The case relates to proposals notified to the Commission by the United Kingdom in August 2002 for a new corporate tax regime for Gibraltar. Under the plans, the government proposed to implement a new tax system setting a zero rate of corporation tax for all companies. The proposal would have removed corporation tax replacing it with new taxes targeted at company personnel and property occupation - which would have been capped at 15% of profits.

The ECJ said in its November 15 ruling that while in most cases the treatment of property and payroll taxes would not be subject to such corporate tax regime scrutiny, “due to the absence of other bases of assessment, combining those two bases of assessment excludes from the outset any taxation of offshore companies, since they have no employees and also do not occupy business premises”. Therefore, the ECJ found that “those criteria discriminate between companies which are in a comparable situation with regard to the objective of the proposed tax reform, namely to introduce a general system of taxation for all companies established in Gibraltar.”

Despite receiving Commission approval in 2003, in 2004 the Commission challenged the proposals on the grounds of 'material selectivity' - on whether the regime breached EU state aid rules by providing lower taxation to offshore companies over their onshore counterparts, and secondly - in a challenge led by Spain - over whether the regime was 'regionally selective', in that it provided for lower rates in Gibraltar than the United Kingdom, a line of inquiry which challenged Gibraltar's separateness from the United Kingdom.

Responding to the latest ruling, the Gibraltar government said on 'material selectivity' that the European Court of Justice has found the previous judgement from the European Court of First Instance to be erroneous. While the European Court of First Instance, now known as the General Court, ruled that regime did not breach EU State Aid Rules, the ECJ has now ruled that it did.

“Consequently, the Court concludes that the fact that offshore companies are not taxed in Gibraltar is not a random consequence of the regime at issue, but the inevitable consequence of the fact that both corporate taxes (in particular their bases of assessment) are specifically designed so that offshore companies avoid taxation. Thus, the fact that offshore companies avoid taxation precisely on account of the specific features characteristic of that group of companies gives reason to conclude that they enjoy selective advantages.”

While the ruling outlaws the previously proposed regime, the Gibraltar government said that this would have no adverse impact on the territory, “because the government in any case some time ago abandoned the Payroll Tax Scheme in favour of income tax of 10% for all companies”.

The second issue on “regional selectivity”, the government said, relates to the question whether Gibraltar has the right under EU law to have a different, lower tax system than the UK itself. “As the government has also previously said, this issue is huge for Gibraltar, since it goes to the very root of the viability of our socio-economic model”.

However, the government added that in its ruling "the ECJ has decided that it is not relevant or necessary for it to even consider this issue because the case before it is disposed of by its ruling on the material selectivity issue”.

Chief Minister, Peter Caruana said: “The General Court’s favourable ruling of December 2008, and the opinion of the Advocate General to the ECJ of April 2011 are the only judicial pronouncements on the question of regional selectivity and Gibraltar, and both robustly confirmed in our favour that the principle of regional selectivity does not apply to disentitle us from having a different and more favourable tax regime than the UK, of which we are not a region. This is the crucial issue for Gibraltar.”