European Commission (C-106/09 P) and Kingdom of Spain (C-107/09 P) v Government of Gibraltar and United Kingdom of Great Britain and Northern Ireland.

• Jurisdiction: European Union
• Court: Court of Justice (European Union)
• Writing for the Court: von Danwitz
• ECLI: ECLI:EU:C:2011:215
• Docket Number: C-107/09,C-106/09
• Date: 07 April 2011
• Procedure Type: Recurso de casación - fundado

OPINION OF ADVOCATE GENERAL

JÄÄSKINEN

delivered on 7 April 2011 (1)

Joined Cases C‑106/09 P and C‑107/09 P

European Commission (C-106/09 P),

Kingdom of Spain (C-107/09 P)

v

Government of Gibraltar and United Kingdom

(Appeals – Scheme of State aid – Reform of Gibraltar corporate tax – Powers of the Member States in the field of direct taxation – Concept of advantage – Regional and material selectivity – Tax haven – Offshore companies)

I – Introduction

1. By their appeals, the European Commission and the Kingdom of Spain seek to have set aside the judgment of the Court of First Instance of the European Communities (now ‘the General Court’) of 18 December 2008 in Joined Cases T‑211/04 and T‑215/04 Government of Gibraltar and United Kingdom v Commission [2008] ECR II‑3745 (‘the judgment under appeal’), by which that Court annulled Commission Decision 2005/261/EC of 30 March 2004 on the aid scheme which the United Kingdom is planning to implement as regards the Government of Gibraltar Corporation Tax Reform. (2) In that decision, the Commission took the view that the reform in question constituted an aid scheme incompatible with the common market.

2. The existence of an advantage, and of regional and material selectivity, for the purposes of Article 87(1) EC, is the core problem in the present appeals. First, it is necessary to ascertain whether a territory within the meaning of Article 299(4) EC, (3) which does not form part of the territory of a Member State, may be used as a reference framework for the application of Article 87(1) EC. More specifically, the present case calls for an examination of the applicability to Gibraltar of the existing case-law relating to regional selectivity.

3. Second, the Court is invited to make a choice that has wider effects regarding the methodology to be used in relation to indirect measures liable to constitute State aid. It is necessary to determine what method will enable the material selectivity of an indirect measure adopted in the context of national tax rules to be appraised whilst at the same time respecting the allocation of powers between the Member States and the European Union in the field of direct taxation.

4. The Commission proposes that the Court establish a new concept of an ‘inherently discriminatory’ tax system (4) and adopt a method of analysis departing from that set out in its Notice on the application of the State aid rules to measures relating to direct business taxation (5) (‘the ad hoc method’).

5. The measure which, on the basis of that concept, is liable to be classified here as a selective advantage is a tax measure which applies to more than 99% of Gibraltar undertakings. (6)

6. The main issue in this case is therefore material selectivity and clarification of the concept of State aid in relation to the phenomenon of harmful tax competition.

7. In my analysis, I propose to examine regional selectivity and material selectivity successively, but I shall depart from the order in which the appellants set out their grounds of appeal.

II – The events giving rise to the dispute and the judgment under appeal

A – The Government of Gibraltar’s corporate tax reform

8. By letter of 12 August 2002, the United Kingdom of Great Britain and Northern Ireland notified the Commission, pursuant to Article 88(3) EC, of the reform of corporate tax which the Government of Gibraltar planned to introduce. (7)

9. The system of taxation that would be introduced by the tax reform and would apply to all companies established in Gibraltar consists of a payroll tax, a business property occupation tax (‘BPOT’) and a registration fee:

– payroll tax: all Gibraltar companies will be subject to a payroll tax of GBP 3 000 per year for every employee employed in Gibraltar;

– BPOT: all companies occupying property in Gibraltar for business purposes will have to pay a tax on the occupation of that property at a rate equivalent to a percentage of their liability to the general rates charged on property in Gibraltar;

– registration fee: all Gibraltar companies will have to pay an annual registration fee, of GBP 150 per annum in the case of companies not intended to generate income and of GBP 300 per annum in the case of companies intended to generate income.

10. Liability to payroll tax together with BPOT will be capped at 15% of profits. The effect of this cap is that companies will pay payroll tax and BPOT only if they make a profit.

11. Certain activities, namely financial services and utilities’ activities, will be subject to a top-up tax on profits generated by them.

12. The overall taxation of financial service companies (payroll tax, BPOT and the top-up tax on profits from financial services activities at a rate of between 4% and 6% of profits) will be capped at 15% of profits. Utility companies will be charged a top-up tax on profits from their activities at the rate of 35% of profits. Such companies will be permitted to deduct payroll tax and BPOT from their liability to top-up tax. (8)

B – The contested decision

13. After examining the notification under the procedure provided for in Article 88(2) EC, the Commission took the view that the Gibraltar corporate tax reform, as notified by the United Kingdom, constituted a State aid scheme that was incompatible with the common market and therefore could not be implemented.

14. The Commission stated, in essence, in recitals 98 to 152 of the contested decision, that the reform is both regionally and materially selective. First, since the reform provides for a system of corporate taxation under which Gibraltar companies are taxed, in general, at a lower rate than those in the United Kingdom, the reform confers, in the Commission’s opinion, a selective advantage on enterprises in Gibraltar.

15. Second, the following aspects of the tax reform concerning the payroll tax and the BPOT are materially selective, according to the Commission: (i) the condition that a profit must be made before tax is levied favours companies which make no profit; (ii) the cap limiting tax liability to 15% of profits favours companies which, for the tax year in question, have profits that are low in relation to their number of employees and occupation of business property; (iii) the payroll tax and the BPOT inherently favour companies which have no real physical presence in Gibraltar and, as a result, do not incur corporate tax.

16. Finally, the Commission concluded that the grant of the tax exemptions and reductions mentioned above involved a loss of tax revenue equivalent to the use of State resources in the form of fiscal expenditure. The measures in question were thus classified as an advantage granted by the State through State resources.

C – Procedure before the General Court leading to the judgment under appeal

17. By applications lodged at the Registry of the General Court on 9 June 2004, the Government of Gibraltar, the applicant in Case T-211/04, and the United Kingdom, the applicant in Case T‑215/04, brought actions for annulment of the contested decision. By order of the President of the Third Chamber of the General Court of 14 December 2004, the Kingdom of Spain was granted leave to intervene in support of the forms of order sought by the Commission. By order of 18 December 2006, the cases were joined for the purposes of the oral procedure.

18. The General Court upheld two of the three pleas put forward by the applicants at first instance, concerning regional and material selectivity, respectively, and it therefore considered it unnecessary to examine the third plea, alleging breach of essential procedural requirements. Consequently, it annulled the contested decision.

III – The appeals

A – Procedure before the Court of Justice

19. By order of the President of the Court of Justice of 26 June 2009, Cases C‑106/09 P and C‑107/09 P were joined for the purposes of the written and oral procedure and of the judgment. By order of the President of the Court of 25 September 2009 in Joined Cases C‑106/09 P and C‑107/09 P, Ireland was granted leave to intervene in the present cases in support of the United Kingdom and the Government of Gibraltar.

20. In its appeal, the Commission puts forward a single ground of appeal in six parts concerning the General Court’s examination of material selectivity and alleging infringement of Article 87(1) EC. The Kingdom of Spain in its appeal puts forward 11 grounds of appeal relating to the General Court’s examination of both regional and material selectivity. Its grounds of appeal also allege procedural irregularities.

21. In their responses to the appeals brought by the Commission and the Kingdom of Spain, the Government of Gibraltar and the United Kingdom contend that the appeals should be dismissed. Ireland intervened in support of the United Kingdom in Case C‑106/09 P only.

22. The Commission, the Government of Gibraltar, the United Kingdom Government, Ireland and the Spanish Government presented oral argument at the hearing on 16 November 2010.

B – Preliminary observations on procedural aspects of the appeals – the consequences of a partial setting aside of the judgment under appeal

23. In its appeal, the Commission criticises only the part of the General Court’s judgment concerning material selectivity. According to the Commission, the contested decision found the reform to be selective from both a regional and a material point of view. Annulment thereof can therefore be appropriate only if the judgment criticising it duly established that both those conclusions were erroneous. Consequently, in the event of the Court of Justice allowing the Commission’s appeal, the annulment of the contested decision will cease to be justified and the judgment must be set aside.

24. As to those submissions, I am of the opinion that the allowing of the Commission’s appeal cannot be sufficient to set aside the judgment under appeal in its entirety. On...