(1)

On 1 June 2012, the Commission received a complaint from the Spanish authorities concerning the new income tax act in Gibraltar, the Income Tax Act 2010 (hereinafter referred to as ‘ITA 2010’).

(2)

On 16 October 2013, the Commission initiated a formal investigation procedure to verify whether the passive interest and royalty income tax exemption in ITA 2010 selectively favours certain companies, in breach of Union State aid rules (the decision taken to initiate that procedure is referred to in this Decision as ‘the First Opening Decision’) (2).

(3)

On 4 December 2013, the United Kingdom (‘UK’) authorities provided the Commission with a note on the exemption of royalties, together with draft legislation prepared by the Government of Gibraltar amending ITA 2010 in order to bring royalty income within the charge to taxation in Gibraltar. On request, this information was supplemented by the Gibraltar authorities by emails dated 6, 12 and 16 December 2013.

(4)

On 16 December 2013, Gibraltar asked for an extension of the deadline to provide comments on the First Opening Decision until 17 January 2014. That request was accepted by the Commission the same day.

(5)

On 20 December 2013, the United Kingdom submitted comments concerning the opening of the procedure pursuant to Article 108(2) of the Treaty. Third party comments on that procedure were received from the Spanish Confederation of Employers (C.E.O.E) (3), Germany, Spain and the Government of Gibraltar, on 27 December 2013, 27 December 2013, 6 January 2014 and 17 January 2014 respectively.

(6)

By email dated 7 January 2014, the Gibraltar authorities provided the Commission with a copy of the Income Tax (Amendment) Act 2013 of 24 December 2013, which introduced an amendment to ITA 2010 in relation to the taxation of royalties.

(7)

By letter of 16 April 2014, the Commission invited the United Kingdom to submit its comments on the observations raised by third parties concerning the opening of the formal procedure. The United Kingdom replied by letter dated 2 June 2014 within the extended deadline.

(8)

On 1 October 2014, the Commission informed the United Kingdom of its decision (4) to extend the procedure laid down in Article 108(2) of the Treaty to include the tax ruling practice in Gibraltar (that decision is referred to in this Decision as ‘the Decision to Extend Proceedings’).

(9)

On 10 November 2014, the Commission requested further information in relation to the tax ruling practice in Gibraltar. That information was provided by the United Kingdom on 8 December 2014.

(10)

On 4 March 2015, a corrigendum of the Decision to Extend Proceedings was communicated to the United Kingdom.

(11)

On 23 March 2015, additional information in relation to the tax ruling practice was requested by the Commission. That information was submitted by the United Kingdom on 23 April 2015.

(12)

On 31 March 2015, the United Kingdom submitted its comments on the Decision to Extend Proceedings.

(13)

Following an email from the United Kingdom dated 9 March 2015 with proposals for draft legislation and guidance notes in relation to both the territoriality principle and the tax ruling practice, the Commission provided the UK with a number of suggestions on the draft legislation and guidance notes by letter of 3 September 2015.

(14)

On 19 October 2015, the United Kingdom provided the Commission with a revised draft regulation and guidance notes on the tax ruling practice as well as 20 tax ruling reviews. On 11 November 2015, the Commission requested information on 2 299 companies with income accruing in or derived from Gibraltar. The requested information was submitted by the United Kingdom on 24 November 2015. Additional tax ruling reviews were sent to the Commission on 3 December 2015, 19 February 2016 and 31 August 2016.

(15)

On 14 July 2016, a new request for information on both the tax ruling practice and the passive interest and royalty income tax exemption was sent to the United Kingdom. The United Kingdom replied by letter dated 31 August 2016.

(16)

On 7 October 2016, the Decision to Extend Proceedings was published in the Official Journal (5).

(17)

In October and November 2016, six interested parties, including Gibraltar and Spain, submitted their observations on the Decision to Extend Proceedings.

(18)

On 9 November 2016, Gibraltar lodged an application for annulment of the Decision to Extend Proceedings before the General Court of the European Union (6).

(19)

On 7 December 2016, the Commission invited the United Kingdom to comment on the third parties comments received. The United Kingdom submitted its comments on 31 January 2017.

(20)

On 16 February 2017, the Commission requested further clarifications from the United Kingdom regarding the Gibraltar tax rulings. The UK authorities replied on 31 March 2017, and submitted further information on 3 May 2017, within the extended deadline.

(21)

On 29 November 2017, the United Kingdom submitted a copy of all reports drawn up by the Gibraltar tax authorities as a result of the reviews performed in relation to the 165 tax rulings listed in the Decision to extend proceedings.

(22)

Further to comments made by the Commission on 7 December 2017, additional information, including draft legislation and guidance notes, were provided by the UK on 18 January 2018.

(23)

On 9 February 2018, the Commission requested further clarifications of the draft legislation sent by the United Kingdom. It also requested supplementary explanations on factual or legal aspects of some of the tax ruling reviews submitted by the United Kingdom in November 2017.

(24)

By letter dated 21 February 2018, the United Kingdom replied to that information request. By email of 1 March 2018, the Commission invited the United Kingdom to provide clarification on certain specific tax rulings. The United Kingdom replied to that request on 15 March 2018. Further clarifications on the same issues were provided by the United Kingdom on 24 May 2018, following a request from the Commission dated 3 May 2018.

(25)

Meetings were held on 5 December 2013, 12 March 2015, 28 May 2015 and 29 November 2017 and 5 October 2018 with the United Kingdom, together with representatives of the Gibraltar authorities.

(26)

Gibraltar is a British Overseas Territory. It has full internal self-government with respect to tax matters, while the United Kingdom government is responsible for its international relations, for example for the negotiation of tax treaties.

(27)

ITA 2010 (7) entered into force on 1 January 2011 and replaced the former Income Tax Act 1952 (‘ITA 1952’). It introduced a general income tax rate of 10 % applying to companies across the whole Gibraltar economy, except for utility companies, telecommunication services and companies enjoying and abusing a dominant market position, which are subject to a rate of 20 %.

(28)

Both a company (8) ordinarily resident (9) in Gibraltar and a company not ordinarily resident in Gibraltar may be a Gibraltar taxpayer but, in the latter case, only if the company carries on a trade in Gibraltar through a branch or agency (10).

—

Table A: trade, business, profession, vocation and real property,

—

Table B: employment and self-employment,

—

Table C: other income (dividends (11), fund income, income from rights, pensions and a general ‘Sweeping Up Class’ in relation to items of income caught under the anti-avoidance provisions in section 40 of and Schedule 4 to ITA 2010).

(29)

For the purposes of computing the basis of assessment for companies, section 16 of ITA 2010 provides that, subject to certain exceptions, the assessable profits or gains of a company for an accounting period are to be the full amount of the profits or gains of the company for that accounting period, applying the territorial basis of taxation outlined in recitals 30 to 32.

(30)

ITA 2010 is based on a territorial system of taxation, meaning that profits or gains are taxed only if the income ‘accrues in or is derived from’ Gibraltar. According to section 74 of ITA 2010, ‘accrued in and derived from’ is to be defined by reference to the location of the activities (12) which give rise to the profits, normally determined on a case by case basis. That provision also deems activities requiring a licence and regulation under any law of Gibraltar to take place in Gibraltar.

(31)

The application by the Gibraltar tax authorities of the concepts of accrual and derivation also finds its source in principles derived from the jurisprudence of the Judicial Committee of the Privy Council (13) in several landmark cases, such as Hang Seng (14) and HK-TVB (15), which both relate to the application of the principle of territoriality in Hong Kong. While the judgments of the Judicial Committee of the Privy Council concerning jurisdictions other than Gibraltar are not binding on Gibraltar, they may be relied upon by the Gibraltar courts if they are considered relevant. In the view of the United Kingdom, that would clearly be the case for the judgments referred to in this recital because of the similarity of the legislation in the two jurisdictions (16).

(32)

According to the case-law mentioned in recital 31, in deciding whether profits of any person accrue in and are derived from Gibraltar, the Gibraltar tax authorities should look at what the person has done, or proposes to do, to earn the profits in question, and where that person has done it, or intends to do it. The focus is therefore on establishing the geographical location of the activity that produced the profits for the relevant transactions. With regard to the provision of services by a company, the Gibraltar authorities have indicated that they would rely in particular on the geographical location where all the income-generating activities (and not simply the back-office or administrative support functions) take place in order to determine the place where the services giving rise to fees are performed.

(33)

Under ITA 2010, as originally enacted, passive interest and royalties were not chargeable to tax (17), irrespective of the source of the income or the application of the territoriality principle. The notion of passive interest refers mainly to inter-company loan interest. By contrast, interest was subject to tax if it was considered trading income, i.e. if it forms an integral part of a company's revenue stream (18).

(34)

ITA 2010 was amended in June 2013, with effect from 1 July 2013, to make all inter-company loan interest (both domestic and foreign sourced) liable to tax at the general rate of 10 % insofar as the interest received or receivable per source company exceeded GBP 100 000 per annum (19). With regard to royalty income, further legislation was enacted on 24 December 2013 subjecting royalties (received or receivable by a company registered in Gibraltar) to tax at the rate of 10 % as from 1 January 2014 (20).

(35)

Pursuant to Table C of Schedule 1 to ITA 2010, dividends paid or payable by a company to another company are not subject to tax. That is the general rule irrespective of the location of the company and regardless of the activity of the companies involved (holding companies or active trading companies). The same applies to dividends received by a permanent establishment (situated in Gibraltar) of a non-resident company.

(36)

The Gibraltar Commissioner of Income Tax is entitled to grant tax rulings under his general duty to ensure the due administration of the Income Tax Act and his responsibility for the assessment and collection of income tax in Gibraltar. Such general powers follow from section 2(1) and (2) of ITA 2010.

(37)

With respect to the tax rulings listed in the Decision to Extend Proceedings, in most cases, requests for tax rulings seek confirmation of whether or not a resident company is liable to tax in Gibraltar as a result of the basic legal taxation principles, i.e. accrual and derivation of income in accordance with the territorial system.

(38)

In addition, section 42 of ITA 2010 provides for a specific procedure for clearance in relation to anti-avoidance issues. Such rulings can only be granted for the purpose of determining whether certain transactions or arrangements are taxable in accordance with section 40 of or Schedule 4 to ITA 2010, i.e. for determining whether or not an arrangement is artificial or fictitious for the purposes of eliminating or reducing the amount of taxation payable.

(39)

In the First Opening Decision, the Commission took the preliminary view that the tax exemption for passive (inter-company loan) interest and royalty income resulting from ITA 2010 constitutes State aid for the purposes of Article 107(1) of the Treaty and expressed doubts as to its compatibility with the internal market.

(40)

With respect to the material selectivity of the measure, the Commission found that the passive income (interest, royalty and dividend) exemption was prima facie selective. However, with regard to dividends it found that the exemption was justified by the logic of preventing double taxation. By contrast, the Commission did not identify any justification for the exemption for passive interest or royalty income. In particular, it did not agree that the exemption for foreign source passive interest followed from the logic of the territorial system of taxation. Nor did it accept the argument that the exemption for domestic source passive interest would be justified by manageability concerns (excessive costs of collecting the tax). Finally, with regard to the royalty exemption, the Commission did not accept the need to make the Gibraltar tax system simple and effective as a valid justification for the exemption.

(41)

On a preliminary basis, the Commission also concluded that the measure was financed through State resources, that it conferred an economic advantage to undertakings, that it affected trade between Member States and that it threatened to distort competition by favouring certain undertakings. Accordingly, it took the view that the tax exemption for passive interest and royalties constituted State aid for the purposes of Article 107(1) of the Treaty.

(42)

The Commission also concluded that such aid constituted ‘new aid’ as the exemption for passive interest under ITA 1952 was not granted automatically and required an assessment of territoriality. In addition, ITA 2010 introduced an exemption for royalties, which did not previously exist under ITA 1952. In this regard, the Commission noted that the application of the territorial system meant that all royalty income received by a Gibraltar company accrues in and is derived from Gibraltar.

(43)

Finally, the Commission expressed its doubts as to the compatibility of the exemption rule for the passive (inter-company loan) interest and royalty income with the internal market. In particular, it did not identify any possible compatibility grounds under Article 107(2) or (3) of the Treaty.

(44)

With the Decision to Extend Proceedings, the Commission decided to extend the formal investigation procedure to cover 165 tax rulings granted by the Gibraltar tax authorities between the period from 2011 to August 2013 (out of a total of 340 rulings granted during that period).

(45)

The Commission considered that the four conditions for qualifying a measure as State aid were in principle met. In particular, it concluded on a preliminary basis that the tax ruling measures were materially selective as the Gibraltar tax authorities generally refrained from conducting a proper assessment of the company's tax obligations, in exercise of their discretionary powers. In the Commission's view, such a course of conduct was made possible because the legal provisions were formulated in a vague manner. The Commission also took the preliminary view that, in some cases, the Gibraltar tax authorities issued tax rulings that were inconsistent with the applicable tax provisions.

(46)

To support its preliminary views on the selective nature of the tax ruling measures due to the existence of discretionary practices, the misapplication of the rules or the absence of proper verification as to where activities are effectively performed, the Commission outlined seven typical categories of cases on the basis of different types of ruling, activity or income.

(47)

On a preliminary basis, the Commission considered that, by granting such tax rulings only to certain multinational companies, as opposed to other, purely domestic companies that do not ask for a tax ruling, the tax authorities treated companies that were in a similar legal and factual situation differently. Accordingly, the measures were found to be prima facie selective. Further, the Commission did not identify an acceptable justification based on the nature or the general scheme of the reference system (see recital 57 of the Decision to Extend Proceedings). In this respect, it also indicated that any possible justification would require the existence of appropriate control and monitoring procedures (21) (in order to ensure a coherent application of the tax system), which seemed to be lacking in the case in hand.

(48)

As a preliminary conclusion, the Commission also found that the tax ruling measures were granted through State resources, that they conferred an economic advantage to undertakings, that they affected trade between Member States and that they threatened to distort competition by favouring certain undertakings. It expressed its doubts as to the compatibility of those measures with the internal market. Accordingly, it took the preliminary view that the tax ruling measures constituted State aid for the purposes of Article 107(1) of the Treaty. It also considered that such State aid constituted ‘new aid’.

(49)

The extended proceedings related not only to the 165 individual rulings but also more generally to the tax ruling practice under ITA 2010, which seemed to misapply the provisions of ITA 2010 on a recurrent basis.

(50)

With regard to the compatibility of the 165 tax rulings and the general tax ruling practice with the internal market, the Commission did not identify any possible grounds for compatibility based on the exceptions laid down in Article 107(2) and (3) of the Treaty.

(51)

In conclusion, the Commission expressed the preliminary view that the 165 tax rulings listed in the Annex to the Decision to Extend Proceedings and the tax rulings practice of Gibraltar constitute State aid for the purposes of Article 107(1) of the Treaty and expressed doubts about their compatibility with the internal market. It also invited the United Kingdom and the Gibraltar authorities to provide it with evidence of ex post controls. Finally, it invited the United Kingdom to explain whether and on what grounds the tax ruling practice or any of the 165 tax rulings assessed could be found compatible.

(52)

The comments submitted by the United Kingdom on 20 December 2013 can be summarised as follows:

(53)

The arguments put forward by the United Kingdom on 31 March 2015 against the Decision to Extend Proceedings can be summarised as follows:

(54)

The Commission received comments from four interested parties — Gibraltar, Spain, Germany and the Spanish Confederation of Business Organisations (CEOE).

(55)

In its comments, Gibraltar supported the line of argument put forward by the United Kingdom that the measure is not selective as it is applied universally and is open to all types of goods, services and companies and that, if it were found to be selective, it should be considered justified by the logic and general nature of the system as a consequence of the territoriality principle. It further pointed out that the exemption for passive interest and royalty income is justified by concerns about administrative manageability, since the costs associated with the collection of the tax are expected to be larger than the actual tax yields.

(56)

With regard to the exemption for royalty income, Gibraltar further submitted that the exemption cannot be regarded as selective as the companies that were in receipt of royalties during the three year period when the non-chargeability to tax was in force were active in sectors as diverse as food retail, high street clothing, gaming and insurance. Furthermore, the type of royalty concerned was equally diverse, including copyright, trade mark, knowhow and patents.

(57)

Gibraltar also maintained that, were the measure nonetheless found to be selective, it should be considered to be ‘existing aid’ as it is de facto a continuation of the old regime under which foreign interest was exempt from taxation, based on an analysis of the ‘situs of the loan’. For that reason, the measure could only be considered to be ‘new aid’ to the extent that it concerned domestic interest income.

(58)

With respect to any potential recovery, Gibraltar also submitted that the amounts of tax foregone would fall below the de minimis threshold established by Commission Regulation (EU) No 1407/2013 (24). In particular, Gibraltar submitted that information collected from 18 companies in receipt of royalty income, who together accounted for GBP 90 million in gross royalty income, showed that the total net figure of royalty income, as a result of the deductible expenses, amounted to no more than GBP 18 million. In addition, with regard to Gibraltar-source passive interest, the maximum tax yield would be approximately GBP 250 000, spread across at least 17 companies. Furthermore, Gibraltar's view is that recovery is likely to be impossible for practical reasons and would meet insurmountable difficulties, due to the mobile character of the funds of the companies in question and in the light of the international law principle that courts of one State will not allow or enforce claims for taxes on behalf of another State.

(59)

With regard to the procedure, Gibraltar asserted that the Commission departed from the normal practice under the Procedural Regulation, with arguments similar to those put forward by the UK authorities.

(60)

In their submissions, Spain, Germany and CEOE supported the Commission's analysis that the measure constituted State aid as it selectively excluded certain types of income from taxation, had a negative effect on intra-Union trade and distorted competition.

(61)

In addition, Spain expressed concern about the effectiveness of the amendment of 7 June 2013 regarding taxation of passive interest, given that the exempted companies in Gibraltar who had received interest income did not have any tax filing obligations. In Spain's view, this would hinder identification of the potential beneficiaries of the measure and ex post controls on the reporting and taxation of interest income.

(62)

Spain also maintained that the new GBP 100 000 threshold introduced by the 2013 amendment is high. Furthermore the anti-abuse provision, which requires the received interest from related companies to be aggregated, does not apply at the level of the recipient companies. Therefore, the threshold provision could be easily circumvented through a simple company group restructuring creating several Gibraltar companies and distributing the interest received amongst those.

(63)

With respect to the exemption of dividends, Spain challenged the double-taxation prevention justification put forward by the Commission. In Spain's opinion, contrary to the Code of Conduct Group's Work Package 2011 on business taxation's guidance notes, Gibraltar had not enacted an effective anti-abuse provision to ensure taxation. In particular, it considered that Gibraltar's legislation failed to require the undertaking in question to be subject to tax (either in Gibraltar or in a foreign country) in order to benefit from the exemption. This failure gave rise, in Spain's view, to a risk of double non-taxation.

(64)

Concerning the tax treatment of royalties, the Spanish authorities considered that the exemption selectively favoured companies receiving income from royalties and that such an exemption could not be justified by the avoidance of double taxation.

(65)

Both the Spanish authorities and CEOE also referred to the fact that the exemption for passive interest and royalty income must be examined in the light of the general effects of ITA 2010. In their opinion, the intention of ITA 2010 was to continue the effects of the previous tax system (already declared by the Court of Justice to be State aid) favouring offshore companies over those resident in Gibraltar.

(66)

Finally, Spain also challenged the assessment made by the Commission with regard to regional selectivity, by distinguishing between the status of the Azores province (which the Commission referred to in its analysis in the First Opening Decision) and the status of Gibraltar. In particular, the Spanish authorities considered that, in addition to examining the three criteria of institutional, procedural and financial autonomy, the implicit criterion concerning tax harmonisation (which, according to the Spanish authorities, clearly does not exist in Gibraltar) should also be examined. Spain also referred to a number of other tax issues, such as the number of shell companies located in Gibraltar without being liable to tax.

(67)

The Commission received comments from six interested parties — Gibraltar, Spain, the Gibraltar Society of Accountants and three companies listed as possible recipients of tax rulings in the Decision to Extend Proceedings.

(68)

The comments made by Gibraltar relate to both procedure and substance. The comments follow the lines of argument put forward by the United Kingdom and can be summarised as follows:

(69)

The comments provided by the Spanish authorities on 30 November 2016 can be summarised as follows:

(70)

On 3 November 2016, the Gibraltar Society of Accountants — the principal representative body for professional accountants working in Gibraltar, submitted its comments to the Decision to Extend Proceedings. The comments can be summarised as follows:

(71)

The Commission also received comments by or on behalf of three companies which were granted a tax ruling identified in the Decision to Extend Proceedings — International Power Ltd; a representative of a potential company at the time of the ruling request; and Hastings Insurance Group Ltd. Their comments can be summarised as follows:

(72)

The Commission forwarded the comments received from interested parties on the passive interest and royalty income exemption to the United Kingdom on 16 April 2014. The United Kingdom's response to those comments can be summarised as follows:

(73)

The Commission forwarded the comments made by interested parties on the tax ruling practice as set out in the Decision to Extend Proceedings to the United Kingdom on 7 December 2016. The United Kingdom's response to those comments can be summarised as follows:

(74)

In the First Opening Decision, the Commission concluded on a preliminary basis that the tax exemption for passive (inter-company loan) interest and royalty income constituted State aid and expressed its doubts about its compatibility with the internal market.

(75)

As from 1 July 2013, the passive interest income has been liable to tax (insofar as the interest received or receivable per source company exceeded GBP 100 000 per annum). As from 1 January 2014, the royalty income (received or receivable by a company registered in Gibraltar) has been subject to tax.

(76)

The scope of this Decision (under section 7) is limited to the assessment of the passive interest and royalty income received or receivable between the entry into force of ITA 2010 (1 January 2011) and 30 June 2013 (as regards interest) or 31 December 2013 (as regards royalties) (25).

(77)

The classification of a national measure as State aid, within the meaning of Article 107(1) of the Treaty, requires the following conditions to be met. First, there must be an intervention by the State or through State resources. Second, the intervention must be liable to affect trade between Member States. Third, it must confer a selective advantage on the recipient. Fourth, it must distort or threaten to distort competition (26).

(78)

To constitute State aid, a measure must both be imputable to a Member State and financed through State resources.

(79)

Since the exemption results from an Act of the Gibraltar Parliament, it can be regarded as imputable to Gibraltar.

(80)

As regards the financing of the exemption through State resources, the Court of Justice has consistently held that a measure by which public authorities grant certain undertakings a tax exemption which, although not involving a positive transfer of State resources, places the persons to whom it applies in a more favourable financial situation than other taxpayers constitutes State aid (27). The tax measure at issue results in Gibraltar waiving tax revenue that it would otherwise have been entitled to collect from companies resident in Gibraltar in receipt of passive interest or royalty income. By renouncing those revenues, the tax measure gives rise to a loss of State resources within the meaning of Article 107(1) of the Treaty (28).

(81)

According to the case-law of the Union Courts, the notion of aid embraces not only positive benefits, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking (29). An advantage may be granted through different types of reduction in a company's tax burden and, in particular, through a reduction in the applicable tax rate, taxable base or in the amount of tax due (30). A measure that entails a reduction of a tax gives rise to an advantage because it places the undertakings to which it applies in a more favourable financial position than other taxpayers and results in a loss of income to the State (31).

(82)

In the case in hand, the measure contradicts the general principle that corporate income tax is collected from all taxable persons that receive income derived from or accruing in Gibraltar. In line with that principle, passive interest and royalty income should normally fall within the scope of taxation, subject to application of the territoriality principle. With regard to royalties, it must be noted that the territoriality principle deems royalty income received by a Gibraltar company to accrue in and be derived from Gibraltar. As for passive interest income, the chargeability of such income to tax under the territorial system depends on application of the ‘situs of the loan’ rule, which is based on four cumulative criteria (32) focusing on the source of the income. Accordingly, in a number of cases, foreign source passive interest income may, even in the absence of the contested tax exemption, not be subject to income tax in Gibraltar by virtue of the territorial system. However, relief from taxation under the territoriality principle is not automatic and criteria other than the source of the interest (e.g. the location of the security of the debt) need to be considered to determine if the interest accrued in or was derived from Gibraltar in accordance with the ‘situs of the loan’ rule.

(83)

As a result, the exemption introduces a mitigation of a charge that companies benefiting from the exemption would otherwise have to bear. This gives rise to an advantage as the companies are relieved of costs inherent to their economic activities and are therefore placed in a more favourable financial position than other taxpayers (who are in receipt of active income).

(84)

In order to be regarded as State aid within the meaning of Article 107(1) of the Treaty, a measure must be found to be selective in the sense that it favours certain undertakings or the production of certain goods.

(85)

As a preliminary remark, with respect to the comments made by Spain on regional selectivity, it must be observed that, in the First Opening Decision, the Commission did not express doubts with regard to regional selectivity and considered that the reference framework for assessment of the exemption was confined exclusively to the geographical territory of Gibraltar (33). The Commission maintains its view that the passive interest and royalty income exemption does not involve regional selectivity. In particular, the three cumulative criteria of autonomy (institutional, procedural and financial autonomy), as devised by the Court of Justice in Azores (34) and Union General de Trabajadores de la Rioja (35), are fulfilled. Accordingly, the Gibraltar authorities are considered sufficiently autonomous from the United Kingdom central government and the reference framework therefore corresponds to the geographical limits of the territory of Gibraltar (36).

(86)

For the purposes of establishing material selectivity, it is settled case-law that, as a first step, the common or normal tax regime applicable in the relevant tax jurisdiction must be identified (‘the reference system’). Second, it must be determined whether a given measure differentiates between economic operators who, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation. If it does, the measure is then regarded as being prima facie selective (37). It then needs to be established, in the third step of the test, whether such prima facie selectivity is justified by the nature or the general scheme of the (reference) system (38). If a prima facie selective measure is justified by the nature or the general scheme of the system, it will not be considered selective and will thus fall outside the scope of Article 107(1) of the Treaty.

(87)

In this context, it is also important to note that for a tax measure to qualify as selective, the tax system does not need to be designed in such a way that companies benefiting from a selective advantage are, in general, subject to the same tax burden as other companies, but benefit from derogating rules, so that the selective advantage is the difference between the normal tax burden and that borne by these companies (39).

(88)

Indeed, such an understanding of selectivity would mean that only a tax system designed according to a certain regulatory technique could qualify as selective, and that national tax rules that were designed differently would escape State aid control, even though they produced the same effects in law or in fact. That would go against well-established case-law, which provides that, when assessing selectivity, Article 107(1) of the Treaty does not distinguish between measures by reference to their causes or their aims, but instead defines them in relation to their effects, and thus, independently of the techniques used (40).

(89)

The reference system constitutes the benchmark against which the selectivity of a measure is assessed. It is composed of a consistent set of rules that generally apply on the basis of objective criteria to all undertakings falling within its scope as defined by its objective. Those rules define not only the scope of the system, but also the conditions under which the system applies, the rights and obligations of undertakings subject to it and the technicalities of the functioning of the system (41). In the case of taxes, the reference system is based on such elements as the tax base, the taxable persons, the taxable event and the tax rates (42).

(90)

In the case in hand, the reference system is ITA 2010. The long title of that Act describes it as ‘an Act to Impose Taxation on Income and to Regulate the Collection thereof’ (43). With regard to the taxable basis for companies, section 16 of ITA 2010 provides that ‘save as otherwise provided hereafter, the assessable profits or gains of a company shall be the full amount of the profits or gains of the company for any accounting period of that period’. As a result, subject to any adjustments up or down provided for in ITA 2010, accounting profits are to constitute the basis of assessment for the calculation of corporate income tax in Gibraltar.

(91)

On the other hand, as the UK authorities pointed out (44), it is within the inherent logic of the territorial system of taxation in Gibraltar that all income, whether active or passive, with a source outside Gibraltar falls outside the scope of Gibraltar tax and remains subject to tax in the jurisdiction where the income accrued or is derived.

(92)

To define the general Gibraltar corporate income tax system as the ‘reference framework’ is in line with the Court's case-law, which has consistently held that, in the case of measures concerning the determination of corporate income tax liability, the reference system to be considered is the corporate income tax system of the Member State in question that applies to undertakings in general, and not the specific provisions of that system applicable only to certain taxpayers or certain transactions. For instance, in World Duty Free, a case concerning the rules governing investments in shareholdings, the Court endorsed the Commission's position that the reference system was the Spanish corporate income tax system and not the specific rules governing the tax treatment of those investments (45).

(93)

While the objective of ITA 2010 is to collect revenue from taxpayers taxable in Gibraltar (i.e. taxpayers receiving income derived from or accruing in Gibraltar) (46), Schedule 1 to that Act did not include within the categories of income taxable in Gibraltar certain categories of income (47). Accordingly, the passive interest and royalty income exemption did not follow from a formal derogation from the tax system, but rather from the non-inclusion of such income in the categories of income falling within the scope of the Gibraltar tax system (an implicit exemption).

(94)

In accordance with the territorial system of taxation generally applicable in Gibraltar (48), only income that is derived from or accrues in Gibraltar is subject to corporate income tax. ITA 2010, however, provided on entry into force for an automatic exemption from corporate income tax for passive interest-loan and royalty income, without consideration needing to be given to the elements which are generally relevant for determining the territorial scope of taxation in Gibraltar, in line with the territoriality principle. In this regard, it is particularly relevant to note that, in the absence of the exemption for royalty income, the territorial system of taxation would deem royalty income received by a Gibraltar company as always accruing in and derived from Gibraltar (49). As for passive interest, a case-by-case assessment of the territoriality principle would be needed in order to determine the location of the activities giving rise to the income and hence the existence or otherwise of a taxable income.

(95)

In the First Opening Decision, the Commission found that the corporate income tax exemption for passive interest and royalty income, in differentiating between companies in a comparable legal and factual situation, should be considered prima facie selective in the light of the objective of ITA 2010, which is to tax income accruing in or derived from Gibraltar.

(96)

The Commission further noted in the First Opening Decision that the exemption seemed to significantly favour a group of 529 companies that receive passive interest or royalty income, in particular interest from other companies of the same group or royalty income. The Commission also noted that the largest part of loan interest received by Gibraltar companies resulted from inter-company loans granted to foreign group entities (50).

(97)

In a case such as this where the measure does not arise from a formal derogation from the tax system, the Commission is of the view that, in assessing selectivity, it is particularly relevant to consider the effects of the measure in order to assess whether the measure significantly favours a particular group of undertakings.

(98)

With regard to royalties, the Commission's analysis of the effects of the measure (51) shows that it only benefited 10 companies (out of 8 003 active companies operating in Gibraltar), all being part of multinational groups. In addition, it appears that at least 8 of them belong to large multinationals operating worldwide. By contrast, no stand-alone company was in receipt of royalty income in Gibraltar.

(99)

As regards interest, the information provided by the UK authorities shows that, of the total amount of inter-company loan interest income received by Gibraltar companies (GBP 1 400 million), 99,8 % derives from loans granted to foreign (group) companies. By contrast, only two Gibraltar companies, accounting for no more than GBP 3 256 834 in total (GBP 222 169 in terms of tax forgone) (corresponding to 0,2 % of the total amount of inter-company loans), benefited from domestic sourced interest.

(100)

Those figures demonstrate that the measure significantly favoured companies belonging to multinational groups entrusted with certain functions (the granting of intra-group loans and/or the right to use intellectual property (IP) rights). In particular, the measure benefited (i) a small number of multinational companies, most of which are part of large multinational groups operating worldwide (in receipt of royalty income); and (ii) companies that are part of multinational groups and provide loans to foreign companies that are part of their group. In the light of the objective of ITA 2010 (namely taxing income accruing in or derived from Gibraltar), these companies are in a similar legal and factual situation to all other Gibraltar companies generating income accruing in or derived from Gibraltar (or carrying on activities requiring a licence under Gibraltar law, such as banking, insurance or gambling).

(101)

The United Kingdom and the Gibraltar authorities consider that the exemption constitutes a general measure applied to all companies in a similar situation, regardless of the sector. They further point out that the fact that it is possible to identify some companies which benefit from a tax rule more than others does not make the rule selective per se. The rule would only be selective if it was inherently likely to benefit an identifiable category of companies. In the view of the UK and the Gibraltar authorities, that is not the case with the measure in hand as there are no other companies in a similar factual or legal situation in Gibraltar to which the exemption does not apply.

(102)

The Commission considers that the United Kingdom's assertion that the measure prima facie applies to all companies, regardless of their sector or activity, is not relevant for the purposes of assessing selectivity. It is settled case-law that the fact that the number of undertakings able to claim entitlement under a national measure is large, or that those undertakings belong to various economic sectors, is not sufficient to call into question the selective nature of the measure (52).

(103)

A measure that differentiates between undertakings which, in the light of the objective pursued by the legal regime concerned, are in a comparable factual and legal situation is a priori selective. In the case in hand, it has been established that the exemption from corporate income tax for passive interest and royalty income mainly benefits multinational groups. As noted in recital 100, in the light of the objective of the reference tax system (ITA 2010), namely taxing income accruing in or derived from Gibraltar, multinational groups are in a similar legal and factual situation to all other Gibraltar companies generating income accruing in or derived from Gibraltar. Therefore, the exemption from corporate income tax for passive interest and royalty income is prima facie selective.

(104)

In addition, it must be noted that the fact that the exemption benefits mainly multinational groups is not a random consequence of the regime (53). The exemption, in a small tax jurisdiction like Gibraltar, with no consideration given to the place where the R & D activities were performed, by definition offered more opportunities for international groups which, due to their international structure and size, are easily able to move intangibles and capital (and then to grant loans and/or the right to use intellectual property rights) within the group. Such findings sufficiently demonstrate that the measure was designed to attract or favour group companies and in particular multinational groups entrusted with certain activities (the granting of intra-group loans and/or the right to use IP rights). On that basis, the Commission concludes that the measure is prima facie selective as its effects, which significantly favoured a particular category of companies, are the inevitable consequence of the design of the measure.

(105)

A measure which is prima facie selective can be justified by the nature or general scheme of the tax system, if it derives directly from its intrinsic basic or guiding principles or is the result of inherent mechanisms necessary for its functioning and effectiveness. This can be the case for the principle of neutrality, the objective of optimising the recovery of fiscal debts or administrative manageability.

(106)

The UK authorities have argued that the exemption is the logical consequence of the territoriality principle, which is based on the aim of avoiding double taxation. In this respect, the Commission notes that the exemption for passive interest and royalty income introduced in ITA 2010 cannot be viewed as a mere application of the territoriality principle. In particular, as already explained in section 7.1.3.2, it must be noted that the territorial system of taxation deems royalty income received by a Gibraltar company to accrue in and be derived from Gibraltar. With regard to interest, a case-by-case assessment of the territoriality principle is needed in order to determine the location of the activities giving rise to the income and hence the existence or otherwise of a taxable income. Therefore, the exemption for passive interest and royalty income, as introduced in ITA 2010, cannot be considered as merely reflecting the application of the territoriality principle.

(107)

Moreover, the argument that the application of the territoriality principle would rely on the need to prevent double taxation does not hold up as the (foreign) paying entity is generally allowed to deduct the interest or royalties for tax purposes (54). In addition, within the framework of Council Directive 2003/49/EC (55) (Interest and Royalties Directive) certain intra-group interest and royalty payments are exempt from withholding taxes (at the level of the foreign paying entity) on the basis of national rules transposing the before mentioned Directive 2003/49/EC into domestic law. Accordingly, in view of the limited risk of double taxation, a full and automatic exemption measure is disproportionate and the prevention of double taxation cannot be seen as an acceptable justification.

(108)

Furthermore, in the context of the formal investigation, the UK authorities also argued that the passive interest and royalty income exemption is justified by reasons of administrative manageability, since the proceeds of the tax would not be sufficient to justify the administrative burden of enforcing taxation of passive interest and royalty income. They noted in this regard that foreign-sourced interest would be exempted in any event under the normal Gibraltar territoriality principle. As regards Gibraltar-sourced interest and royalties, they consider the tax exemption justified by the fact that the cost of collection would exceed expected revenues.

(109)

The Commission invited the UK authorities to demonstrate, with concrete elements, the assertion that the administrative cost of enforcing corporate income tax on passive interest and royalty income would outweigh any resulting proceeds. However, the UK authorities did not put forward any concrete elements to substantiate their claim. In the absence of any evidence, the Commission cannot accept the assertion that the passive interest and royalty income exemption is justified by reasons of administrative manageability.

(110)

In light of the considerations set out in this section, the Commission considers that the measure is selective as it significantly favours a particular set of companies belonging to multinational groups entrusted with certain functions (the granting of intra-group loans or the right to use IP rights), as compared with other companies that are in a similar factual and legal situation given the intrinsic objective of ITA 2010.

(111)

According to Article 107(1) of the Treaty, in order to constitute State aid, a measure must distort or threaten to distort competition, and it must affect intra-Union trade.

(112)

In the course of the investigation, it was established that most of the companies that benefited from the passive interest and royalty income exemption form part of international groups of companies active in sectors in which intra-Union trade occurs (56).

(113)

Even if the Gibraltar companies subject to the exemption were not involved in the trade directly, the Court of Justice has maintained that when aid is granted to an undertaking, thereby strengthening its position as compared with other companies engaged in intra-Union trade, the measure should be regarded as affecting trade and distorting competition (57).

(114)

Furthermore, it must be noted that the corporate income tax exemption for passive interest and royalty income is not related to any specific investment and simply alleviates the beneficiaries from costs that they would normally have had to bear in their day-to day business. Therefore, if the exemption is found to involve State aid, it would involve operating aid. Operating aid is more likely to distort or threaten to distort competition as it does not address a particular market failure and is not limited in time.

(115)

The United Kingdom and the Gibraltar authorities also argued that any aid resulting from the exemption for royalties would be de minimis and would fall outside the scope of State aid rules in accordance with Regulation (EU) No 1407/2013. In the context of the formal investigation, the UK authorities were invited to demonstrate that the conditions for the measure to be considered as de minimis and therefore as falling outside the scope of State aid rules would be met for all companies concerned. However, the information provided only concerned a handful of companies and the UK authorities did not substantiate their claim that the de minimis conditions would be met for all aid beneficiaries. Therefore, the Commission cannot accept the argument that the exemption would involve no aid on the ground that the advantage obtained would always be de minimis.

(116)

Consequently, the Commission considers that the measure distorts or threatens to distort competition and that it affects intra-Union trade.

(117)

Since all the conditions laid down in Article 107(1) of the Treaty are met, the Commission therefore concludes that the passive interest and royalty income exemption scheme, as it existed before entry into force of the relevant amendments made in 2013, constitutes State aid within the meaning of that Article.

(118)

According to Article 1(c) of the Procedural Regulation, ‘new aid’ means all aid, that is to say, aid schemes and individual aid, which is not existing aid, including alterations to existing aid. ‘Existing aid’ refers to authorised aid or aid which is deemed to have been authorised as provided for in Article 1(d) of the Procedural Regulation.

(119)

The United Kingdom authorities and Gibraltar assert that if the exemption for foreign-source interest constitutes State aid, it would be existing aid as the status of such interest under the exemption has remained the same de facto as under the previous 1952 legislation (as a result of the territoriality principle).

(120)

In that regard, the Commission notes that, under the territorial system of taxation, a case-by-case assessment of the interest income would need to be performed in order to determine whether there was any taxable income. This would not lead to automatic exemption of the relevant income. Therefore, the exemption for passive interest income (before 1 July 2013), as introduced under ITA 2010, substantially differs from the tax treatment of passive interest income before ITA 2010 and cannot be considered as having the same effect as application of the territoriality principle had.

(121)

In addition, should the territoriality principle result effectively in the exemption of foreign-source interest, that would not be sufficient to establish the ‘existing aid’ nature of the measure since the previous exemption was not limited to foreign-source interest income (it covered both foreign and domestic sourced interest). Any possible justification for the exemption (and its conformity with the territoriality principle) must be based on reasoning that is applicable to all interest income, not on a specific part (foreign-source interest) of it only.

(122)

State aid is deemed to be compatible with the internal market if it falls within any of the categories listed in Article 107(2) of the Treaty (58) and it may be considered to be compatible with the internal market if it falls within any of the categories listed in Article 107(3) of the Treaty (59). However, it is the Member State granting the aid which bears the burden of proving that State aid granted by it is compatible with the internal market pursuant to Article 107(2) or (3) of the Treaty (60).

(123)

The Commission notes that the UK authorities have not provided any arguments as to why the corporate income tax exemption for passive interest and royalty income should be considered compatible with the internal market. In particular, the United Kingdom did not comment on the doubts expressed in the First Opening Decision as regards the compatibility of the measure.

(124)

The Commission itself has not identified any possible grounds for compatibility and it considers that none of the exceptions listed in Article 107(2) or (3) of the Treaty applies, since the measure does not appear to be aiming to achieve any of the objectives listed in those provisions. Moreover, as the corporate income tax exemption for passive interest and royalty income is not related to any specific investment and simply alleviates the beneficiaries from costs that they would normally have to bear in their day-to day business, it is considered to involve operating aid. As a general rule, such aid can normally not be considered compatible with the internal market under Article 107(3) of the Treaty in that it does not facilitate the development of certain activities or of certain economic areas. Furthermore, the tax advantages in this case are not limited in time, declining or proportionate to what is necessary to remedy a specific market failure or to fulfil any objective of general interest in the areas concerned. Consequently, the measure cannot be considered compatible with the internal market in accordance with Article 107(2) or (3) of the Treaty.

(125)

As a preliminary matter, it should be recalled that ‘in the absence of EU rules governing the matter, it falls within the competence of the Member States or of infra-State bodies having fiscal autonomy to designate the bases of assessment and to spread the tax burden across the various sectors of production and economic sectors’ (61). At the same time, in line with well-established case-law, ‘the exercise of reserved powers cannot permit the unilateral adoption of measures prohibited by the Treaty’ (62).

(126)

In particular, the Commission does not call into question the granting of tax rulings by the tax administrations of the Member States. It recognises the importance of advance rulings as a tool to provide legal certainty to taxpayers. Provided they do not grant a selective advantage to specific economic operators, tax rulings do not raise issues under Union State aid law (63).

(127)

However, where a tax ruling endorses a result that does not reflect in a reliable manner what would result from a normal application of the ordinary tax system, that ruling may confer a selective advantage upon the addressee, in so far as that selective treatment results in lowering that addressee's tax liability in the Member State as compared with other companies in a similar factual and legal situation (64).

(128)

In the Decision to Extend Proceedings, with respect to 165 tax rulings granted by the Gibraltar tax authorities between January 2011 and August 2013, the Commission concluded on a preliminary basis that the tax rulings were materially selective as the Gibraltar tax authorities generally refrained from a proper assessment of the companies' tax obligations, exercising their discretionary powers. The Commission also took the preliminary view that, in some cases, the Gibraltar tax authorities would issue tax rulings that were inconsistent with the applicable tax provisions (65).

(129)

As a preliminary view, the Commission considered that, by granting such tax rulings only to certain multinational companies as opposed to other, purely domestic companies that do not ask for a tax ruling, the tax authorities treated companies that were in a similar legal and factual situation differently. Accordingly, the measures were considered to be prima facie selective. Further, the Commission did not identify any acceptable justification resulting from the nature or the general scheme of ITA 2010.

(130)

As part of the formal investigation, the Commission analysed the relevant documentation provided by the UK authorities in relation to the 165 rulings falling within the scope of the investigation, in order to identify any possible discretionary practices, misapplication of the rules or absence of proper checks as to where the activities were effectively performed. The documentation assessed by the Commission included the following:

(131)

Analysis of that information allowed the Commission to assess whether the relevant companies generated income taxable in Gibraltar in accordance with the territorial system of taxation and/or whether any tax ruling had been granted or implemented in a manner that was inconsistent with the applicable tax provisions.

(132)

In the vast majority of cases (160 out of the 165 rulings under investigation), that analysis did not show that the rulings had been granted in a manner that was inconsistent with the applicable general tax rules. In most cases, the income generated by the companies in question did not meet the territorial requirements to be taxable in Gibraltar. In particular, the audit reports and the other documents provided by the UK authorities showed that the Gibraltar activities of the companies were limited and in general could not lead the tax authorities to conclude that income-generating activities had effectively taken place in Gibraltar. In other words, there was sufficient evidence that the activities that gave rise to the profits, did not take place in Gibraltar. Several rulings confirmed the non-taxation of passive interest, royalties and/or dividends which was consistent with the applicable tax provisions, since, at the time the tax rulings were granted, the applicable tax provisions did not provide for the taxation of royalties and passive interest income. As shown in recitals 145 to 147, appropriate justifications have been provided in relation to the other cases. The above conclusions are illustrated by the following examples, which reflect the various categories of business activity (covered by the 165 tax rulings) identified in the Decision to Extend Proceedings (66).

(133)

The first example relates to a ruling granted to a company providing management and consultancy services to hotels and casinos in Africa. The audit report concluded that the services were provided in Africa through staff employed by the company in Africa. The audit showed that the company carried on no trade activities in or from Gibraltar. The company's activity in Gibraltar was limited to basic administrative support provided by one single staff member in the role of an administrative secretary, without any significant activity being performed in Gibraltar. Such basic secretarial duties were not found to be income-generating activities in Gibraltar. This was corroborated by a site visit to the company's premises in Gibraltar, which were found to consist of an office facility exclusively laid out for hosting board meetings. Surveillance of the premises on other days by the tax authorities showed that the premises were not used for any other purposes. On that basis, the report concluded that the company was outside the scope of taxation in Gibraltar on account of the fact that no income accrued in or was derived from Gibraltar (as the company carried on no income-generating activities in Gibraltar).

(134)

In the second example, a ruling was granted to a company providing shipping brokerage services to customers on behalf of ship-owners. The audit confirmed that the services were performed in or from the group's various locations within London, Singapore, Australia or Monaco, without any income-generating activities taking place in Gibraltar. The audit did not find any evidence to indicate that the company had engaged in any activity in Gibraltar. On that basis, the audit report considered that the company did not have a presence or permanent establishment in Gibraltar other than its server. Accordingly, it concluded that the company was outside the scope of taxation in Gibraltar on account of the fact that no income accrued in or was derived from Gibraltar (as the company carried on no income-generating activities in Gibraltar).

(135)

The third example relates to a ruling granted to a company providing administrative and support services to a related Luxembourg company. The services were carried on by two of its Gibraltar resident directors. The company also held loans granted to various group companies located mainly in the Netherlands. The security and collateral for those loans was held outside Gibraltar (67). The investigative review carried out in 2015 concluded that the company had a physical presence in Gibraltar by virtue of the professional management services carried on by its resident directors, who make management decisions. Until 30 June 2013, the company was taxed on income resulting from administrative and support services only, as the inter-company loan interest was not taxable in Gibraltar (68) (in line with the passive interest exemption under ITA 2010). Since 1 July 2013, the company has been chargeable to tax on interest income too (Class 1A, Table C of Schedule 1 to ITA 2010) as a result of the amendment which brought inter-company loan interest into the scope of taxation under ITA 2010. The company has been fully regularised for all taxation purposes in Gibraltar since 1 July 2013.

(136)

By way of a fourth example, a ruling was granted to a company which, under a joint venture agreement, contracted with third parties established outside Gibraltar for the provision of advertising, marketing and promotional services in relation to remote gaming activities, including recognition and development of the brand. The company received a share of the revenues generated from the operation of the remote gaming business carried on in Malta by the counterparty to the joint venture agreement. The review, which included a site visit and a roving investigation undertaken by the Gibraltar tax officials within Gibraltar's financial business, banking and office accommodation sectors within Gibraltar, showed that the company did not have a physical presence or a permanent establishment in Gibraltar and that its corporate directors did not perform income-generating activities in or from Gibraltar. The report concluded that the company was outside the scope of taxation on account of the fact that no income accrued in or was derived from Gibraltar. The ruling was revoked by the Gibraltar tax authorities on 17 July 2015 since the company's representatives confirmed at the site meeting that they no longer had a relationship with the company.

(137)

In the fifth example, a ruling was granted to a company active in the procurement of petroleum products directly from refineries in Asia and in the subsequent storage, transportation and delivery of those products from the company's storage terminals located within Asia to customers in Italy, Greece, Israel and Turkey. The review showed that the company had no physical presence or permanent establishment in Gibraltar and that its sole director had not performed income-generating activities in or from Gibraltar. The review also found that, as shown by the website of the group of which the company was a part, the trading activity was carried on in various geographical locations through offices located in Hong Kong, the United Kingdom, Dubai, Oman and Afghanistan. On that basis, the review concluded that the company was outside the scope of taxation under section 11 of ITA 2010 on account of the fact that no income accrued in or was derived from Gibraltar.

(138)

In the sixth example, a ruling was granted to a company carrying on a trade in non-pharmaceutical medical and health related products from South Korea to Germany. The audit showed that the management and commercial decisions were outsourced to a person resident in Namibia. The audit also showed that the company's sole director residing in Gibraltar provided general consultancy services to the company and was not actively involved in the day-to-day trading activities undertaken by the company. No physical presence in Gibraltar could be identified on the basis of a site visit, a meeting with the company, responses to additional written questions and systematic checks carried out on the web. The investigative review considered that the company did not render a service in or from Gibraltar and therefore concluded that the company had no sources of income accruing in or derived from Gibraltar.

(139)

In the seventh example, the company engaged in the operation of internet games via a website. The company's income comprised charges received from end-users for non-basic features and rights, commissions received from betting trading under licence to third party providers and the sale of games-related products. Analysis of the available information showed that, until 1 January 2014, all activities were carried on outside Gibraltar. In particular, software development was performed by the company's subsidiary in another Member State, while the host server was located in Switzerland. The customer service function was carried out by three freelance individuals in another Member State and in a third country. The subscription fees were processed in the Netherlands. In this context, the investigative review considered that the company was not taxable on income generated until 1 January 2014 (69). Since 2 January 2014, the business has had a physical presence in Gibraltar, and it has income that accrues in and is derived from Gibraltar, it files full and complete returns of its income and is fully regularised for all taxation purposes in Gibraltar. The tax ruling was revoked in January 2014.

(140)

In the eighth example, the audit confirmed that the company carried on a trade in agricultural chemicals from Hungary, Belgium and Israel to customers in the Former Yugoslav Republic of Macedonia, Bosnia and Herzegovina, and Slovakia. After examination of all the documents filed by the company as well as additional information provided by the company in writing and in the context of a meeting with the company's representatives (and on the basis of other investigative functions), the audit found that no income-generating activities took place in Gibraltar (in the absence of any services rendered in or from Gibraltar or any activity performed in or from Gibraltar) and it therefore concluded that the company was outside the scope of taxation under section 11 of ITA 2010.

(141)

The ninth and final example relates to a ruling granted to a company chartering a luxury yacht (registered in the UK) in the British Virgin Islands. The business had a website which showed that the chartering was carried on in the Caribbean. The Gibraltar tax authorities' review showed that the company carried on no trade in Gibraltar and had no physical presence or permanent establishment in Gibraltar. It therefore concluded that there were no income-generating activities that rendered the company chargeable to tax under the territoriality principle. The ruling lapsed in October 2015 as the company had been struck off the Company Register by the Registrar of Companies in Gibraltar.

(142)

These nine examples are only illustrative. The Commission assessed the information and documents available in relation to all 160 rulings to make sure that the rulings were granted in conformity with the applicable tax rules in Gibraltar and that the activities carried on by the companies in question fairly reflected the activities described in the request for a ruling.

(143)

Out of those 160 tax rulings, 98 actually related to the territoriality principle (and the reviews made by the Gibraltar tax authorities found that no income-generating activities were carried on in Gibraltar). Accordingly, the revenues generated by the companies concerned did not in any event fall within the scope of the territorial system of taxation in Gibraltar.

(144)

In 34 cases, the addressees were in receipt of passive interest, royalties and/or dividends (70) and it appears that either their situations were regularised or their activities ceased after the 2013 amendments. However, to the extent the tax treatment of these companies is the result of the implementation of the aid scheme examined in section 7 of this Decision, the Commission refers to that section. Accordingly, any aid granted on the basis of these rulings (during the period preceding entry into force of the 2013 amendments) is treated in the operational part of this Decision as being part of the aid scheme identified in section 7.

(145)

In 19 cases, either the company was not incorporated, or the activities described in the tax ruling requests did not materialise, or the company was dormant. There was therefore nothing to tax in those cases and, regardless of the position taken by the tax authorities, the rulings could not involve the granting of any advantage to the companies concerned.

(146)

In four other cases, the rulings concluded that the relevant income accrued in and was derived from Gibraltar and was therefore taxable in accordance with section 11 of ITA 2010. In this regard, it is relevant to note that, in such cases, the audit reports by the Gibraltar tax authorities stressed that the tax rulings had been revoked as a result of legislative or material changes. It also appears that the revocations were not the result of the audits performed in 2015 but of earlier examinations, e.g. when the 2013 amendments in relation to interest and royalty income came into force. In other words, in these four cases, the relevant companies were liable to tax on their income accruing in or derived from Gibraltar.

(147)

The remaining five rulings relate to personal income tax issues such as the taxation of employees. Those rulings do not affect the level of taxation of the relevant companies and therefore do not fall within the scope of corporate income taxation.

(148)

The table in the Annex provides an overview of the Commission's findings in relation to the 160 unproblematic tax rulings, with reference to the categories described in this section. It shows that no case has been found where any of the rulings were inconsistent with the normal application of the Gibraltar tax system (71).

(149)

As a result, even if it had been found that the Gibraltar authorities had issued the 160 tax rulings without following any designated procedure or without conducting any substantive analysis at the time the rulings were granted, it would have had no impact in practice and would not have resulted in the granting of any advantage since the activities (or absence of activities) of the companies concerned did not generate income liable to tax in accordance with the Gibraltar income tax rules (72).

(150)

Accordingly, after having carefully examined the evidence provided by the UK authorities, the Commission has come to the conclusion that the 160 tax rulings reflected in a reliable manner what would have resulted from a normal application of the ordinary Gibraltar tax system, without involving any misapplication of the law or other indication of existence of State aid. It follows that the granting and implementation of such rulings does not raise any State aid issues (73).

(151)

The Commission investigation has shown that five rulings granted to Gibraltar corporate partners of Dutch limited partnerships (Commanditaire vennootschap or ‘CV’) did raise issues with regard to State aid rules.

(152)

The relevant rulings were granted in 2011 or 2012 and confirmed that royalties (and passive interest income to a lesser extent) generated at the level of the Dutch CVs was not taxable under ITA 2010. Those rulings remained in effect and were not revoked by the tax authorities either as a result of the amendments to ITA 2010 in 2013 that brought interest and royalties into the scope of taxation, or as a result of the audits carried out in 2015.

(153)

The situations referred to in the requests for ruling typically involved the following structure:

Limited partner 1 %

General partner 99 %

GIBCO2

Royalty

Licence

Dutch CV Holds IP rights

Dutch BV Exploit IP rights

GIBCO1

(154)

Under Dutch law, a CV is a limited partnership, which is generally considered a transparent entity for tax purposes and therefore not liable to corporate income tax in the Netherlands (74). Accordingly, the income of the CV is not taxed in the Netherlands at the level of the CV but at the level of the participants in the CV, according to their share in the CV. In other words, a tax liability in relation to the income of such CVs arises in the Netherlands only if one or more participants in the CV are Dutch resident persons or companies.

(155)

As to the tax treatment in Gibraltar, it appears from the UK submissions that, in the absence of specific rules in ITA 2010, Gibraltar applies common law principles and therefore considers Dutch CVs as transparent entities in accordance with the rules and case-law applicable in the UK (75). The relevant share of any income received by the CVs will therefore be deemed to be received directly by the Gibraltar companies with an interest in the Dutch CV.

(156)

In the absence of any bilateral tax convention between Gibraltar and the Netherlands, chargeability to tax in Gibraltar would in principle depend on whether the share of the relevant income generated by the Dutch CV fell within the scope of taxation under ITA 2010. As passive interest and royalty income was not subject to tax until June 2013 (in the case of passive interest) and January 2014 (in the case of royalty income), any such income received by the Dutch CV was not taxable at the level of the Gibraltar partners. By contrast, following the amendments to ITA 2010 which subjected royalty and passive interest income to tax irrespective of its source (Class 1A and 3A, Table C of Schedule 1 to ITA 2010), a correct application of the Gibraltar tax rules should have led the Gibraltar tax authorities to consider the relevant royalties (received as from 1 January 2014) and passive interest (received as from 1 July 2013) as taxable income at the level of the Gibraltar partners (76).

(157)

In their submission of 21 February 2018, the UK authorities confirmed that the Gibraltar Income Tax Office views Dutch CVs as tax transparent entities. However, they concluded that no taxation arises in Gibraltar since there is no specific provision in ITA 2010 that defines and prescribes how the Gibraltar partner should be taxed. The reason for this is that the definition of a ‘person’ in section 74 of ITA 2010 does not explicitly refer to Dutch limited partnerships and therefore no specific mechanism on how to tax income from participations held in a CV exists.

(158)

The Commission fails to understand the reasoning of the United Kingdom and the Gibraltar tax authorities for the following reasons. First, the relevant question is not whether Dutch CVs should be taxed in Gibraltar or not, but whether the corporate partners (resident in Gibraltar) of such CVs should be taxed on their share of the income generated by such CVs. Since CVs are considered transparent for tax purposes in Gibraltar (under common law principles), the corporate partners resident in Gibraltar should be taxed on their share of the CVs' income to the extent that the income falls within the scope of taxation under ITA 2010 (for interest income, that would be the case since 1 July 2013 and for royalties, since 1 January 2014) (77). The Commission expressed doubts on the reasoning put forward by the United Kingdom but did not receive any convincing arguments supporting its reasoning.

(159)

Second, even if the definition of a ‘person’ in section 74 were relevant for the cases in hand (in the Commission's view, this is the case for the relevant Gibraltar companies with interest in Dutch CVs only, not for the Dutch CVs as such), it must be noted that the definition in section 74 (78) is very generic and sufficiently broad to include a Dutch CV.

(160)

The beneficiaries of the five contested tax rulings are as follows:

(161)

The amount of profits made at the level of the CVs and the relevant shares of those profits assessable at the level of those five beneficiaries (in accordance with their respective interests in the CVs) for the period 2014-2016 (81) are as follows (82):

(162)

The relevant shares of the profit amounts referred to in the above table should have been incorporated in the assessable basis of the five Gibraltar companies and taxed in accordance with the normal Gibraltar tax rules.

(163)

As already outlined in recital 77, for a measure to be categorised as State aid, there must, first, be an intervention by the State or through State resources; second, the intervention must be liable to affect trade between Member States; third, it must confer a selective advantage on an undertaking and, fourth, it must distort or threaten to distort competition (83).

(164)

As regards intervention by the State or through State resources, the contested tax rulings were issued by the Gibraltar tax authorities, which are part of the Government of Gibraltar. The tax rulings amounted to an acceptance by those authorities of a particular tax treatment. On the basis of those rulings, the beneficiaries of the rulings have determined their corporate income tax liability in Gibraltar (for each tax year). Where the beneficiary was required to submit a tax return (84), the tax ruling has subsequently been used by the beneficiary to fill in its returns and these returns have been accepted by the Gibraltar tax authorities as corresponding to the beneficiary's corporate income tax liability in Gibraltar. Where there was no requirement to file a tax return because of the absence of assessable income as a result of the ruling, no tax liability arose either. Any tax advantage granted on the basis of the contested tax rulings is therefore imputable to Gibraltar.

(165)

As regards the financing of the measures through State resources, the Court of Justice has consistently held that a measure by which public authorities grant certain undertakings a tax exemption which, although not involving a positive transfer of State resources, places the said undertakings in a more favourable financial situation than other taxpayers constitutes State aid (85). In this case, the contested tax rulings confirm that the relevant share of the royalty and interest income generated by the Dutch partnerships is not taxable at the level of the Gibraltar resident companies with interests in those partnerships. Therefore, the tax treatment granted on the basis of the contested tax rulings can be said to reduce the corporate income tax liability in Gibraltar of the beneficiaries of those rulings and hence to give rise to a loss of State resources. That is because any exemption granted as a result of the contested tax rulings results in a loss of tax revenue that would otherwise have been available to Gibraltar in the absence of the exemption (86). Therefore, the measures are financed through State resources.

(166)

As regards the need for an effect on trade, the five companies benefiting from the contested tax rulings are part of multinational groups operating on various markets in several Member States, so any aid in their favour is liable to affect intra-Union trade. In the same vein, by providing favourable tax treatment to the relevant multinational group companies, Gibraltar has potentially drawn investment away from Member States that cannot or will not offer a similarly favourable tax treatment. Since the contested tax rulings strengthen the competitive position of the beneficiaries as compared with other undertakings competing in intra-Union trade, they must be considered as being liable to affect such trade (87).

(167)

Similarly, as regards the need for distortion on competition, a measure granted by a State is considered to distort or threaten to distort competition where it is liable to improve the competitive position of the beneficiary of that measure as compared with that of other undertakings with which it competes (88).

(168)

The UK authorities argue that there is no evidence that any of the tax rulings distorted competition. In their view, a measure can distort competition only in the sector in which it applies, or in some closely related sector. Such a distortion is not obvious from the Decision to Extend Proceedings as the tax rulings apply in a large number of different sectors.

(169)

The investigation has shown that the beneficiaries of the five contested tax rulings are all active in global markets such as paediatric nutrition, executive search, chemical products for consumers and industrial applications, in both several Member States and in third countries. These are all markets in which those beneficiaries face competition from other undertakings. The tax treatment granted on the basis of the contested tax rulings relieves the beneficiaries of a tax liability that they would have otherwise been obliged to bear in their day-to-day management of normal activities. Therefore, the aid granted on the basis of the tax rulings should be considered to distort or threaten to distort competition by strengthening the financial position of the beneficiaries in the markets in which they operate. By relieving them of a tax liability they would otherwise have had to bear, and which competing undertakings have to bear, the tax treatment granted on the basis of the contested tax rulings frees up resources which the companies could use, for instance, to invest in their business operations, to undertake further investments or to improve the remuneration of shareholders, thereby distorting competition on the markets where they operate. Therefore, the fourth condition for a finding of State aid is also fulfilled in this case.

(170)

As regards the third condition — the existence of a selective advantage — it must be recalled that the function of a tax ruling is to confirm in advance the way the ordinary tax system applies to a particular case given its specific facts and circumstances. However, like any other tax measure, the tax treatment granted on the basis of a tax ruling must respect State aid rules. As already explained in recital 127, where a tax ruling endorses a tax treatment that does not reflect what would result from a normal application of the ordinary tax system, without justification, the measure confers a selective advantage on its beneficiary insofar as that tax treatment improves the financial position of that undertaking in the Member State as compared with other undertakings in a comparable factual and legal situation, having regard to the objective of the tax system.

(171)

Whenever a measure adopted by a State improves the net financial position of an undertaking, an advantage is present for the purposes of Article 107(1) of the Treaty (89). In establishing the existence of an advantage, regard must be had to the effect of the measure itself (90). In the case of fiscal measures, an advantage may be granted through different types of reduction of an undertaking's tax burden and, in particular, through a reduction in the taxable base or in the amount of tax due (91).

(172)

The contested tax rulings granted in 2011 or 2012 confirmed that the royalty and passive interest income received by the Gibraltar companies through their interests in the relevant CVs is not taxable under ITA 2010. That tax treatment determined their corporate income tax liability in Gibraltar during the period covered by the contested tax rulings (92) and was thus able to provide a selective advantage.

(173)

Article 107(1) of the Treaty only prohibits aid ‘favouring certain undertakings or the production of certain goods’, that is to say, it prohibits measures conferring a selective advantage (93). As mentioned in recital 86, in order to assess selectivity, it is necessary to establish the reference framework and a derogation from it that is not justified by logic of the tax system.

(174)

Therefore, analysis of the existence of a selective advantage must begin by identifying the reference system applicable in the Member State or, in the case in hand, in the overseas territory in question. It is then necessary to determine whether the measure amounts to a derogation from that reference system, giving rise to a more favourable treatment as compared with other undertakings in a comparable factual and legal situation, having regard to the objectives of the system (prima facie selectivity) (94). Finally, a tax measure which constitutes a derogation from the reference system may nonetheless be justified if the Member State can show that that the measure results directly from the basic or guiding principles of that tax system (95). If that is the case, the tax measure is not selective.

(175)

As already explained in recital 89, a reference system comprises a consistent set of rules that generally apply on the basis of objective criteria to all undertakings falling within its scope, as defined by its objective.

(176)

With regard to the application of corporate income tax rules in Gibraltar, as already indicated in recital 90, the reference system is ITA 2010, the objective of which is to collect revenues from taxpayers that receive income accruing in or derived from Gibraltar. Section 7.1.3.1 defines the reference system in more detail.

(177)

Section 16(1) of ITA 2010 provides that, subject to the other provisions of ITA 2010, the assessable profits or gains of a company in Gibraltar for an accounting period shall be the full amount of the profits or gains of the company for that accounting period. In accordance with common law rules (96), when it comes to the profits or gains derived from a partnership (of which a Gibraltar company is a partner), it is necessary to consider the share to which the Gibraltar company is entitled in the profits or gains of the partnership and to assess such profits or gains in accordance with the provisions of ITA 2010, as though such share were profits or gains of the Gibraltar company.

(178)

As a second step, it is necessary to determine whether the measure derogates from the normal application of the rules of the reference system in favour of certain undertakings which are in a similar factual and legal situation to other undertakings, having regard to the intrinsic objective of the reference system.

(179)

In their comments on the Decision to Extend Proceedings, the Gibraltar Society of Accountants submitted that most of the rulings listed in that Decision were issued at a time when passive interest income was not assessable to tax under ITA 2010, and, therefore, the vast majority of the rulings could not give rise to any assessable interest income.

(180)

As already explained in recital 156, it is indeed the case that, at the time the tax rulings were granted, they were consistent with the applicable tax provisions, since the applicable tax provisions did not provide for the taxation of royalties and passive interest income.

(181)

Nevertheless, as established in section 7 of this decision, this exemption resulting from the legislation of Gibraltar was a State aid scheme. Therefore, the argument put forward by the Gibraltar Society of Accountants demonstrates that the tax treatment provided by these rulings was State aid. Indeed the application, in individual cases, of an aid scheme is an individual aid measure.

(182)

Furthermore, by allowing the beneficiaries of the rulings to continue to benefit from the rulings after entry into force of the 2013 amendments for interest and royalties, the Gibraltar tax authorities prolonged the existence of this scheme in five individual cases. Moreover, they have even failed to comply with the national rules. The prolongation of this favourable tax treatment is clearly a derogation from the ordinary tax system.

(183)

With regard to the period between 1 January 2011 (entry into force of ITA 2010) and the day preceding entry into force of the amendments for passive interest and royalties (30 June 2013 and 31 December 2013 respectively), the part of the tax rulings that concerned the exemption for passive interest and royalties merely confirmed the application of the tax provisions applicable at the time (97), i.e. that such income did not fall within the scope of taxation in Gibraltar. Accordingly, the exemption granted under the relevant tax rulings (during the period preceding the 2013 amendments) should therefore be considered as being part of the State aid identified in section 7.

(184)

As from 1 July 2013 and 1 January 2014 respectively, passive interest income and royalties have been part of the categories of income subject to taxation in Gibraltar (98). Accordingly, any exemption granted to the five Gibraltar companies on their share of the income generated by the Dutch CVs did not reflect the normal application of the ordinary tax system. The continued application of the tax rulings, even after the amendments that brought interests and royalties into the scope of taxation entered into force, and even after the audits performed by the Gibraltar authorities in 2015 to assess whether the tax treatment of the relevant companies complied with the applicable tax rules, gave rise to a selective advantage in favour of those five companies.

(185)

Even if the said exemptions were the result of a mere misapplication of the law through a de facto continuation of the previous exemption regimes and were not the direct result of the five tax rulings as such, it would not modify this conclusion since the effects of the measure would be the same.

(186)

In the light of the objective of the Gibraltar corporate income tax system (taxing income accrued in or derived from Gibraltar), the five companies concerned are in a comparable legal and factual situation to all corporate taxpayers (with income accrued in or derived from Gibraltar) subject to corporate income tax in Gibraltar. The tax rulings at issue relate to companies in receipt of royalty and passive interest income, which was liable to tax in all cases (subject to the GBP 100 000 threshold with respect to interest) after entry into force of the relevant legislative amendments. In that respect, no difference can be made with other companies in receipt of the same categories of income or in receipt of other categories of income subject to tax (including where such income is received through a fiscally transparent structure). The fact that the income was obtained through interests in Dutch CVs does not make a difference as the Gibraltar tax rules, which rely on common law principles in the absence of specific rules for the taxation of partnerships, provides for the taxation of such income at the level of the Gibraltar partners. Therefore, the tax treatment granted on the basis of the contested tax rulings confers an advantage on those five companies as compared to all other corporate taxpayers in receipt of income accrued in or derived from Gibraltar, the latter being in a comparable legal and factual situation in the light of the objective pursued by the Gibraltar corporate income tax.

(187)

In light of the foregoing, the Commission concludes that the advantages granted on the basis of the contested tax rulings are prima facie selective.

(188)

According to settled case-law, the concept of State aid does not refer to State measures which differentiate between undertakings and which are, therefore, prima facie selective, where that differentiation arises from the nature and the logic of the system, which it is for the Member State concerned to demonstrate (99).

(189)

A measure which creates an exception to the application of the general tax system may be justified by the nature and overall structure of the tax system if the Member State concerned can show that that measure results directly from the basic or guiding principles of its tax system or where it is the result of inherent mechanisms necessary for the functioning and effectiveness of the system (100). In that connection, a distinction must be made between, on the one hand, the objectives attributed to a particular tax regime, which are extrinsic to it, and, on the other hand, the mechanisms inherent in the tax system itself, which are necessary for the achievement of such objectives (101).

(190)

To the extent that the tax treatment of the five Gibraltar companies with interest in Dutch CVs is the result of the implementation of the aid scheme examined in section 7 of this Decision, the Commission refers to the part of that section dealing with the alleged justifications of this scheme.

(191)

Furthermore, neither the UK nor third parties have advanced any possible justification for the favourable treatment endorsed by the contested tax rulings in favour of the five Gibraltar companies with interest in Dutch CVs. The Commission recalls, in this respect, that the burden of establishing such a justification lies with the Member State. Therefore, in the absence of any justification advanced by the UK, the Commission must conclude that the tax advantage granted to the five beneficiaries of the tax rulings at issue cannot be justified by the nature or general scheme of the Gibraltar corporate income tax system.

(192)

In any event, the Commission has not been able to identify any possible ground for justifying the preferential treatment for the five companies concerned that could be said to derive directly from the intrinsic, basic or guiding principles of the reference system or that is the result of inherent mechanisms necessary for the functioning and effectiveness of the system (102).

(193)

Furthermore, the reasons invoked by the UK authorities for not taxing the income generated at the level of the Dutch CVs (i.e. that there is no specific provision in ITA 2010 that defines and prescribes how a Gibraltar partner of a Dutch CV should be taxed), do not conform with the applicable Gibraltar tax rules (and the applicable common law principles) and cannot be seen as a justification deriving directly from the intrinsic, basic or guiding principles of the reference system.

(194)

In conclusion, the tax advantage granted to the five beneficiaries of the tax rulings cannot be justified by the nature and logic of the system.

(195)

In the light of the foregoing, the Commission concludes that the tax advantages granted to the five companies identified in recital 160 on the basis of the contested tax rulings are selective in nature.

(196)

Since the tax treatment granted on the basis of the five contested tax rulings fulfils all the conditions of Article 107(1) of the Treaty, it must be considered that the non-taxation of royalty and interest income granted to the beneficiaries of the five tax rulings (as part of the 165 rulings identified in the Decision to Extend Proceedings) in receipt of such income through their interest in Dutch CVs constitutes State aid within the meaning of that provision, either on the basis of the assessment under section 7 of this Decision (with regard to the advantages obtained by the beneficiaries of the problematic tax rulings before entry into force of the 2013 amendments), or on the basis of section 8 (with regard to the advantages granted after entry into force of the 2013 amendments).

(197)

The Commission notes that all five Gibraltar companies benefiting from the contested tax rulings are part of large multinational groups. The Commission further notes that the group corporate set-up involving the Dutch CV, the Dutch BV and the Gibraltar partners, as illustrated in recital 153, benefits the owner of the Gibraltar partners (‘the parent company’). Instead of exploiting the IP rights itself, the parent company places the IP rights in a complex corporate structure (involving a Dutch company, a Dutch partnership and one or two Gibraltar holding companies) which allows the parent company to generate profits from the IP rights exploitation without those profits being taxed. Given the (fiscally) transparent character of the Dutch CV and the fact that the Gibraltar companies do not carry out any other activity than holding a participation in the Dutch CV, the ultimate beneficiary of the non-taxed profits stemming from the exploitation of the IP rights is the parent company.

(198)

For the purpose of the application of State aid rules, separate legal entities may be considered to form one economic unit. That economic unit is then considered to be the relevant undertaking benefiting from the aid measure. As the Court of Justice has previously held, ‘[i]n competition law, the term “undertaking” must be understood as designating an economic unit (…) even if in law that economic unit consists of several persons, natural or legal’ (103). To determine whether several entities form an economic unit, the Court of Justice looks at the existence of a controlling share and functional, economic or organic links (104). In the present case, the corporate set-up of the Dutch and the Gibraltar entities is established and fully controlled by the parent company for the purposes of IP rights exploitation and tax optimisation. Accordingly, this whole corporate structure, i.e. the Dutch BV, the Dutch CV, the Gibraltar partners and the parent company form a single economic unit and should all be seen as the undertakings benefiting from the aid measure.

(199)

Consequently, in addition to the Gibraltar corporate partners of the Dutch CVs who are the beneficiaries of the aid, the Commission considers also the Dutch BVs, the Dutch CVs, and the parent companies of the Gibraltar partners as benefiting from State aid granted on the basis of the contested tax rulings within the meaning of Article 107(1) of the Treaty.

(200)

The UK authorities as well as Gibraltar, the Gibraltar Society of Accountants and third parties representing some of the companies listed in the Decision to Extend Proceedings argue that the Decision to Extend Proceedings is based on an incorrect understanding of the applicable legal framework in relation to the tax ruling procedure. Although they acknowledge such misunderstanding is due to incorrect information provided by the UK authorities (the incorrect reference to section 42 of ITA 2010), the UK authorities and Gibraltar consider that it was that incorrect information that led the Commission to assume that it might be possible to regard tax rulings given since 2010 as ‘new aid’.

(201)

In this respect, it must be noted first that it was only after adoption of the Decision to Extend Proceedings that the United Kingdom and Gibraltar informed the Commission that the ruling practice was based on section 2 of ITA 2010. As section 2 does not explicitly grant the Commissioner the power to issue rulings, it was not obvious to the Commission that such a power resulted from the general powers to administer ITA 2010 set out in that provision.

(202)

Second, in the Commission's view, it is irrelevant for the purposes of the investigation procedure in this case whether the tax ruling practice was based on section 42 of ITA 2010 or on the general power of the Gibraltar Tax Commissioner to administer that Act. The Decision clearly identified the tax ruling practice and the 165 individual tax rulings to which it related. Hence the reference to section 42 of ITA (2010) cannot have misled any interested parties as to the measures that would be investigated in the formal investigation procedure.

(203)

More importantly, nowhere in that Decision is any reliance placed on the fact that there was no provision in ITA 1952 corresponding to section 42 of ITA 2010 as a reason to support the conclusion that the tax ruling practice and the 165 individual tax rulings constituted ‘new aid’.

(204)

The UK authorities also claim that the rulings are only part of a consistent practice which began long before the UK acceded to the European Communities in 1973. The practice was based on section 3(1) of ITA 1952, now reproduced in virtually identical form in section 2(1) and (2) of ITA 2010, which provides the Commissioner of Income Tax with a general power to ensure the due administration of the Acts for the assessment and collection of income tax in Gibraltar. Therefore, in the United Kingdom's view, if there were found to be any element of State aid, it would necessarily be ‘existing aid’, and not ‘new aid’. In addition, the economic, legal and financial effects of the rulings would have always been based on the Commissioner's understanding of the applicable law and the rulings before 2010 were substantially identical in every respect to the rulings given after enactment of ITA 2010. Similar comments were made by the Gibraltar authorities and the Gibraltar Society of Accountants.

(205)

The arguments from the United Kingdom and some interested parties assume that the Decision to Extend Proceedings relates to the practice of issuing tax rulings as such. The Commission disagrees with that assumption as it is clear from the wording of that Decision that it relates to the 165 tax rulings issued in the period 2011-2013 mentioned in the Annex to that Decision and to the tax ruling practice under ITA 2010 evidenced by those rulings. In the Decision to Extend Proceedings, the Commission took the preliminary position that the tax rulings constituted State aid because (i) they were given without there being a designated procedure for the request of information by the Gibraltar tax authorities; and (ii) the Gibraltar tax authorities refrained from a proper assessment of the companies' tax obligations, exercising their discretionary powers. The Commission also took the preliminary view that, in some cases, the Gibraltar tax authorities issued tax rulings that were inconsistent with the applicable tax provisions.

(206)

In order to succeed in claiming that the practice constitutes ‘existing aid’, the UK authorities or interested parties would have to establish that, before 1 January 1973, there existed a practice, amounting to a de facto aid scheme, of granting tax rulings that possibly misapply ITA 1952. The UK authorities have provided no indications that such a practice existed prior to the UK's accession.

(207)

Consequently, even if the pre-accession rulings were based on a general power of the Gibraltar Commissioner to administer the Income Tax Act, which has existed since 1953, they are clearly not part of the measures described in the Decision to Extend Proceedings. In this context, it must be underlined that the legal framework under which the aid was granted (ITA 2010) is substantially different from ITA 1952. The changes include the non-taxation of passive income under ITA 2010, and the repeal of the measures in favour of ‘exempt companies’ and ‘qualifying companies’, which existed under ITA 1952.

(208)

State aid is deemed compatible with the internal market if it falls within any of the categories listed in Article 107(2) of the Treaty and it may be deemed compatible with the internal market if it is found by the Commission to fall within any of the categories listed in Article 107(3) of the Treaty. However, it is the Member State granting the aid which bears the burden of proving that State aid granted by it is compatible with the internal market pursuant to Article 107(2) or (3) of the Treaty.

(209)

The UK has not invoked any of the grounds for a compatibility finding under either of those provisions for the State aid that it has granted on the basis of the contested tax rulings. The third parties have not invoked any such grounds either.

(210)

Moreover, since the tax treatment granted on the basis of the contested tax rulings relieves the relevant companies of a tax liability that they would otherwise have been obliged to bear in their day-to-day management of normal activities, the aid granted on the basis of those tax rulings constitutes operating aid. As a general rule, such aid is normally not considered compatible with the internal market under Article 107(3) of the Treaty in that it does not facilitate the development of certain activities or of certain economic areas. Furthermore, the tax advantages in question are not limited in time, declining or proportionate to what is necessary to remedy a specific market failure or to fulfil any objective of general interest in the areas concerned. Therefore, they cannot be considered compatible.

(211)

Consequently, the State aid granted to the relevant five companies by the Gibraltar tax authorities is incompatible with the internal market.

(212)

In the Decision to Extend Proceedings, the Commission expressed doubts not only in relation to the 165 individual rulings identified in the Annex to that Decision, but also more generally in relation to the tax ruling practice under ITA 2010. This was because the Gibraltar tax authorities seemed to misapply the provisions of the ITA 2010 on a recurrent basis. In that regard, the Commission expressed the preliminary view that the 165 tax rulings and the tax ruling practice of Gibraltar constituted State aid measures for the purposes of Article 107(1) of the Treaty and expressed doubts about their compatibility with the internal market.

(213)

While the Commission was justified in having doubts at the time that it opened the formal investigation procedure, it must be noted that the findings referred to in sections 8.3.1 and 8.3.2 are not sufficient to show the existence of an aid scheme based of the tax ruling practice in Gibraltar. In particular, such findings do not point to a recurrent practice of misapplying ITA 2010 through the granting of tax rulings.

(214)

Moreover, the legislative and regulatory amendments enacted by Gibraltar in relation to the tax ruling procedure, the territoriality principle and the anti-avoidance provision (see section 11 of this Decision), reduce the level of discretion of the Gibraltar tax authorities in the granting of tax rulings and in the enforcement of corporate income tax rules.

(215)

Accordingly, the Commission concludes that the tax ruling practice, as investigated in this case, does not involve the existence of an aid scheme.

(216)

According to Article 108(3) of the Treaty, Member States are obliged to inform the Commission of any plan to grant aid (notification obligation) and they may not put into effect any proposed aid measures until the Commission has adopted a final decision on the aid in question (standstill obligation).

(217)

The Commission notes that the United Kingdom did not notify the Commission of any plan to grant the passive interest and royalty income exemption or the contested tax rulings, nor did it respect the standstill obligation laid down in Article 108(3) of the Treaty. Therefore, in accordance with Article 1(f) of Regulation (EU) 2015/1589, the passive interest and royalty income exemption that existed under ITA 2010 and the tax treatment granted on the basis of the contested tax rulings constitute unlawful aid, put into effect in breach of Article 108(3) of the Treaty.

(218)

According to the Treaty and the Court's established case-law, the Commission is required to decide that the Member State concerned must abolish or alter aid if it has found that the aid is incompatible with the internal market (105). The Court has also consistently held that the obligation on a Member State to abolish aid regarded by the Commission as being incompatible with the internal market is designed to re-establish the situation previously existing (106).

(219)

The Court has established that that objective is attained once the recipient has repaid the amounts granted by way of unlawful aid, thus forfeiting the advantage which it had enjoyed over its competitors on the market, and the situation prior to payment of the aid is restored (107).

(220)

In line with the case-law, Article 16(1) of the Procedural Regulation states that ‘where negative decisions are taken in cases of unlawful aid, the Commission shall decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary […]’.

(221)

Thus, given that the measures in question were implemented in violation of Article 108(3) of the Treaty, and are considered to be unlawful and incompatible aid, the Member State should be required to recover the aid in order to re-establish the situation that existed on the market prior to the granting of that aid. Recovery should cover the time from when the advantage accrued to the beneficiary, that is to say from when the aid was put at the disposal of the beneficiary, until effective recovery has taken place, and the sums to be recovered should bear interest until effective recovery.

(222)

No provision of Union law requires the Commission, when ordering the recovery of aid declared incompatible with the internal market, to quantify the exact amount of the aid to be recovered. Rather, it is sufficient for the Commission's decision to include information enabling the addressee of the decision to work out that amount itself without overmuch difficulty (108).

(223)

In relation to unlawful State aid in the form of tax measures, the amount to be recovered should be calculated on the basis of a comparison between the tax actually paid and the amount which should have been paid in the absence of the preferential tax treatment.

(224)

In this case, in order to arrive at an amount of tax which should have been paid in the absence of the preferential tax treatment, the UK authorities should reassess the tax liability of the entities benefiting from the measures in question for each tax year for which they benefited from those measures.

(225)

Individual aid should be deemed to be put at the disposal of the beneficiary on the day that the tax foregone would have fallen due, for each tax year, in the absence of those measures.

(226)

The amount of tax foregone with respect to a specific tax year should be calculated as follows:

(227)

With regard to the aid granted through the passive interest and royalty income exemption, the United Kingdom and the Gibraltar authorities have argued that recovery is likely to be impossible for practical reasons, due to the mobile character of the funds of the companies in question, and the international law principle that courts of one State will not allow or enforce claims for taxes on behalf of another State. However, neither the United Kingdom nor the Gibraltar authorities have provided any proof of concrete difficulties in practice which could lead to the conclusion that it is absolutely impossible to recover the aid. Indeed, it is settled case-law that the condition that it be ‘absolutely impossible’ to implement a decision is not fulfilled where the Member State merely informs the Commission of the legal, political or practical difficulties involved in implementing the decision, without taking any real steps to recover the aid from the undertakings concerned, and without proposing to the Commission any alternative arrangements for implementing the decision which could have enabled those difficulties to be overcome (109). Consequently, the Commission concludes that the United Kingdom and the Gibraltar authorities have not demonstrated that it would be absolutely impossible to recover the aid granted through the exemption.

(228)

Any tax forgone as a result of the passive interest and royalty income exemption between 1 January 2011 and the day preceding the entry into force of the respective amendments which brought passive interest and royalties into the scope of taxation should be recovered to the extent that the income accrued in or was derived from Gibraltar (110).

(229)

As explained in recital 82, royalty income received by a Gibraltar company is deemed to accrue in and be derived from Gibraltar. The UK authorities should therefore be required to recover the tax foregone by any Gibraltar company which was in receipt of royalty income during the period between 1 January 2011 and 31 December 2013.

(230)

As regards passive interest income received by Gibraltar companies during the period between 1 January 2011 and 30 June 2013, in order to determine whether such income accrued in or was derived from Gibraltar, the UK authorities will need to apply the ‘situs of the loan’ rule described in recital 82, in line with the territoriality principle.

(231)

Where the UK authorities conclude that the passive interest income accrued in or was derived from Gibraltar, the tax foregone as a result of the non-taxation of that income should be recovered from the company in question.

(232)

The UK authorities should be required to abolish the practice of not taxing the share of each Gibraltar company identified in recital 160 in the royalty and passive interest income generated by the Dutch CV in which the company participates.

(233)

The UK authorities should further be required to recover the tax forgone by those five Gibraltar companies as a result of the non-taxation of their shares in the royalty and passive interest income generated by the relevant Dutch CVs.

(234)

The recovery should cover the tax foregone in the period between 1 January 2011 and the date when the UK authorities abolish the practice of not taxing the income of the Gibraltar companies resulting from their participation in the Dutch CVs as referred to in recital 232.

(235)

As regards the royalty income of the Gibraltar companies resulting from their participation in the Dutch CVs, the UK authorities should recover the amounts corresponding to the tax foregone in relation to such income during the whole period defined in the preceding recital.

(236)

As regards the passive interest income of the Gibraltar companies resulting from their participation in the Dutch CVs, the aid should be recovered from those Gibraltar companies as follows:

(237)

In the light of the observations in the recitals in section 8.3.2, the Commission considers that the United Kingdom should, in the first place, recover the unlawful and incompatible aid granted to the Gibraltar companies from those Gibraltar companies. Should it not be possible to recover the full amount of the aid from the relevant Gibraltar company, the United Kingdom should recover the remaining amount of that aid from other entities forming a single economic unit with that Gibraltar company, i.e. the relevant Dutch BV, the Dutch CV or the parent company of the Gibraltar company, so as to ensure that the advantage granted is eliminated and the situation previously existing on the market is restored through the recovery.

(238)

Although in most cases the granting of tax rulings falling within the scope of the formal proceedings did not result in the granting of State aid, the Commission investigation revealed certain weaknesses in the tax system operated in Gibraltar, which could be exploited by multinationals for tax planning purposes. In particular, it found that the territorial system of taxation operated in Gibraltar could create opportunities for cross-border tax planning (with a significant risk of non-taxation of the relevant companies' profits in both Gibraltar and the countries where the activities are actually performed). In addition, it found that the territorial system may potentially give too large a discretion to the tax authorities in the absence of clear guidelines on how the territoriality principle should be applied in practice.

(239)

Moreover, the investigation also brought to light some weaknesses in the procedure for the granting of tax rulings, in particular the absence of any designated procedure providing clear requirements for both the applicant and the tax authorities and the absence of adequate ex ante and ex post control procedures.

(240)

Finally, weaknesses were also identified in relation to the general anti-avoidance provision, including the transfer pricing rules, provided for in section 40 of ITA 2010 since application of the provision is conditional on the existence of an ‘artificial arrangement’.

(241)

None of those weaknesses constitutes State aid in their own right. However, in the absence of appropriate measures to address those weaknesses, the tax authorities may enjoy an excessive level of discretion in the enforcement of the rules, which may increase the risk of State aid being granted. In addition, those weaknesses have contributed to the doubts raised by the Commission in the Decision to Extend Proceedings.

(242)

With a view to addressing those weaknesses, the Gibraltar's Government has agreed to introduce legislative and regulatory changes in relation to their tax ruling procedure, the territoriality principle and the anti-abuse/transfer pricing rules. In the Commission's view, the changes, which were adopted in October 2018, constitute a significant step forward to improve transparency and reduce discretion in the application of Gibraltar's income tax rules.

(243)

The changes, that were published and adopted on 25 October 2018, can be summarised as follows:

(244)

Finally, it is also relevant to note that Gibraltar enacted an amendment of section 29 of ITA 2010 (114) to require all companies registered in Gibraltar to submit a tax return irrespective of whether the companies have income that accrues in and is derived from Gibraltar and irrespective of whether or not they apply for a tax ruling. The amendment came into effect on 1 January 2016.

(245)

The Commission finds that the United Kingdom has unlawfully implemented the passive interest and royalty income exemption scheme in Gibraltar, in breach of Article 108(3) of the Treaty. The Commission also finds that that scheme is State aid that is incompatible with the internal market within the meaning of Article 107(1) of the Treaty.

(246)

The Commission considers that the tax treatment granted by the Government of Gibraltar on the basis of the tax rulings in favour of five Gibraltar companies with interests in Dutch limited partnerships (Commanditaire Vennootschappen) in receipt of royalty and passive interest income constitutes individual State aid measures, which were unlawfully implemented in breach of Article 108(3) of the Treaty and which are incompatible with the internal market within the meaning of Article 107(1) of the Treaty.

(247)

The United Kingdom should be required to recover that State aid from the beneficiaries by virtue of Article 16 of the Procedural Regulation. The United Kingdom should also ensure that no additional aid is granted in the future to the beneficiaries or to any of their group companies as a result of the passive interest and royalty income exemption or the tax treatment set out in the contested tax rulings.

(248)

Since the United Kingdom notified on 29 March 2017 its intention to leave the European Union, pursuant to Article 50 of the Treaty on European Union, the Treaties will cease to apply to the United Kingdom from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification, unless the European Council in agreement with the United Kingdom decides to extend this period. As a consequence, and without prejudice to any provisions of the withdrawal agreement, this Decision only applies until the United Kingdom ceases to be a Member State,