EC extends in-depth inquiry into Gibraltar's corporate tax regime 

The European Commission has extended the scope of its ongoing in-depth inquiry into Gibraltar's corporate tax regime.

In a statement on 31 October, it said was reassessing the compatibility with State aid rules of a 2012 tax ruling granted to MJN Holdings Gibraltar Limited (MJN GibCo), on which the Commission had adopted a decision, subsequently annulled by the General Court. 

In December 2018, the Commission found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings (including a 2012 tax ruling in favour of MJN GibCo), were illegal under EU State aid rules. In April 2022, the General Court partially annulled the Commission's decision. 

In particular, the Court found that the 2014 Commission's decision opening proceedings was not sufficiently precise as to the measure in favour of MJN GibCo. At the same time, the Court confirmed the Commission's decision on the tax exemption regime. 

The EC also made clear that its findings on the other four tax rulings were not challenged before the Court and are final. 

Following the partial annulment, the EC decided to extend the scope of its original investigation to specify further the measure in favour of MJN GibCo, in line with the Court's indications, and reassess the information submitted by the UK in relation to MJN GibCo 2012 tax ruling. 

MJN GibCo is a subsidiary of the infant and child nutrition products manufacturer Mead Johnson Nutrition group. The 2012 tax ruling exempted MJN GibCo from income taxation on the royalties received from a Dutch limited partnership, of which MJN GibCo was the main shareholder. 

Whereas royalties were not taxable in Gibraltar in 2012, the ruling in favour of MJN GibCo continued to apply and exempt royalties after a 2013 legislative amendment that brought such income within the scope of taxation in Gibraltar as from 1 January 2014. 

The EC further said the extension of the in-depth investigation gives Gibraltar as well as all interested third parties an opportunity to submit comments on the measures subject to the extension. It does not prejudge the outcome of the investigation. In accordance with Article 92 of the Agreement on the Withdrawal of the UK from the EU, the Commission is competent for administrative procedures that were initiated before the end of the transition period on 31 December 2020.

On 19 December 2018, the EC said in a notice it had found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, were illegal under EU State aid rules and that the beneficiaries had to return unpaid taxes of around €100m to Gibraltar.

Commissioner Margrethe Vestager, in charge of competition policy, said at the time: "Our investigation has found that Gibraltar gave unfair and selective tax benefits to several multinational companies, through a corporate tax exemption scheme and through five tax rulings. 

"This preferential tax treatment is illegal under EU State aid rules and Gibraltar must now recover the unpaid taxes. At the same time, I very much welcome the significant actions taken by Gibraltar to remove the illegal tax exemptions, streamline its tax ruling practice, and reinforce its transfer pricing rules - this should help ensure that these issues remain in the past."

In October 2013, the Commission opened an in-depth investigation into Gibraltar's corporate tax regime, to verify whether the corporate tax exemption regime applied between 2011 and 2013 for interest (mainly arising from intra-group loans) and royalty income selectively favoured certain categories of companies, in breach of EU State aid rules.

In October 2014, the Commission extended its State aid investigation to also cover Gibraltar's tax rulings practice, with a particular focus on 165 tax rulings granted between 2011 and 2013. The Commission had concerns that these tax rulings involved State aid because they were not based on sufficient information to ensure that the companies concerned by the rulings were taxed on equal terms with other companies generating or deriving income from Gibraltar.

Background on Gibraltar's tax system

Gibraltar is autonomous with respect to tax matters and therefore has an income tax legislation separate from the United Kingdom.

The Income Tax Act 2010 ("ITA 2010"), which entered into force on 1 January 2011, is a territorially-based tax system (i.e. only income accrued in or derived from Gibraltar is taxable). The ITA 2010 did not provide for the taxation of (passive) inter-company loan interest and royalties. However, in 2013, Gibraltar introduced amendments which, as of 1 July 2013 (for interest) and 1 January 2014 (for royalties), subjected such income to corporate income tax.

The Commission has examined the Gibraltar corporate tax system on various occasions in the past. In 1999 the Commission started an investigation of a specific tax regime exempting from corporate income tax companies without any trade or business in Gibraltar and not owned by Gibraltar residents. Companies that fulfilled these conditions, but had a physical presence in Gibraltar, paid between 2-10% tax on profits. Gibraltar subsequently abolished this scheme which was considered to favour offshore companies.

In August 2002, the UK notified plans for a corporate tax reform, applicable to all companies in Gibraltar and consisting of a payroll tax, a business property occupation tax and a registration fee. In March 2004, the Commission found that the proposed tax reform selectively favoured certain categories of companies in breach of EU State aid rules. In November 2011, the EU Court of Justice upheld the Commission's decision, concluding that the combined effect of the tax measures would create a selective advantage for "offshore companies", which have no employees and do not occupy business property in Gibraltar.