On 2 April 2020, the European Court of Justice (“ECJ”) rendered its judgment in the case ‘GVC Services (Bulgaria)’ (C-458/18) following a preliminary ruling requested by the Sofia Administrative Court in Bulgaria (Administrativen sad Sofia-grad) addressing the question of Gibraltar within the European Union (“EU”) and more particularly whether Gibraltar companies could rely on Article 2 of the EU Parent-Subsidiary Directive (2011/96/EU) (“PSD”) as further amended, together with its Annex I. The ECJ’s ruling was long awaited after Advocate General (“AG”) Hogan had given his opinion on this case on 24 October 2019 (please refer to the article in our January newsletter).
The request for a preliminary ruling before the ECJ relates to the distribution of dividends free of withholding tax from a Bulgarian subsidiary to its parent company established in Gibraltar (”GibCo”). The Bulgarian distributing company applied the withholding tax exemption of the PSD as implemented in Bulgarian law, arguing that GibCo should be considered as a foreign legal person resident for tax purposes in a Member State of the EU. Such interpretation was rejected by the Bulgarian tax authorities and subsequently challenged before the Administrative Court of Sofia, Bulgaria, which decided to refer the questions to the ECJ for a preliminary ruling.
The questions referred to the ECJ entailed whether the PSD can be interpreted as to apply to GibCo, being established in Gibraltar, a European territory whose external relations are under the responsibility of the United Kingdom, an EU Member State at that time. Since Gibraltar companies are not listed in Annex I to the PSD, the question was thus whether it could rely upon the provisions of Annex I related to the United Kingdom. As far as the United Kingdom is concerned, GibCo must (i) be categorised as falling under the title ‘companies incorporated under the law of the United Kingdom’ (forms of companies – Part A) and (ii) be subject to ‘corporation tax in the United Kingdom’ (taxes covered - Part B).
JUDGMENT OF THE ECJ
In its ruling, the ECJ followed the advocate general (“AG”) Hogan’s opinion by clarifying that Article 2 of the PSD, together with its Annex I, are to be interpreted as meaning that the terms ‘companies incorporated under the law of the United Kingdom’ and ‘corporation tax in the United Kingdom’ do not refer to companies incorporated in Gibraltar and subject to tax there.
However, in contrast to AG Hogan, the ECJ refused to carry out an analysis of the Bulgarian law in light of the EU freedom of establishment principle. The Bulgarian law distinguishes between dividends paid by a subsidiary to its parent company located in an EU Member State, which are free of withholding taxes and payments made to a parent company located in Gibraltar, which are subject to withholding taxes on the sole ground that the parent company is incorporated in Gibraltar.
With its judgment, the ECJ has thus, once again, interpreted the PSD strictly, however without specifying whether the Bulgarian law violated the EU freedom of establishment.