On Friday, the European Commission referred the United Kingdom to the European Court of Justice (ECJ) for failing to recover illegal state assistance obtained by Gibraltar companies.
In 2012, Spain expressed its displeasure with Gibraltar’s unfair taxation practises. The Commission opened an inquiry into the allegations the following year. Shortly after, the UK presented to the Commission an amendment to Gibraltar’s tax code that resolved the issue.
The Commission’s investigation was extended in order to ascertain the extent to which companies had benefited from the tax laws. The Commission concluded in 2018 that Gibraltar’s royalties and passive interest tax structure violated state assistance rules between 2011 and 2013.
State aid is explicitly prohibited by the Treaty on the Functioning of the European Union unless it is justified by reasons of general economic growth. The Commission has given Gibraltar until April 23, 2019, to take steps to recover the assistance that the beneficiaries have received. Gibraltar has only regained 20% of the assistance since then. As a result, the Commission has referred to the United Kingdom to the European Court of Justice.
Despite the United Kingdom’s exit from the EU, the Commission retains the right to bring them before a court. If the decision was made before December 31, 2020, the agreement governing the UK’s withdrawal from the EU allows the Commission to impose penalties for failures to comply with Commission decisions. While a two-year delay may seem excessive, it’s unclear how much of it is due to difficulties recovering aid, reluctance to recover aid or problems related to the pandemic and global economic crisis.