Forskargruppe for europarett

On the (complex issue of) material selectivity of tax systems under EU/EEA State aid rules

The EU Court gives its judgment in Joined cases C-106/09 and C-107/09 and finds the Gibraltar corporate tax system of 2002 incompatible State aid.


On 15 November 2011 the EU Court set aside the General Court´s (GC) ruling in Joined Cases T-211/04 and T-215/04 Gibraltar and UK v Commission [2008] ECR II-3745 and upheld the Commission´s decision of 2004 finding the proposed changes to the Gibraltar corporate tax system of 2002 incompatible State aid.

In 2002 the UK notified the Commission of proposals of alterations to the Gibraltar corporate tax. The new system was to replace the previous one, where a percentage of benefits was taxed, with a hybrid system consisting of a companies registration fee, a payroll tax and a business property occupation tax (BPOT) with a cap on liability to payroll tax and BPOT of 15% of profits. In 2004 the Commission identified the system to be aid that is incompatible with the Internal Market. The system could thus be not implemented. The Commission considered three aspects of the notified system to be materially selective: 1) the requirement that a company must make a profit before it becomes liable to payroll tax and BPOT due to favouring non-profitable companies; 2) the cap on liability to payroll tax and BPOT of 15% of profits due to favouring companies which, for the tax year in question, have profits that are low in relation to their number of employees and their occupation of business property; (3) the payroll tax and BPOT due to favouring offshore companies. The system was also considered regionally selective as it benefitted the companies in Gibraltar due to paying lower rates than the companies in the UK.

On 18 December 2008 the GC (the Court of First Instance at that time) declared the decision void due to misapplication of the criterion of material selectivity. The GC held that the Commission should have demonstrated that certain elements of the proposed system constituted derogations from Gibraltar’s common or “normal” tax regime and the Commission was not entitled to regard general tax measures as being selective in the light of their effects. In assessing the regional selectivity the Commission should have referred solely to Gibraltar and not the UK’s territorial limits. Both the Commission and the UK brought an appeal against the judgment of the GC.

The EU Court found the GC to have erred in law when it ruled out the material selectivity. The proposed system allowed the offshore companies to avoid taxation, which constitutes a State aid scheme that is incompatible with the Internal Market. As the Court held "is not a random consequence of the tax at issue but the inevitable consequence of the fact that both corporate taxes […] are specifically designed so that offshore companies […] avoid taxation”.

As the notified system would confer selective advantages on the offshore companies (material selectivity) the question of regional (territorial) selectivity did not have to be examined. In fact, the new regime never been implemented and Gibraltar has in the meantime introduced a different tax system that is in force since 1 January of 2011.