CJEU holds Ireland provided illegal State aid to Apple

The CJEU has overturned the earlier General Court decision and held that Ireland did illegally provide state aid to Apple through tax rulings provided to the Irish branches of Apple entities: European Commission v Apple (Case C-465/20). The CJEU has held that the Commission had been correct to consider that the Irish Apple branches had obtained a selective advantage in the form of a different tax treatment as a result of the rulings which were not justified by the nature or the general scheme of the Irish tax system.

In essence, the CJEU's analysis is that Ireland failed to apply its own national tax laws, including the application of the arm's length principle, when issuing the tax rulings. The Irish revenue had failed to properly analyse the contribution provided by the overseas head offices to the relevant Apple IP used by the branches compared to the contribution made by those branches. In doing so, it had allowed Apple to attribute profits from the use of that IP outside Ireland on a favourable basis that provided a selective advantage (in terms of lower tax) to the Irish branches which was not justified by the Irish tax system and amounted to illegal State aid.

Background

The long-running state aid case concerns tax rulings provided by Ireland to branches of other Apple group companies (ASI and AOI, neither of which were Irish tax resident) in 1991 and 2007. These rulings related to the amount of profits of ASI and AOI that should be attributed to its Irish branches. ASI's Irish branch was responsible for procurement, sales and distribution of Apple products in Europe, the Middle East, India and Africa. AOI's Irish branch was responsible for the manufacture of Apple compute products.

In essence, the Commission took the view that rulings allowed Apple to attribute profits to the head office of ASI and AOI in a way that was incompatible with the arm's length principle. In particular, the head offices had not been able to control or manage the relevant Apple group IP licences and as such they should not have been allocated, in an arm's length context, the profits derived from the use of those licences. Those profits should have been allocated to the Irish branches, which were in a position to perform the functions related to the IP that were crucial to ASI and AOE's trading activities. The Irish Revenue had failed to verify whether those profits were attributable to the branches or the head office.

The Commission took the view that the rulings amounted to the provision of a selective advantage to ASI and AOI compared to the operation of the normal tax system (in this case, the Irish corporation tax system) and amounted to illegal state aid.

The General Court rejected the Commission's case. The General Court considered that the Commission's assessment of normal taxation under Irish law had been flawed in its application of an "exclusion approach" (assuming the profits must be allocated to Ireland if the head offices had no employees or physical presence). In addition, the General Court held that the Irish branches did not control the IP and the agreements of ASI and AOI outside Ireland showed that they were in a position to develop and manage the relevant IP and generate profits outside Ireland.

The Commission appealed the decision of the General Court to the CJEU arguing that the General Court was in error on both of these aspects of its decision.

CJEU decision

The Commission first argued that it had not applied an "exclusion approach". The Commission argued that it had in fact positively shown that the Irish branches performed functions justifying the allocation of the profits to them. The CJEU agreed. Whilst the Commission's case had stressed the lack of activities of the head office, it had done so in a comparison with the activities of the Irish branches. Thus the Commission's arguments were not simply based on the lack of activities by the head office. The Commission drew its conclusion "after linking two separate findings, that is to say, first, the absence of active or critical functions performed and risks assumed by the head offices and, secondly, the multiplicity and centrality of the functions performed and risks assumed by those branches".

Secondly, the Commission argued that the General Court had taken into account the functions performed by Apple Inc outside Ireland in relation to the IP for the purposes of determining ASI and AOE's profits. The allocation of the profits of ASI and AOE should have been based solely on the functions performed by the head offices and the Irish branches, not by the parent, Apple Inc. In essence, the decision of the General Court had been based on inadmissible evidence and had disregarded the necessary separate entity approach on which the Irish tax provisions are based.

The CJEU has again accepted this criticism of the General Court's approach. It was clear that "the test for determining the profits of a non-resident company... requires the allocation of assets, functions and risks between the branch and the other parts of that company to be taken into account, without requiring any account to be taken of the role played by separate entities". Equally, it was clear from the judgment of the General Court that it had relied, explicitly or implicitly, on the functions performed by Apple Inc. in relation to the Apple group's IP under cost-sharing agreements or the marketing services agreements or in its capacity as parent company of the group, comparing those functions to those performed by the Irish branches in relation to the IP licences. The General Court's assessment that the Commission had erred in concluding that the Irish branches performed significant people functions in relation to the IP was based largely on a comparison with the functions performed at the level of Apple Inc. As such, the General Court had again erred in its judgment.

Accordingly, the CJEU held that it was necessary to set aside the decision of the General Court and that the CJEU should itself decide the issue.

Ireland put forward a number of other arguments, many of which had been rejected by the General Court. In particular, Ireland argued that the Commission had carried out a joint assessment of the concepts (and existence of) an advantage and selectivity. Ireland also complained that the Commission had misidentified the reference framework and the question of normal taxation under Irish tax law. Ireland contended that the Commission had been wrong in presuming that the measures were selective because they only applied to ASI and AOI.

The CJEU has rejected these arguments. It may well be that those two elements may be examined together where a measure confers an economic advantage on a person and that advantage is not enjoyed by other undertakings. In any event, it was clear that the Commission did in practice carry out the necessary evaluations. The Commission had bee right to find- that the different tax treatment of ASI and AOI as a result of the rulings was not justified by the nature or general scheme of the Irish tax system. The Court also rejected the argument that the Commission's decision breached the principles of legal certainty and legitimate expectations. The Commission's approach was not novel in general terms and, according to the Court, it could not have appeared to be unforeseeable in the light of the principles established by earlier judgments on State aid.

In conclusion, the CJEU has held that the selective nature of the advantage granted to ASI and AOE by the tax rulings had been established to the requisite legal standard on the basis of the Commission's decision.

Comment

The decision is the biggest success in the Commission's long running attempt to apply the State aid rules to what it has seen as selective tax advantages provided by Member States to multinational businesses. Ireland will now need to recoup some €13bn from Apple for the periods under dispute.