On 24 October 2019, Advocate General (AG) Hogan issued his opinion on case C-458/18 and considered that companies incorporated in Gibraltar should not enjoy the benefits of the EU parent-subsidiary directive (2011/96/EU), in particular the dividend withholding tax exemption.

In the case, a Bulgarian company (BulCo) distributed dividends to its parent company incorporated in Gibraltar (GibCo) free of withholding tax in accordance with Bulgarian domestic tax provisions transposing the EU parent-subsidiary directive. The Bulgarian tax authorities disagreed with this treatment, concluding that withholding tax on dividends distributed to the Gibraltar company should have been applied.

AG's reasoning

The Bulgarian company argued that EU law was applicable to GibCo due to the special status of Gibraltar, considered as a European territory whose external relations are under the responsibilities of the United Kingdom (UK).

Thus, the GibCo had to be assimilated to a company incorporated in the UK and the corporation tax in Gibraltar equated to UK corporation tax, both companies and taxes being listed in Annex I of the EU parent-subsidiary directive.

On the contrary, the Bulgarian tax authorities considered that the list of companies and taxes referred to in Annex I of the EU parent-subsidiary directive was exhaustive and could not be extended to companies incorporated in Gibraltar and liable to tax there.

In substance, the European Court of Justice (ECJ) must determine whether the expressions contained in the EU parent-subsidiary directive "companies incorporated under the law of the United Kingdom" and "corporation tax in the United Kingdom" also cover companies incorporated in Gibraltar and corporation tax paid in Gibraltar respectively.

In his opinion, AG Hogan concluded that companies incorporated in Gibraltar and subject to Gibraltar's corporation tax should not be considered as covered by the EU parent-subsidiary directive.

To arrive at this conclusion, AG Hogan first reminded us of the case law in Gaz de France - Berliner Investissement dated 1 October 2009 (C‑247/08), where the ECJ ruled that the fundamental principle of legal certainty precludes the list of companies referred to in Annex I of the EU parent-subsidiary directive to be interpreted as merely an indicative list.

Indeed, in the case law of Gaz de France - Berliner Investissement, the ECJ ruled that a company under French law in the form of a "société par actions simplifiée" (SAS) could not be considered as a "company of a Member State" within the meaning of the EU parent-subsidiary directive (prior to its amendment of 22 December 2003), this form not being expressly mentioned in the exhaustive list of companies provided by the said directive.

In addition, AG Hogan emphasized in his opinion the observations made by the UK Government, according to which companies incorporated under UK law cannot extend to Gibraltar companies and UK law does not consider equivalent tax paid in Gibraltar to constitute "corporation tax in the UK."

AG's opinion versus the European Commission's position

It is interesting to note that the European Commission (EC) has always considered that the EU parent-subsidiary directive applies to Gibraltar. The EC recently confirmed this view in its answer made on
30 November 2016 regarding a petition (0358/2016) filed by a company formed in accordance with Gibraltar law which questioned the omission of the companies subject to Gibraltar law from the list contained in the EU parent-subsidiary directive.

The EC acknowledged that the failure to mention Gibraltar specifically in the EU parent-subsidiary directive was of no importance, since it is accepted that the obligations created by the latter directive apply to the whole territory of the EU. Thus, the EC stated that the terms of the directive had to be interpreted in such a way as to give its effect in the EU territory, in particular by understanding the reference to the UK to include territories for whose external relations that Member State is responsible, i.e., Gibraltar.

Hence, the EC concluded that the expression "companies incorporated under the law of the UK" is to be construed as including companies incorporated under the law of Gibraltar and "corporation tax in the UK" had to be read as including the corporation tax levied in Gibraltar.

Conclusions

Where the ECJ would follow the opinion of AG Hogan, the Luxembourg tax authorities would have to treat companies incorporated in Gibraltar as not covered by the EU parent-subsidiary directive and would therefore deny the domestic withholding tax exemption on dividends distributed by Luxembourg companies to their parent company located in Gibraltar.

Since the Luxembourg rules are pretty similar regarding the treatment for dividend income and capital gains, the Luxembourg tax authorities would also deny the exemption for corporate income tax and municipal business tax purposes. In the same vein, participations held in companies located in Gibraltar would not benefit from the net wealth tax exemption anymore.

At this stage, AG Hogan's opinion does not trigger any legal effect, meaning that the EU parent-subsidiary directive should still apply to companies incorporated in Gibraltar. As such, the final decision to be rendered in the coming months by the ECJ will have to be carefully scrutinized.

Our Baker McKenzie Luxembourg tax experts would be happy to assist you should you require any further information.

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