Good Prospectsfor Finance Sector

As more and more European Union finance directives come into play — and several are expected to be fully implemented by early next year — sweeping changes are expected across Europe's financial services industry. Optimistic as ever that bureaucratic red tape and obfuscation will overcome traditional economic forces, Brussels believes that its measures will not only open cross-border financial markets but also level the playing field.

And Gibraltar can certainly benefit from many of the new openings. As Gibraltar Bankers' Association president Roy Clinton told last month's symposium on "Innovations in Banking":

"We cannot ignore these devel opmentsand we have to keep up to ensure our passporting rights into Europe.These rights are a competi tive edge over other jurisdictions such as the Channel Islands and we have to protect them at ail costs. Indeed we could perhaps do more to use those hard-earned rights by promoting Gibraltar as a springboard to branch and pass port services into Europe."

And our financial services pros pects DO look good. In the past year bank deposits and other li abilities have increased by more than £1 billion or 18.7per cent, following a similar increase the previous year. Cash, loans and other assets have also increased in aggregate by the same amount. And though only one new banking licence was issued last year, ten insurance related licences were granted and with a further five so far this year have brought the total in the fast-growing sector to 88.

Only one darker cloud still hovers on the horizon — Gibral tar still awaits the outcome of our challenge to the EC ruling on aspects of the proposed new tax system. However that cloud could be dispelled in the light of two recent judgments delivered by the European Court of Justice. Jointly they serve to consolidate Gibraltar's position as a centre offering tax efficient solutions to international clients, according to Clotilde Briquet, an associate practising commercial and tax law at Hassans.

In a paper prepared for the inter national law firm. Briquet draws attention to a judgment handed down in September confirming Portugal's right to make separate tax arrangements in respect of the Azores without infringing EU State Aid rules. The case is significant because, in a parallel action, the Commission is ques tioning Gibraltar's right to have a corporate tax structure different to the UK's.

Although the Azores relation ship with Portugal is different from that of Gibraltar and Britain the legal portents are good,Briquet

Although the European Court's decision on Gibraltar's case is not expected until later next year. Bri quet believes it fair to say that the Azores judgment "paves the way for the introduction in Gibraltar of a new corporate tax code to replace the exemptcompany regime which is in the process of being phased out as a result of pressure from Brussels".

The second judgment — part of a wider series of litigation be tween Cadbury Schweppes and the British taxman — answers a reference for a preliminary ruling from the UK Special Commission ers of Income Tax. "The case is significant because is casts light on the circumstances in which international clients can shop for jurisdictions offering a favourable tax regime without being penalised for it by the home jurisdiction," Briquet writes.

Cadbury Schweppes pic, through its subsidiary Cadbury Schweppes Overseas Ltd, held the entire shares in Cadbury Schweppes Treasury Services Ltd and Cadbury Schweppes Treasury International Ltd — both of which were incorporated in Ireland and subject to the Irish Financial Ser vices Centre's 10 per cent corporate tax rate.

In their question to the court,the Special Commissioners wanted to know whether certain articles in the EC Treaty precluded national tax legislation from imposing a charge on a company resident in that State in respect of the profits of a subsidiary resident in another member State and which was sub ject to a lower level of taxation,

In a landmark ruling, the court held that an EU national cannot be deprived of his rights under the Treaty simply because he seeks to profit from certain tax advantages. Similarly, a company cannot be deprived of its rights of establish ment under the Treaty just because it seeks to benefit from a favourable tax regime. Such behaviour would not itself constitute abuse of that freedom, the court ruled.

And it went on to say that any advantage resulting from low tax to which a subsidiary company established in a member Slate other than that in which the parent com pany was incorporated could not authorise the parent company's member State to offset that advan tage by less favourable tax treat ment of the parent company.

The court, however, added a qualification that less favourable tax treatment could be justified where the company's tax arrange ments were "artificial" and aimed at avoiding the effects of national legislation. "Even then, the less favourable treatment must be proportionate and not go beyond what is strictly needed to achieve the overriding policy purpose of avoiding tax forum shopping," Briquet explains.

"Unfortunately,the court did not go on to elucidate on what sort of arrangements it would consider 'artficial'. It simply points to the extent to which the company in question has a physical presence in the favourable tax jurisdiction, and carries on genuine economic activities there."

The significance of thisjudgment for Gibraltar is clear. Investors wishing to benefit from, for ex ample, the Parent and Subsidiary Directive by using Gibraltar's favourable tax regime can now safely doso without fearing penal ties from home jurisdictions pro vided their presence in Gibraltar is not "artificial" and that they are carrying on "genuine economic activities".

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