The European Court of Justice [ECJ] judgement last September in the Azores Case, was widely welcomed as positive for Gibraltar’s own taxation case, which is still before the court.

The ECJ must decide whether a proposed new system to replace Gibraltar’s existing tax framework is compatible with EU rules on state aid.

In the Azores case, the court had to decide what criteria applied when assessing if a tax regime breached EU state aid rules on the grounds of regional selectivity.
In simple terms, the issue hinged on deciding whether or not the Azores, a Portuguese island territory, was entitled to have a different tax regime to that in place in mainland Portugal, and on what grounds.

A key issue in the reaching the ruling was the autonomy of the regional government in question.

The court upheld the three tests put forward in a reasoned opinion by its advocate general, in order to evaluate whether a regional tax regime is truly autonomous: institutional, procedural and economic autonomy.

This means that a regional tax regime must be approved by a public body with a considerable degree of autonomy and without the interference of the central government in the approval process, and that its financial impact must be borne by the autonomous government, without compensation from the state authorities.

For the Azores itself, the ECJ ruling was not good news.

The court ruled that the regional government of the Azores did not meet the requirement of financial autonomy, confirming the European Commission’s view that the tax rate approved by the islands’ authorities - a rate lower than that applicable in mainland Portugal – amounted to state aid.

But the arguments used to reach that decision, overrode the Commission’s automatic assumption that any regional tax incentives were selective and therefore potentially in breach of state aid rules, on the grounds that they did not apply the territory of the member state as a whole.

For Gibraltar – which enjoys, particularly in the light of the new Constitution, a vast degree of institutional, procedural and economic autonomy – the ECJ’s decision was thus good news.

Shortly after the ruling was published, the Gibraltar Government said it believed the court’s decision vindicated Gibraltar’s own arguments as to why it is entitled to have a separate and different tax regime to that of the UK.

This is the core issue in the Gibraltar case and the court is now likely to follow the precedent set in the Azores case.

“The judgement therefore confirms that the principles to be applied in deciding this issue, are the very principles upon which the Gibraltar Government’s case is based and pleaded,” the Gibraltar Government said at the time.

The Government is encouraged, in particular, by the fact that in para.68 of the judgement, the court sets out the principles to be applied, by upholding the UK Government’s arguments.”

“Those arguments are the same ones as both the Gibraltar and UK
Governments are making in the Gibraltar case.”

“This judgement is therefore extremely helpful to our case.”
Similar sentiments were expressed within the financial sector, not least by key players in the online gaming industry, one of the newest strands of Gibraltar’s economy.

Leading gaming company PartyGaming’s group Finance Director Martin Weigold told specialist UK magazine Accountancy Age, that the ruling had removed the risk that gaming companies based in Gibraltar would have to pay the full UK tax rate of 30%. ‘It’s effectively removed one of the risks associated with the replacement tax regime that will come into effect at the end of 2010,” he said.

“We expect a low-cost tax regime that’s non-discriminatory to take its place when the tax-exempt scheme is phased out.”