CJEU rules on the application of the EU Parent Subsidiary Directive to companies incorporated in Gibraltar

April 7, 2020 | Blog

On April 2, 2020 a decision (C-458/18) of the Court of Justice of the European Union (“CJEU”) on the preliminary question introduced by Bulgarian authorities decided that Gibraltar companies are not covered by EU Parent Subsidiary Directive (“EU PSD”).

Facts of the case

GVC Services is a Bulgarian limited liability company providing IT services. Until February 1, 2016 GVC Services was wholly owned by PGB Limited, a Gibraltar tax resident company.

The issue at hand was triggered with respect to dividend distributions made between July 13, 2011 and April 1, 2016 by GVC Services to its sole shareholder PGB Limited. GVC Services considered that the distributions to PGB Limited benefited from the exemption from withholding tax by application of the EU PSD. The EU PSD provides for an exemption from withholding taxes under several conditions, amongst others, that dividends are distributed to an entity included in the exhaustive list provided in Annex I, Part A to the EU PSD. As Gibraltar entities are not explicitly listed in that annex, the Bulgarian tax authorities denied the exemption and requested payment of withholding tax, as well as a fine for late payment.

The following preliminary questions with respect to the application of the EU PSD to Gibraltar entities were introduced before the CJEU by the Bulgarian tax authorities:

  1. Does the provision of the EU PSD regarding “companies incorporated under the law of the United Kingdom” also cover companies incorporated in Gibraltar?
  2. Does the expression within the EU PSD “corporation tax in the United Kingdom” also covers the corporation tax that has to be paid in Gibraltar?’

The CJEU, following the reasoning provided by Advocate General Hogan (AG) in the opinion from October 24, 2019, concluded that both questions should be answered in the negative.

Legal background

Based on Article 355(3) of the Treaty of the Functioning of the European Union (TFEU) the provisions of European Treaties are to apply to European territories for whose external relations a Member State is responsible. Gibraltar is a European territory for whose external relations the United Kingdom is responsible, and therefore EU law is applicable to that territory pursuant to Article 355(3) TFEU. However, by way of derogation, on the basis of the 1972 Act of Accession, EU acts (including legislative acts) do not apply to Gibraltar in certain areas of EU law. More particularly, the common agricultural policy and the acts on the harmonization of legislation of Member States concerning turnover taxes do not apply to Gibraltar and Gibraltar does not form part of the EU customs territory. These limitations are, however, to be interpreted in a narrow manner so as to leave out of their scope the provisions that are strictly necessary for Gibraltar to safeguard the interests which these provisions allow Gibraltar to protect.

According to the opinion of the AG, the purpose of the EU PSD, which can be summarized as exempting dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and to eliminate double taxation of such income at the level of the parent company, does not fall under the exemption on basis of safeguarding the interest of Gibraltar.

In addition, the CJEU concluded that the two questions asked should find their response in the UK domestic interpretation of the phrase “companies incorporated under the law of the United Kingdom” as included in Annex 1 Part A to the EU PSD and “corporation tax in the United Kingdom” as included in Annex I, Part B, to the EU PSD.

The Government of the United Kingdom confirmed in their written observations that “companies incorporated under the law of the United Kingdom” should not be interpreted as including companies incorporated in the territory of Gibraltar. In addition, the United Kingdom Government confirmed that taxes levied by Gibraltar do not constitute “corporation tax in the United Kingdom”.

Based on the above, the CJEU concluded that entities incorporated in Gibraltar do not fall within the scope of the EU PSD and therefore do not benefit from the exemptions provided therein.

Practical impact

As a consequence of the CJEU decision, Luxembourg companies can no longer claim an exemption from tax on income and gains derived from Gibraltar subsidiaries and/or distributions made to Gibraltar shareholders on the basis of the EU PSD. Most investments including a company resident in Gibraltar may have already been reorganized in light of BEPS and Brexit. However, for those that are still in place, the impact of the CJEU decision will need to be analyzed.

The AKD tax team is happy to discuss any potential outcome of this decision and the most optimal solution going forward.

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