Although it may be as long as three months before Gibraltar learns whether or not its tax case against the European Commission has been successful, this week's four and a half hour hearing of oral evidence before the European Court of Justice in Luxembourg has strengthened a sense of quiet optimism about the outcome among the Government's legal team. A ruling in Gibraltar's favour will open the door to a new tax structure that, it is widely believed, will see the application of an across-the-board company tax in the vicinity of 10 per cent.

Initially Gibraltar had hoped that the court's decision would be handed down within weeks - in time for the new tax structure to be incorporated in the budget for the 2007-08 fiscal year beginning in July, but an unexpected intervention by Spain not only lengthened the oral proceeding but will have added to the deliberations of the five judges, so lengthening the wait for their decision.

The introduction of the new tax structure – details of which were prepared some time ago – could be delayed "until the last minute", so that if the decision was handed down in early June there would still be time for Chief Minister, Peter Caruana QC (who, incidentally, attended Wednesday's oral hearing) to introduce proposals for the new corporate tax structure which will compete favourably with those of other "low tax" jurisdictions.

If Gibraltar gets the court's green light in time, the 2007 Budget also is expected to significantly reduce Gibraltar's personal tax levels, as well as setting up the new corporate regime. If, however, a decision is not made in time for the Budget, the Gibraltar Government will have to reconsider its taxation plans – and postpone the introduction of new structures for another year, Mr Caruana has indicated.

Spain's intervention at the oral hearing focused on the issue of material selectivity which relates to the form of the actual tax reform plan. Madrid is understood to be concerned with the possible effect of any court ruling on tax regimes already operated in areas of Spain such as the Basque homeland.

Significantly, a favourable ruling also will remove much of the uncertainty which has clouded Gibraltar's economic horizon for almost three years since the European Commission first intervened to claim that Gibraltar could not have a corporate tax regime which differed from that of Britain. Although Gibraltar's economy has continued to grow across the financial sector, efforts to capture new markets have been constrained by the ongoing uncertainty created by the EU moves.

The EU also argued that Gibraltar's new series of tax proposals, first mooted four years ago, infringed EU State Aid rules. Both arguments were rejected by the British and the Gibraltar governments, but the Commission's stance also led Gibraltar deciding to put on hold several planned tax changes and to scrap plans for a "zero tax" regime which was believed at that time would enhance the Gibraltar's attraction for foreign investors.

Gibraltar's optimism has been encouraged by a judgment handed down by the European court last year which confirmed Portugal's right to make separate tax arrangements in respect of the Azores without infringing EU State Aid rules.

Whereas the Azores is an integral (albeit autonomous) part of the Portuguese state, Gibraltar is not part of the United Kingdom. And under Gibraltar's new Constitution, which came into effect at the beginning of this year, Gibraltar has in effect a new, non-colonial relationship with Britain – a fact which was stressed in the oral evidence presented in Luxembourg this week.

These constitutional realities mean that, although the arguments being fielded by the European Commission can not be the same in both instances, in the light of the European court's finding that Portugal possesses the right to makes separate tax arrangements for the Azores without infringing EU State Aid Rules, it follows that the UK should equally possess such a right in the far more clear cut case of Gibraltar which does not form part of the UK, the argument runs. The Azores judgment paves the way for the introduction in Gibraltar of a new corporate tax code to replace the exempt company regime which is in the process of being phased out on the basis that it was found not to be compliant with EU State Aid Rules.

The Azores ruling was raised during this week's oral hearing, which signals the final stage of the lengthy litigation process. Under the EU court system the exchange of written arguments is the core of the procedure, and Gibraltar believes it has submitted a substantial array of arguments. From the outset it has stressed aspects of what is regarded as the "regionality" issue, pointing to the German system of Lander which impose their own taxes which differ from that set by the Federal Government, and the Scottish Parliament and Welsh Assembly in Britain which also have individual fiscal powers that differ from the tax regime imposed by central government.

The feeling in Gibraltar generally is that the EU Court will rule in favour of Gibraltar's ability to have its own tax regime independent of the UK. Nevertheless, it is widely anticipated that however the Court adjudicates the issue of the new proposed zero tax regime, Gibraltar will move to a system of low corporate

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