Ec Tax Review 2009/2 67

ec Article TAX REVIEW The Gibraltar Judgment and the Point on Selectivity in 2009–2 Fiscal Aids Pierpaolo Rossi-Maccanico, Attorney at law, European Commission, Legal Service. The views expressed are solely those of the writer and should not in any circumstances be regarded as stating the offi cial position of the European Commission. A recent judgment of the Court of First Instance (CFI) the outstanding questions about the interpretation of provides the latest interpretation of the controversial controversial notions such as the general tax meas- notion of selectivity with respect to state-aid review of ure exception and the justification by the nature business tax measures pursuant to Article 87(1) of the and scheme of the tax system. With the judgment in European Community Treaty. review, the Third Chamber of the CFI in extended Taxation was not the initial focus of the state-aid composition has annulled the said Commission Deci- restrictions, but the European judicature has made it sion in its entirety, finding that the Commission had clear in some early judgments that the restriction applies infringed the duty to give reasons imposed on it by to all forms of public aid including all kinds of relief Article 253 of the EC Treaty with regard to establish- from taxation normally imposed and that the restriction ing the analytical framework of reference relating to does not distinguish between measures of state interven- the determination of the selective character of Gibral- tion in respect to their causes or their aims but solely to tar’s proposed company tax legislation. The CFI dic- their effects. However, all tax systems provide exceptions tum concerns both the so-called regional and material and derogations, and the distinction between legitimate elements of selectivity and is particularly noteworthy or normal tax differentiations and state aids depends on because the two notions are dealt in parallel, includ- the interpretation of the national framework concerned ing the conclusions. However, although the ruling on with the tax rules under examination, which effectively regional selectivity is consistent with the prior case law leaves a broad margin of technical appreciation to the on the point, the one on material selectivity is not. Commission and creates greater practical uncertainties The CFI judgment may not constitute the settled for national authorities and taxpayers alike. case law yet, since the Commission may appeal against The most important statements or fi ndings of the the judgment that may be set aside by the European Court with reference to the two issues relating respec- Court of Justice (ECJ), with the case being referred tively to the notions of geographic and material selectiv- back to the CFI for a second judgment on the point ity are illustrated, followed by a comprehensive review of material selectivity.4 For the moment, its dictum of the controversial notions of selectivity general measure that a combined company tax system such as the one and justifi cation by the nature and scheme of the tax sys- proposed by Gibraltar is not to be considered state aid tem, under the case law of the Court and the Commission is ‘good law’. practice. Before discussing the delicate questions raised by the judgment, the factual and legal background of the dispute shall be illustrated (section 2) and the most important statements or findings of the CFI will be 1. INTRODUCTION summarized with reference to the two issues dealt By its judgment of 18 December 2008 in Cases with by the CFI, relating respectively to the notions T-211/04 and T-215/04, Government of Gibraltar v. of geographic and material selectivity (section 3). On Commission,1 the Court of First Instance (CFI) of the this basis, a comprehensive illustration of the contro- European Communities (ECs) annulled the Com- versial notions of selectivity, justification and general mission Decision 2005/261/EC of 30 March 2004,2 measure is provided in section 4. prohibiting Gibraltar to enact its proposed company tax legislation that sought to make the British protec- torate a more attractive offshore location for mobile 1 Judgment in Case Nos. T-211/04 and T-215/04, Government of business activities. Gibraltar v. Commission [18 Dec. 2008], not yet in ECR. 2 OJ L 85 (2005): 1. This judgment provides the latest interpretation by 3 Specifi cally, Art. 87(1) of the EC Treaty states that ‘any aid granted the European judicature of the controversial notion of by a Member State or through State resources in any form whatso- selectivity with respect to state-aid review of business ever which distorts or threatens to distort competition by favoring tax measures pursuant to Article 87, paragraph 1 of certain undertakings or the production of certain goods shall, in so 3 far as it affects trade between Member States, be incompatible with the EC Treaty. The ruling is relevant in the context the common market’. of establishing the interplay between state-aid pro- 4 The judgment may be appealed within sixty days from the date of hibition and taxation but does not permit to answer notifi cation to the parties. EC TAX REVIEW 2009/2 67 © 2009 Kluwer Law International BV, The Netherlands THE GIBRALTAR JUDGMENT AND THE POINT ON SELECTIVITY IN FISCAL AIDS 2. BACKGROUND the ECJ has therefore ruled that to be termed ‘aid’ a tax measure must confer on certain recipients an The state-aid prohibition is contained in paragraph 1 advantage that exempts (fully or partially) them from of Article 87 of the EC Treaty, according to which state charges that are normally borne from their budgets aid is any benefit that selectively favours certain under- ‘without there being any justification for this exemption on takings or the production of certain goods, whereas a the basis of the nature or general scheme of this system’.8 general benefit that assists all sectors or industries is Against the aforementioned substantive and proce- not state aid because it constitutes a general measure dural backgrounds, it is the choice of the national that is unable to alter the level-playing field between authorities to notify their tax systems to the Com- undertakings. The EC Treaty also provides exceptions mission, pursuant to Article 88, paragraph 3 of the to the general prohibition on state aid. Paragraphs 2 EC Treaty, or to implement their planned tax reforms and 3 of Article 87 of the EC Treaty, respectively, list without consulting the Commission, however at their types of aid that are deemed compatible and aids that risk. State-aid review of direct business tax measures the European Commission may declare compatible has received an impetus following the Commission with the common market. One should keep in mind adoption in 1998 of specific guidelines relating to that such exceptions do not diminish the absolute sig- the application of the Community rules on state aid nificance of the state-aid prohibition, but rather define to direct business taxation measures9 and the coor- situations where an aid is admissible because it is aimed dinated package of state-aid review carried out with at objectives of common interest and is not excessively respect to tax schemes enacted by Member States to distortive, and therefore compatible with the common attract the location of mobile business activities and market. For example, under Article 87, paragraph 3, intra-group functions from 2001 to 2006.10 letter (c), which is the Treaty legal base for compat- In August 2002, following prior state-aid proceed- ibility of most aids granted, state aid can be held to be ings against the special tax regimes in Gibraltar for compatible if it is aimed to ‘facilitate the development exempt and qualifying companies, which the Commis- of certain economic activities or of certain economic areas sion had determined to be incompatible aid favouring where such aid does not adversely affect trading conditions Gibraltar’s offshore sector,11 the United Kingdom, on to an extent contrary to the common interest’. This means Gibraltar’s behalf, notified to the Commission a pro- that the possible characterization of a public measure posed company tax reform. The reform was aimed at has state aid preserves its legal relevance. replacing the special tax regimes for exempt and qual- Article 88 of the EC Treaty outlines notification and ifying companies, which had been declared incom- adjudication procedures for all proposed measures patible with the common market with a combined of state aid with the potential to affect competition system of different direct taxes on companies, includ- 5 between the Member States. Paragraph 3 of Article ing payroll, registration, and property taxes. The gen- 88 of the EC Treaty states that the Commission must eral nature of the combined system was described by be informed, in sufficient time, to enable it to submit the United Kingdom to be that of regressive taxation its comments, of any plans to grant or alter aid. If of the profitable use of property and employees in the Commission considers any such plan incompat- Gibraltar (see in particular paragraphs 37 and 40 of ible with the common market under Article 87 of the the contested Decision). EC Treaty, it will, without delay, initiate the proce- More particularly, the proposed reform was based dures provided for in paragraph 2 of Article 88 of the on the following main elements: EC Treaty. The Member State concerned must not put its proposed measures into effect until this procedure – A payroll tax in the amount of GBP 3,000 per per- has resulted in a final decision. son employed in Gibraltar, payable by profi t-making Although tax incentives were not the initial focus of companies taxable in Gibraltar (a payroll tax).

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