The European Commission has announced it will take the United Kingdom to the European Court of Justice, in a case concerning illegal state aid to Gibraltar paid out when the country was still a member state of the EU.
In December 2018, the Commission issued a decision stating that the tax regime in Gibraltar, which involved an exemption for passive interest and royalties, constituted illegal state aid. And it ordered the UK to recoup the sum of €100 million which it had wrongly failed to levy.
Under EU law, state aid to industry is considered to distort competition in the EU as a whole, and must be recouped for that distortion to be removed.
“The aid granted by Gibraltar in the form of corporate tax exemption for passive interest and royalties gave an unfair advantage to some multinational companies and had to be recovered by the United Kingdom and the Gibraltar authorities,” Commission vice-president Margrethe Vestager, in charge of competition policy, said.
“However, more than two years after the Commission adopted this decision, the aid has still not been recovered in full, and sufficient progress has not been made in restoring competition. That is why we have decided to refer the United Kingdom to the Court of Justice for failing to implement this decision.”
It may seem odd for a country that is no longer a member of the EU to be ordered before one of its institutions by another one. And in fact, the UK made many protests during the Brexit negotiations of how it would refuse to be bound by the decisions of the Court after it had left the Union.
But the truth, like the devil, is in the detail.
Under Article 95(1) and Article 87(2) of the Withdrawal Agreement signed by the UK, the Commission is entitled to bring the United Kingdom to the Court of Justice for failing to implement a Commission decision taken before the end of the transition period, meaning before 31 December 2020.
If the Court rules against the UK, as it likely will, the government of Boris Johnson will be forced to recover the unfair funds in full. Four companies are concerned, two of which have paid back the aid, while the other two continue to fight back, having already paid an estimated 20% of the sums owed. The UK government, meanwhile, has suspended all orders to pay.
Should London continue to refuse to follow the Court’s order, the next option under the Withdrawal Agreement would be some sort of sanction on the part of the EU.
Commissioner Vestager’s decision was released today at lunchtime. The UK government has yet to react.