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Offshore Companies Avoiding Tax = State Aid


The European Court of Justice has recently ruled that a tax system designed in such a way that enables offshore companies to avoid taxation constitutes a state aid scheme that is incompatible with the common market. The case, Commission and Spain v Government of Gibraltar and United Kingdom concerns a reform of the corporate tax system in Gibraltar which replaced the former corporate tax with three taxes applicable to all Gibraltar companies: a company registration fee, a payroll tax and a business property occupation tax (BPOT). Taxand Belgium discusses the issue of tax aid and the proposed tax reform designed to counter selective advantages.

In 2004 the Commission decided the reform of the system constituted a state aid scheme that was incompatible with the internal market as aspects of the tax reform were materially selective because, inter alia, the payroll tax and BPOT favour companies operating offshore as these companies have no real physical presence in Gibraltar and would therefore incur no corporation tax. In addition the Commission held that the scheme was regionally selective as it imposed upon companies in Gibraltar a lower rate of tax than those in the United Kingdom. At first the General Court annulled the Commission's decision.

Taxand's Take

On appeal the Court of Justice held that the General Court erred in law in finding that the proposed tax reform does not confer selective advantages on offshore companies. The Court of Justice found that the combination of the payroll tax and BPOT excludes from the outset any taxation of offshore companies since they have no employees and also do not occupy a business property in Gibraltar. This Court therefore upheld the decision of the European Commission.

Your Taxand contact for further queries is:
Geert De Neef
T. + 32 2 787 91 11

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