The Government has agreed to scrap tax breaks for thousands of companies registered in Gibraltar following pressure from Europe.
Under current rules, an "Exempt Company" pays no income tax on its profits and is instead subject to a fixed annual tax of between £225 and £300. Companies subject to the general company taxation regime in Gibraltar pay a standard rate of tax on profits of 35 per cent.
The European Commission issued an ultimatum last month, warning that it would launch legal action unless the current arrangements were phased out.
Now the government has formally notified Brussels that the offshore tax regime will be scrapped by the end of 2010.
Neelie Kroes, the EU Competition Commissioner, said: "The abolition of the Gibraltar 'Exempt Company' tax regime is a further important step towards eliminating harmful tax practices that violate state aid rules."
The Treasury amended the "Exempt Company" scheme after the Commission complained that it was illegal. But the Commission was still not satisfied and delivered its ultimatum.
Such companies cannot trade within Gibraltar, but thousands of offshore companies take advantage of the generous tax concession to register there.
Under the new agreement the number of companies benefiting from the Gibraltar system is capped at 8,464 - the number registered at the end of 2003. As companies leave the scheme, numbers permitted to join and replace them will be reduced until the end of June 2006, after which no new entrants will be allowed.
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