Take a one week trial to International Tax Review and find many more related articles.

The European Court of First Instance has annulled the veto imposed by the European Commission against the reform of corporate tax in Gibraltar.

The Commission first imposed the veto in 2004 following a formal investigation into Gibraltar's plans to implement a widespread corporate tax reform.

The reforms included the repeal of the former tax system, which operated a 35% corporate tax rate, and the imposition of three taxes applicable to all companies in Gibraltar: the registration fee, payroll tax and a business property occupation tax, with a cap on liability to payroll tax and business property occupation tax of 15% of profits.

The Commission was mainly concerned with Gibraltar's fiscal independence as an overseas territory of the UK.

European officials felt that these proposed rates were regionally selective since they provided for a system under which companies in Gibraltar would be taxed at a lower rate than those in the UK which the Commission felt direct contravened EU state aid rules.

"The Commission just did not think about it [the veto] and they completely missed the point," said Chris White, senior tax partner, Hassans International Law Firm in Gibraltar.

"We do not need to go cap in hand to the UK as we have a good financial situation and we regularly have a healthy budget surplus each year, so to think we need support from the UK is ridiculous.

"When we drafted these rules, the world was a different place and so we have begun drafting amended legislation following the decision."

The court upheld that the Gibraltar authorities that devised the tax reform have, from a constitutional point of view, a political and administrative status separate from that of the central government of the UK.

Speaking about the future of the lower rate corporate tax system in Gibraltar, White said: "We have no intentions of becoming the lepers of international tax planning. Gibraltar will always be a fair and safe tax centre. We are just positioning ourselves better in the tax flow system and we will soon see ourselves competing with other countries, like Ireland has done."

The judges decided that no comparison can be made between the tax system applicable to companies established in Gibraltar and that applicable to companies established in the UK for the purpose of establishing a selective advantage favouring the former.

Chief Minister of Gibraltar, Peter Caruana, said: "This is a huge and vital victory for Gibraltar. A threat to our economic, social, and thus political wellbeing, has, once again, been successfully seen off.

The European Commission has two months to lodge an appeal, which will be limited to points of law.

Visit www.internationaltaxreview.com to follow updates on this story.

Take a one week trial to International Tax Review and find many more related articles.