   there is no variation or discretion in the concept of territoriality, which is applied consistently under ITA 2010 to all companies;

7. (7)

   Spain's comments concerning parts of Gibraltar tax law in respect of which the Commission has not initiated an investigation procedure are irrelevant and the Commission's investigation should be limited to the matters for which the procedure was initiated;

8. (8)

   finally, comments were provided on the status of Gibraltar as a British Overseas Territory, its executive, legislative and judiciary independent governance, thus showing that the measure cannot be treated as regional aid.

1. (1)

   the comments made by the three addressees of tax rulings corroborate the submissions that the UK authorities have made to the Commission during the investigation procedure and constitute further evidence which supports the legality of the tax ruling practice in Gibraltar and the fact that that practice does not constitute State aid;

2. (2)

   the Government of Gibraltar carried out extensive reviews of all 165 rulings listed in the Decision to Extend Proceedings which, in the UK's view, confirm that none of the 165 rulings has exempted the recipient from tax that would otherwise have been due to, or has led to a loss of tax revenue for Gibraltar;

3. (3)

   the reviews carried out confirm that none of the rulings listed in the Decision to Extend Proceedings is selective and therefore none of them constitutes State aid on that basis;

4. (4)

   14 of the rulings listed in the Decision to Extend Proceedings concerned transactions that never materialised and further three rulings concerned the taxation of employees' income and/or benefits in kind and neither of those categories raises State aid concerns;

5. (5)

   the position expressed by Gibraltar that its tax authorities do not enjoy wide discretion when issuing rulings, and do not issue rulings without checking or evaluating the requests, is correct. The rulings do not lead to a selective application of the tax regime since they just apply the law as set out in ITA 2010.

According to Article 1(c) of the Procedural Regulation, ‘new aid’ means all aid, that is to say, aid schemes and individual aid, which is not existing aid, including alterations to existing aid. ‘Existing aid’ refers to authorised aid or aid which is deemed to have been authorised as provided for in Article 1(d) of the Procedural Regulation.

The United Kingdom authorities and Gibraltar assert that if the exemption for foreign-source interest constitutes State aid, it would be existing aid as the status of such interest under the exemption has remained the same de facto as under the previous 1952 legislation (as a result of the territoriality principle).

In that regard, the Commission notes that, under the territorial system of taxation, a case-by-case assessment of the interest income would need to be performed in order to determine whether there was any taxable income. This would not lead to automatic exemption of the relevant income. Therefore, the exemption for passive interest income (before 1 July 2013), as introduced under ITA 2010, substantially differs from the tax treatment of passive interest income before ITA 2010 and cannot be considered as having the same effect as application of the territoriality principle had.

In addition, should the territoriality principle result effectively in the exemption of foreign-source interest, that would not be sufficient to establish the ‘existing aid’ nature of the measure since the previous exemption was not limited to foreign-source interest income (it covered both foreign and domestic sourced interest). Any possible justification for the exemption (and its conformity with the territoriality principle) must be based on reasoning that is applicable to all interest income, not on a specific part (foreign-source interest) of it only.

The Commission notes that the UK authorities have not provided any arguments as to why the corporate income tax exemption for passive interest and royalty income should be considered compatible with the internal market. In particular, the United Kingdom did not comment on the doubts expressed in the First Opening Decision as regards the compatibility of the measure.

The Commission itself has not identified any possible grounds for compatibility and it considers that none of the exceptions listed in Article 107(2) or (3) of the Treaty applies, since the measure does not appear to be aiming to achieve any of the objectives listed in those provisions. Moreover, as the corporate income tax exemption for passive interest and royalty income is not related to any specific investment and simply alleviates the beneficiaries from costs that they would normally have to bear in their day-to day business, it is considered to involve operating aid. As a general rule, such aid can normally not be considered compatible with the internal market under Article 107(3) of the Treaty in that it does not facilitate the development of certain activities or of certain economic areas. Furthermore, the tax advantages in this case are not limited in time, declining or proportionate to what is necessary to remedy a specific market failure or to fulfil any objective of general interest in the areas concerned. Consequently, the measure cannot be considered compatible with the internal market in accordance with Article 107(2) or (3) of the Treaty.

As a preliminary view, the Commission considered that, by granting such tax rulings only to certain multinational companies as opposed to other, purely domestic companies that do not ask for a tax ruling, the tax authorities treated companies that were in a similar legal and factual situation differently. Accordingly, the measures were considered to be prima facie selective. Further, the Commission did not identify any acceptable justification resulting from the nature or the general scheme of ITA 2010.

1. (1)

   the 165 rulings themselves and the applications for those rulings;

2. (2)

   ex post audit reports performed by the Gibraltar authorities in 2015 with respect to all beneficiaries of the 165 rulings. Such audits (or reviews) were carried out with a view to assessing whether any of the provisions of ITA 2010 had been wrongly applied. The audit reports include background information on the companies concerned and on their activities, as well as possible changes in their organisation, activities and functions that had occurred since the ruling was granted, and also some factual information on the activities of the companies and a legal assessment of whether the companies and/or activities were taxable in accordance with ITA 2010. The main issue assessed by the audits was whether any income derived from the activities met the conditions for being considered to accrue in or be derived from Gibraltar. The audits relied on extensive searches of all documents filed by the audited companies, replies to questionnaires, site visits and meetings with the companies or their representatives. More detailed financial information regarding 25 companies, including financial accounts and, for some of them, copies of their tax returns were even provided;

3. (3)

   factual information on all 165 companies for the purposes of assessing whether the allegation that such companies do not carry on activities in Gibraltar is sufficiently substantiated, including information on the number of staff and directors, personal expenses, amortisation costs, other operating expenses related to Gibraltar operations and operating expenses not related to Gibraltar activities.

Analysis of that information allowed the Commission to assess whether the relevant companies generated income taxable in Gibraltar in accordance with the territorial system of taxation and/or whether any tax ruling had been granted or implemented in a manner that was inconsistent with the applicable tax provisions.

The first example relates to a ruling granted to a company providing management and consultancy services to hotels and casinos in Africa. The audit report concluded that the services were provided in Africa through staff employed by the company in Africa. The audit showed that the company carried on no trade activities in or from Gibraltar. The company's activity in Gibraltar was limited to basic administrative support provided by one single staff member in the role of an administrative secretary, without any significant activity being performed in Gibraltar. Such basic secretarial duties were not found to be income-generating activities in Gibraltar. This was corroborated by a site visit to the company's premises in Gibraltar, which were found to consist of an office facility exclusively laid out for hosting board meetings. Surveillance of the premises on other days by the tax authorities showed that the premises were not used for any other purposes. On that basis, the report concluded that the company was outside the scope of taxation in Gibraltar on account of the fact that no income accrued in or was derived from Gibraltar (as the company carried on no income-generating activities in Gibraltar).

In the second example, a ruling was granted to a company providing shipping brokerage services to customers on behalf of ship-owners. The audit confirmed that the services were performed in or from the group's various locations within London, Singapore, Australia or Monaco, without any income-generating activities taking place in Gibraltar. The audit did not find any evidence to indicate that the company had engaged in any activity in Gibraltar. On that basis, the audit report considered that the company did not have a presence or permanent establishment in Gibraltar other than its server. Accordingly, it concluded that the company was outside the scope of taxation in Gibraltar on account of the fact that no income accrued in or was derived from Gibraltar (as the company carried on no income-generating activities in Gibraltar).

By way of a fourth example, a ruling was granted to a company which, under a joint venture agreement, contracted with third parties established outside Gibraltar for the provision of advertising, marketing and promotional services in relation to remote gaming activities, including recognition and development of the brand. The company received a share of the revenues generated from the operation of the remote gaming business carried on in Malta by the counterparty to the joint venture agreement. The review, which included a site visit and a roving investigation undertaken by the Gibraltar tax officials within Gibraltar's financial business, banking and office accommodation sectors within Gibraltar, showed that the company did not have a physical presence or a permanent establishment in Gibraltar and that its corporate directors did not perform income-generating activities in or from Gibraltar. The report concluded that the company was outside the scope of taxation on account of the fact that no income accrued in or was derived from Gibraltar. The ruling was revoked by the Gibraltar tax authorities on 17 July 2015 since the company's representatives confirmed at the site meeting that they no longer had a relationship with the company.

In the fifth example, a ruling was granted to a company active in the procurement of petroleum products directly from refineries in Asia and in the subsequent storage, transportation and delivery of those products from the company's storage terminals located within Asia to customers in Italy, Greece, Israel and Turkey. The review showed that the company had no physical presence or permanent establishment in Gibraltar and that its sole director had not performed income-generating activities in or from Gibraltar. The review also found that, as shown by the website of the group of which the company was a part, the trading activity was carried on in various geographical locations through offices located in Hong Kong, the United Kingdom, Dubai, Oman and Afghanistan. On that basis, the review concluded that the company was outside the scope of taxation under section 11 of ITA 2010 on account of the fact that no income accrued in or was derived from Gibraltar.

In the sixth example, a ruling was granted to a company carrying on a trade in non-pharmaceutical medical and health related products from South Korea to Germany. The audit showed that the management and commercial decisions were outsourced to a person resident in Namibia. The audit also showed that the company's sole director residing in Gibraltar provided general consultancy services to the company and was not actively involved in the day-to-day trading activities undertaken by the company. No physical presence in Gibraltar could be identified on the basis of a site visit, a meeting with the company, responses to additional written questions and systematic checks carried out on the web. The investigative review considered that the company did not render a service in or from Gibraltar and therefore concluded that the company had no sources of income accruing in or derived from Gibraltar.

In the eighth example, the audit confirmed that the company carried on a trade in agricultural chemicals from Hungary, Belgium and Israel to customers in the Former Yugoslav Republic of Macedonia, Bosnia and Herzegovina, and Slovakia. After examination of all the documents filed by the company as well as additional information provided by the company in writing and in the context of a meeting with the company's representatives (and on the basis of other investigative functions), the audit found that no income-generating activities took place in Gibraltar (in the absence of any services rendered in or from Gibraltar or any activity performed in or from Gibraltar) and it therefore concluded that the company was outside the scope of taxation under section 11 of ITA 2010.

The ninth and final example relates to a ruling granted to a company chartering a luxury yacht (registered in the UK) in the British Virgin Islands. The business had a website which showed that the chartering was carried on in the Caribbean. The Gibraltar tax authorities' review showed that the company carried on no trade in Gibraltar and had no physical presence or permanent establishment in Gibraltar. It therefore concluded that there were no income-generating activities that rendered the company chargeable to tax under the territoriality principle. The ruling lapsed in October 2015 as the company had been struck off the Company Register by the Registrar of Companies in Gibraltar.

These nine examples are only illustrative. The Commission assessed the information and documents available in relation to all 160 rulings to make sure that the rulings were granted in conformity with the applicable tax rules in Gibraltar and that the activities carried on by the companies in question fairly reflected the activities described in the request for a ruling.

Out of those 160 tax rulings, 98 actually related to the territoriality principle (and the reviews made by the Gibraltar tax authorities found that no income-generating activities were carried on in Gibraltar). Accordingly, the revenues generated by the companies concerned did not in any event fall within the scope of the territorial system of taxation in Gibraltar.

In 19 cases, either the company was not incorporated, or the activities described in the tax ruling requests did not materialise, or the company was dormant. There was therefore nothing to tax in those cases and, regardless of the position taken by the tax authorities, the rulings could not involve the granting of any advantage to the companies concerned.

In four other cases, the rulings concluded that the relevant income accrued in and was derived from Gibraltar and was therefore taxable in accordance with section 11 of ITA 2010. In this regard, it is relevant to note that, in such cases, the audit reports by the Gibraltar tax authorities stressed that the tax rulings had been revoked as a result of legislative or material changes. It also appears that the revocations were not the result of the audits performed in 2015 but of earlier examinations, e.g. when the 2013 amendments in relation to interest and royalty income came into force. In other words, in these four cases, the relevant companies were liable to tax on their income accruing in or derived from Gibraltar.

The remaining five rulings relate to personal income tax issues such as the taxation of employees. Those rulings do not affect the level of taxation of the relevant companies and therefore do not fall within the scope of corporate income taxation.

The Commission investigation has shown that five rulings granted to Gibraltar corporate partners of Dutch limited partnerships (Commanditaire vennootschap or ‘CV’) did raise issues with regard to State aid rules.

The relevant rulings were granted in 2011 or 2012 and confirmed that royalties (and passive interest income to a lesser extent) generated at the level of the Dutch CVs was not taxable under ITA 2010. Those rulings remained in effect and were not revoked by the tax authorities either as a result of the amendments to ITA 2010 in 2013 that brought interest and royalties into the scope of taxation, or as a result of the audits carried out in 2015.

In their submission of 21 February 2018, the UK authorities confirmed that the Gibraltar Income Tax Office views Dutch CVs as tax transparent entities. However, they concluded that no taxation arises in Gibraltar since there is no specific provision in ITA 2010 that defines and prescribes how the Gibraltar partner should be taxed. The reason for this is that the definition of a ‘person’ in section 74 of ITA 2010 does not explicitly refer to Dutch limited partnerships and therefore no specific mechanism on how to tax income from participations held in a CV exists.

1. (1)

   MJN Holdings (Gibraltar) Limited (ruling No 144, granted on 11 September 2012);

2. (2)
   Heidrick & Struggles (Gibraltar) Holdings Limited79 (ruling No 83, granted on 2 June 2011);
3. (3)
   Heidrick & Struggles (Gibraltar) Limited80 (ruling No 84, granted on 2 June 2011);
4. (4)

   Ash (Gibraltar) One Limited (ruling No 139, granted on 8 May 2012);

5. (5)

   Ash (Gibraltar) Two Limited (ruling No 140, granted on 8 May 2012).

The relevant shares of the profit amounts referred to in the above table should have been incorporated in the assessable basis of the five Gibraltar companies and taxed in accordance with the normal Gibraltar tax rules.

In the Decision to Extend Proceedings, the Commission expressed doubts not only in relation to the 165 individual rulings identified in the Annex to that Decision, but also more generally in relation to the tax ruling practice under ITA 2010. This was because the Gibraltar tax authorities seemed to misapply the provisions of the ITA 2010 on a recurrent basis. In that regard, the Commission expressed the preliminary view that the 165 tax rulings and the tax ruling practice of Gibraltar constituted State aid measures for the purposes of Article 107(1) of the Treaty and expressed doubts about their compatibility with the internal market.

While the Commission was justified in having doubts at the time that it opened the formal investigation procedure, it must be noted that the findings referred to in sections 8.3.1 and 8.3.2 are not sufficient to show the existence of an aid scheme based of the tax ruling practice in Gibraltar. In particular, such findings do not point to a recurrent practice of misapplying ITA 2010 through the granting of tax rulings.

Moreover, the legislative and regulatory amendments enacted by Gibraltar in relation to the tax ruling procedure, the territoriality principle and the anti-avoidance provision (see section 11 of this Decision), reduce the level of discretion of the Gibraltar tax authorities in the granting of tax rulings and in the enforcement of corporate income tax rules.

Accordingly, the Commission concludes that the tax ruling practice, as investigated in this case, does not involve the existence of an aid scheme.

As explained in recital 82, royalty income received by a Gibraltar company is deemed to accrue in and be derived from Gibraltar. The UK authorities should therefore be required to recover the tax foregone by any Gibraltar company which was in receipt of royalty income during the period between 1 January 2011 and 31 December 2013.

As regards passive interest income received by Gibraltar companies during the period between 1 January 2011 and 30 June 2013, in order to determine whether such income accrued in or was derived from Gibraltar, the UK authorities will need to apply the ‘situs of the loan’ rule described in recital 82, in line with the territoriality principle.

Where the UK authorities conclude that the passive interest income accrued in or was derived from Gibraltar, the tax foregone as a result of the non-taxation of that income should be recovered from the company in question.

The UK authorities should be required to abolish the practice of not taxing the share of each Gibraltar company identified in recital 160 in the royalty and passive interest income generated by the Dutch CV in which the company participates.

The UK authorities should further be required to recover the tax forgone by those five Gibraltar companies as a result of the non-taxation of their shares in the royalty and passive interest income generated by the relevant Dutch CVs.

The recovery should cover the tax foregone in the period between 1 January 2011 and the date when the UK authorities abolish the practice of not taxing the income of the Gibraltar companies resulting from their participation in the Dutch CVs as referred to in recital 232.

As regards the royalty income of the Gibraltar companies resulting from their participation in the Dutch CVs, the UK authorities should recover the amounts corresponding to the tax foregone in relation to such income during the whole period defined in the preceding recital.

• for the period between 1 January 2011 and 30 June 2013, the UK authorities should first determine whether the interest accrued in or was derived from Gibraltar. This assessment should be done by applying the ‘situs of the loan’ rule described in recital 82. To the extent that the interest income accrued in or was derived from Gibraltar, the UK authorities should recover the tax foregone as a result of the non-taxation of that income,

• for the period from 1 January 2014, the UK authorities should recover the tax foregone as a result of the non-taxation of such income if the income amounts to at least GBP 100 000 per annum per source company.

In the light of the observations in the recitals in section 8.3.2, the Commission considers that the United Kingdom should, in the first place, recover the unlawful and incompatible aid granted to the Gibraltar companies from those Gibraltar companies. Should it not be possible to recover the full amount of the aid from the relevant Gibraltar company, the United Kingdom should recover the remaining amount of that aid from other entities forming a single economic unit with that Gibraltar company, i.e. the relevant Dutch BV, the Dutch CV or the parent company of the Gibraltar company, so as to ensure that the advantage granted is eliminated and the situation previously existing on the market is restored through the recovery.