Ireland Gains €13 Billion From Apple Loss

Introduction

On September 10, 2024, the Court of Justice of the European Union (CJEU) issued its final judgment on the appeal against the General Court's judgment and confirmed the European Commission's Apple State aid decision¹. The ruling found that Apple's Irish tax-breaks were illegal State aid, thereby concluding the long-running saga between the EU, the US tech giant, and the Irish government. As a result, Apple is required to forfeit approximately €13 billion in tax breaks, which had been granted to Ireland.

The case began in June 2014, when the European Commission initiated a formal investigation into the tax rulings adopted by the Irish tax authorities in favour of two companies of the Apple Group, namely Apple Sales International (ASI) and Apple Operations Europe (AOE), on the ground that those rulings might constitute State aid. Specifically, the two tax rulings, issued by the Irish Government in January 1991 and May 2007 (Tax Rulings), approved the method by which ASI and AOE - incorporated in Ireland, but not tax resident in Ireland - proposed to treat their chargeable profits in Ireland in relation to the trading activity of their respective Irish branches.

The Decision at Issue

On August 30, 2016, the European Commission adopted a decision asserting that the Irish tax authorities had allegedly granted State aid to ASI and AOE through the Tax Rulings from 1991 to 2014, which was deemed incompatible with EU internal market rules². Specifically, the Commission considered that the Tax Rulings

1. constituted a derogation from the reference framework (i.e. Irish ordinary corporation tax rules);
2. led to a reduction in the tax bases of ASI and AOE for the corporation tax purposes in Ireland, thus conferring an advantage on the two companies;
3. led to a reduction in the amount of the ASI and AOE's tax liability, thereby improving the competitive position of the companies, and consequently, the rulings were capable of distorting or threatening to distort competition;
4. were addressed only to ASI and AOE, so they could be assumed to be selective in nature; and
5. affected trade within the EU, since ASI and AOE were part of the Apple Group operating in all Member States.

In conclusion, the European Commission found that Ireland's Tax Rulings, which excluded profits generated by the use of intellectual property licences held by ASI and AOE from the tax base on the ground that the companies' head offices were located outside Ireland and management of the licences was carried out at the level of the Apple Group in the United States, had conferred on ASI and AOE State aid under Article 107(1) of the TFEU³ that was "unlawfully put into effect by Ireland ... and is incompatible with the internal market." The Commission ordered Ireland to recover from Apple that aid, estimated at €13 billion⁴.

The General Court's Judgment

Ireland, ASI and AOE⁵ brought actions against the decision at issue, seeking its annulment before the General Court of the CJEU.

1. The General Court first dismissed the pleas presented by Ireland, ASI and AOE which claimed that the Commission had overstepped its competences and violated the principle of the fiscal autonomy of the Member States. The Court recalled that, although direct taxation falls within the competence of the Member States, "instances of intervention by the Member States in the field of direct taxation, even if they concern issues that have not been harmonised in the EU, are not excluded from the scope of the rules on State aid control." Consequently, the Commission was competent to examine whether (i) the Irish tax authorities had granted ASI and AOE favourable tax treatment and (ii) the Tax Ruling had constituted an aid within the meaning of Article 107 TFEU⁶. However, the Court ruled that the Commission had failed to demonstrate that the Tax Rulings resulted in a reduction of the corporation tax payable by ASI and AOE in Ireland. In other words, the Court held that the Commission was wrong to declare that ASI and AOE had been granted a selective economic advantage and, by extension, State aid.
2. The General Court proceeded to examine the pleas alleging errors in the Commission's primary line of reasoning.
   
   First, the Court endorsed the Commission's identification of the reference framework for assessing the selective advantage in the ordinary rules of taxation of corporate profits, which aim to tax the chargeable profits of companies operating in Ireland, whether they're resident or non-resident, integrated or stand-alone.
   Secondly, the Court ruled that the Commission could validly rely on the arm's length principle⁷ to determine the existence of a tax advantage. Although not formally incorporated into Irish law, under this principle the profit derived from a branch of a non-resident company must be taxed as if it were determined under market conditions. However, the Court emphasized that the Commission (i) cannot assert an obligation on Member States to apply that principle across all areas of national tax laws and (ii) lacks the authority to autonomously determine what constitutes the "normal" taxation for an integrated undertaking, while disregarding the national rules of taxation.
   Regarding the Authorised OECD Approach⁸, the Court held that the Commission could validly rely on it when it considered that, under Irish tax law, the allocation of profits to the Irish branch of a non-resident company had to consider the allocation of assets, functions and risks between the branch and the parent company. However, the Commission erred in its application of the Irish tax provisions concerning non-resident companies: profits derived from property (in this case, Apple Group's intellectual property licences) controlled by a non-resident company cannot be considered chargeable profits attributable to the Irish branches, namely ASI and AOE, even if such property was made available to them.
3. The General Court then scrutinized the Commission's subsidiary line of reasoning, which asserted that the profit allocation methods endorsed in the Tax Rulings resulted in outcomes that deviated from a reliable approximation of a market-based outcome in accordance with the arm's length principle. This, the Commission argued, led to a reduction in ASI and AOE's chargeable profits in Ireland. The Court's analysis revealed that "the defects in the methods for calculating the chargeable profits of ASI and AOE demonstrate the incomplete and occasionally inconsistent nature of the contested tax rulings". Nevertheless, the Court held that those deficiencies were insufficient to prove the existence of an advantage within the meaning of Article 107(1) TFEU.⁹
4. Lastly, the Court addressed the pleas related to the Commission's alternative line of reasoning, which posited that the Tax Rulings "still had to be regarded as granting ASI and AOE a selective advantage in so far as those rulings were the result of the discretion exercised by the Irish tax authorities". In this context, the Court concluded that (i) since the Commission failed to demonstrate the existence of an advantage through its primary and subsidiary lines of reasoning, it could not establish a selective advantage solely based on its alternative line of reasoning; and yet (ii) the Commission did not prove that the Tax Rulings were the result of discretion exercised by the Irish tax authorities, nor that AS and AOE had thereby been granted a selective advantage.

Accordingly, the General Court annulled the Commission's decision on the Irish Tax Rulings in favour of Apple's Irish branches in its entirety, finding that the Commission had not met the requisite legal standard to demonstrate the existence of an advantage within the meaning of Article 107(1) TFEU.

By the appeal filed on September 25, 2020, the Commission sought to have set aside the General Court's judgement that annulled its decision on Apple's State aid.

Last November, the CJEU Advocate General issued a (non-binding) legal opinion proposing that the CJEU should set aside the judgement and refer the case back to the General Court for a new decision on the merits. The advocate general argued that the General Court committed a series of errors in law when it ruled that the Commission had not shown the requisite legal standard that the intellectual property licences held by ASI and AOE (and related profits) had to be attributed for tax purposes to the Irish branches¹⁰.

The Court of Justice's Final Judgment

By its judgment, the CJEU has overturned the judgment of the General Court, thereby bringing the matter to a definitive conclusion: Ireland granted Apple unlawful State aid which Ireland is required to recover.

In its reasoning, the CJEU addressed the pleas concerning the existence of a selective advantage, focusing on the identification of the appropriate reference framework and the selective nature of Tax Rulings, and whether this selective advantage constitutes State aid. Regarding the identification of the reference framework, the CJEU held that, since the complaints lodged by ASI and AOE had already been rejected by the General Court and there had been no cross-appeal, the General Court's judgment had become res judicata (final judgment based on merits).

As for the selective nature of the Tax Rulings, the CJEU ruled that the Commission has demonstrated that the Tax Rulings "have the effect that ASI and AOE enjoy favourable tax treatment as compared to resident companies taxed in Ireland which are not capable of benefiting from such advance rulings by the tax administration, that is, in particular, non-integrated standalone companies" which "was not justified by the nature or by the general scheme of the Irish tax system"¹¹.

As regards the condition that the selective advantage must be granted "through State resources", the CJEU aligned to the case-law of the Court¹² that a State measure which grants certain undertakings exclusion from the obligation to pay a tax constitutes State aid, even if it does not involve the transfer of State resources, since it involves the renunciation by the authorities of tax revenue which they would normally have received. Moreover, according to the final judgement, the Commission has also succeeded in proving that the Irish branches were actively involved in managing the IP licences, therefore "the profits generated by the exploitation of the Apple Group's IP licences should have been allocated to those Irish branches when determining the annual chargeable profits of ASI and AOE in Irelandsup>13.

Given the above, the Court concluded that the Tax Rulings reduced the chargeable profits of ASI and AOE, thereby lowering the amount of corporation tax they were required to pay in Ireland, as compared to other companies taxed in Ireland whose chargeable profits reflect prices determined on the market in line with the arm's length principle. The CJEU considered the Tax Rulings as State aid granted in violation of Article 107 TFEU.

The current CJEU decision follows a series of cases concerning the European Commission's State aid investigations into tax rulings granted by Member States. The Commission hailed this decision as an unexpected victory, especially in light of the trend where recent rulings had often favoured taxpayers by overturning the Commission's decisions. A notable example is the CJEU's annulment of the Commission's decision that had declared Luxembourg's tax ruling as incompatible and illegal State aid (regarding the miscalculation of the transfer prices of Fiat Chrysler Finance Europe for the financing activities provided to the Fiat group companies mainly established in Europe), or the recent two milestone judgments issued in the Engie and Amazon cases in which CJEU overturned Commission's decisions and clarified the relevant conditions for determining whether a tax measure constitutes unlawful State aid¹⁴.

However, the CJEU judgment in the Commission v. Apple and Ireland case is not an entirely isolated episode; in fact, in 2021 the Court ruled in favour of the Commission recognising the existence of an aid scheme in the tax exemptions granted by Belgium to multinational companies¹⁵, and, with the latest ruling, the highest EU Court finally seems to be turning its previous orientation around.

Regardless of the different trends, companies benefiting from specific tax advantages or favourable arrangements with tax authorities should conduct thorough reviews of their existing structures to assess potential exposure under State aid rules considering the financial risks associated with a tax advantage being classified as State aid (which can be recovered, with interest, over a period of up to 10 years). At the same time, prudent legislators should also take State aid considerations when enacting legislation that may result in tax benefits, ensuring prior consultation with the European Commission to mitigate potential risks.

Footnotes

1 Commission v Ireland and Others, case C-465/20 P.

2COMMISSION DECISION (EU) 2017/1283 of 30 August 2016 on State aid SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP) implemented by Ireland to Apple (notified under document C (2017) 5605).

3 Article 107(1) Treaty on the Functioning of the European Union: "Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market".

4 Commission press release of August 30, 2016: "State aid: Ireland gave illegal tax benefits to Apple worth up to 13 billion euro".

5 Respectively case T‑778/16 and case T‑892/16; subsequently, the cases were joined for the purposes of the procedure.

6 Ireland and Others v European Commission, Judgment of the General Court (Seventh Chamber, Extended Composition), July 15, 2020, cases T‑778/16 and T‑892/16.

7 The application of the arm's length principle enables the Commission to ascertain, in the exercise of its powers under Article 107(1) TFEU, whether the chargeable profit of a branch of a non-resident company is determined in a manner that ensures that non-resident companies operating through a branch in Ireland are not granted favourable treatment as compared with resident stand-alone companies whose chargeable profits reflect prices negotiated at arm's length on the market.

8 OECD 2010 Report on the Attribution of Profits to Permanent Establishments of 22 July 2010.

9 Ibid, paragraph 479.

10 OPINION OF ADVOCATE GENERAL PITRUZZELLA, 9 November 2023, Case C‑465/20 P, European Commission v. Ireland, Apple Sales International, Apple Operations International, formerly Apple Operations Europe.

11 Ibid, paragraphs 305 and 310.

12 See judgment of November 17, 2009, Presidente del Consiglio dei Ministri, C‑169/08, EU:C:2009:709, paragraph 57.

13 JUDGMENT OF THE COURT OF JUSTICE (Grand Chamber), 10 September 2024, case C‑465/20 paragraph 287.

14 Respectively, joined cases C‑885/19 P and C‑898/19 P; joined cases C‑451/21 P and C‑454/21 P; and case C‑457/21 P.

15 Case C-337/19 P.