Gibraltar: Is the game up?
The EU has demanded the UK phase out tax breaks for companies in Gibraltar. Graham Keeley reports on the implications for the Rock.
The Rock's tax haven status is about to end
The European Commission has called on the British government to phase out a tax break for offshore companies based in the Rock by 2010.
The EC said the practice flouted EU competition rules and gave the UK a month to agree or else face possible legal action.
Under Gibraltar's Exempt Company programme, more than 8,000 offshore firms do not have to pay income tax.
*quote1*Instead, they pay a small fee. The scheme is the life- blood of Gibraltar.
While Gibraltar only gets a fixed annual payment of between GBP 225 and GBP 300 from each company, the programme has encouraged some 8,500 overseas companies to invest in the British territory on the southern tip of Spain.
The presence of these companies has helped fuel Gibraltar's service economy.
Companies qualify if they register in Gibraltar but do not conduct any business there or have any Gibraltarian shareholders.
*sidebar1*Other firms trading in the territory must pay a standard 35 percent tax on their profits.
"This advantage is clearly selective, is financed from state resources, and is liable to distort competition," the European Commission said in a statement.
"The regime satisfies none of the criteria set out in (EU law) under which state aid may be authorised," it said.
Commission spokesman Jonathan Todd said he was confident that the UK government would stop the programme.
"We are now very optimistic that this measure will be withdrawn once and for all," he said.
Under the Commission's direction, the Exempt Company scheme will close to new entrants in July 2006 before being withdrawn in 2010.
So what does this mean for Gibraltar?
Perhaps surprisingly, Gibraltar's First Minister Peter Caruana does not believe this ruling will be a disaster for the colony.
He told the Gibraltar Chronicle it represented a "reasonably good arrangement which avoids the worst consequences for Gibraltar".
Caruana explained the ruling allowed "absolute legal certainty to exempt companies compared to what the position would be if we had not reached any agreement".
He said the worst case scenario would have been if the tax haven status had been abruptly terminated by Brussels.
In Madrid, the news was warmly received, making front page stories in most Spanish dailies.
Gibraltar First Minister Peter Caruana (right) with Foreign Secretary Jack Straw
El Pais newspaper reported last year that Gibraltar is the fifth biggest investor in Russia, claiming that many organised criminals, who live on the nearby Costa del Sol, do shady financial deals through Gibraltar.
After last Friday's ruling, Spain's Economy Minister Pedro Solbes said he would have liked it if the ruling had been more restrictive, but added it was "better than nothing".
The move comes amid a period of change for the Rock, which has been a British territory since 1713.
*quote2*While Spain still wants to regain sovereignty over the territory, this is almost universally opposed by the people of Gibraltar, who in a 2002 referendum voted 99 percent in favour of remaining solely British.
Hostility between Spain and Gibraltar has seemed a permanent fixture.
Relations reached a new low last August when Gibraltar celebrated its 300th anniversary and Princess Anne and British Defence Minister Geoff Hoon visited the colony.
The visit sparked a full-scale diplomatic row with Madrid.
But then the Spanish government, led by prime minister Jose Luis Rodriguez Zapatero, launched a charm offensive, designed to take the chill out of relations with the residents of