Gibraltar: Rule preventing double taxation of amounts recovered as unlawful state aid may be applied (CJEU judgment)
Gibraltar tax authority may apply a domestic rule to prevent double taxation of amounts recovered as unlawful state aid
Rule preventing double taxation of amounts recovered as unlawful state aid may be applied
The Court of Justice of the European Union (CJEU) today issued a judgment that the Gibraltar tax authority may apply a domestic rule to prevent double taxation of amounts recovered as unlawful State aid.
The case is: Fossil (Gibraltar) (C-705/20)
Background
As explained in a release [PDF 109 KB] from the CJEU:
- Following a formal investigation procedure into the corporate income tax regime in Gibraltar, the European Commission (EC) made a decision that the tax exemption regime applied by Gibraltar between 2011 and 2013 to passive interest income and royalty income selectively favored certain types of companies and therefore constituted unlawful State aid. In order to comply with that decision, Gibraltar amended its domestic law to permit retroactive taxation of royalty income generated between 2011 and 2013.
- The taxpayer, a Gibraltar subsidiary of a U.S. company engaged in fashion design and manufacturing, benefitted from a tax exemption on its royalty income between 2011 and 2013 under a domestic rule providing relief in respect of foreign taxes paid because that income was also subject to tax in the United States at a rate of 35%. However, after the EC’s decision, the Gibraltar tax authority refused to grant the taxpayer that exemption.
- The taxpayer brought an action before the Income Tax Tribunal of Gibraltar, and the tribunal decided to stay the proceedings to ask the CJEU whether the EC’s decision precluded the Gibraltar tax authority from granting tax relief under the rule providing relief in respect of foreign taxes paid.
CJEU judgment
The CJEU found that the EC’s decision does not preclude the Gibraltar tax authority from applying an applicable rule that prescribes a mechanism for the set-off of foreign taxes paid by a taxpayer against taxes that it is liable for in Gibraltar.
The CJEU stated that a measure seeking to avoid double taxation by prescribing a mechanism for the set-off of foreign tax paid by a taxpayer falls, in principle, within the scope of the fiscal autonomy of the Member States and cannot, unless it is established that it is based on discriminatory parameters, be classified as prohibited State aid.
Read a September 2022 report prepared by KPMG's EU Tax Centre
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