As noted in the EC release, special attention will focus on the exemption allowed for passive income—including dividends, interest, and royalties—from corporate tax in Gibraltar.
Gibraltar’s corporate tax system, introduced by the Income Tax Act 2010, is based on the territorial principle—all activities deriving from or accrued in Gibraltar are taxed. However, there is an exemption for passive income (i.e. dividends, royalties, and certain types of interest) from tax in Gibraltar regardless of the source of the income.
In June 2012, the EC received a complaint from Spain about these provisions, and a claim that the system granted a selective advantage to offshore companies through the combined effect of the territorial system and the tax exemption for passive income.
Possible state aid?
The EC considers that the tax exemption for passive interest and royalty income may involve state aid because this treatment departs from the general corporation tax system.
The regime could grant a special advantage to the particular group of companies that produce this type of income. Unlike for dividends (the exemption of which can be justified by the need to avoid double taxation), the EC has found no valid justification for an exemption.
Effect of repeal
Gibraltar repealed (as of 1 July 2013) the exemption for inter-company loan interest, whether from Gibraltar or abroad. Despite this change, the EC stated it must examine whether the passive interest exemption was in breach of the state aid rules during the period when it was effective.