Introduction
On 10 September 2024, the Court of Justice [CJEU] delivered its much anticipated judgment, in case C-465/20 P, Commission v Ireland & Apple. It ruled that Ireland had granted incompatible State aid to Apple through preferential tax rulings.[1] The judgment was the result of an appeal by the Commission against the judgment of the General Court in case T-778/16, Ireland v Commission, which had annulled Commission decision 2017/1283 that had reached the same conclusion. The gist of the Commission’s appeal was that the General Court misinterpreted Irish tax law and its application to branches of company groups. Now, Ireland has to recover from Apple unpaid taxes whose amount is estimated to be around EUR 14 billion.
The judgment of the CJEU does not break new ground. However, it confirms 1) that the Commission may use the “arm’s length principle” to determine whether transactions between related companies correspond to market conditions; 2) that advance tax rulings can be selective in themselves where they are granted only to company groups; and 3) that the tax base of group companies that transact mostly or wholly with related companies has to be determined by a realistic allocation of assets, including IP rights, and costs between parent and subsidiary companies.
Background
The Apple Group includes the US-based Apple Inc. which fully owns Apple Operations International [AOI]. In turn, AOI fully owns Apple Operations Europe [AOE]. AOE fully owns Apple Sales International [ASI]. AOE and ASI are both companies incorporated in Ireland, but are not tax resident in Ireland.
Apple Inc., on the one hand, and ASI and AOE, on the other, were bound by a cost-sharing agreement. The shared costs concerned, inter alia, the research and development of technology incorporated in the Apple Group’s products. Apple Inc. remained the legal owner of Apple Group’s intellectual property rights. In addition, Apple Inc. granted ASI and AOE royalty-free licences enabling those companies to use the Apple Group’s IPs and to manufacture and sell the products concerned. The parties to the cost-sharing agreement were required to bear the risks resulting from that agreement, of which the main risk was the obligation to pay the development costs relating to the Apple Group’s IP rights.
ASI and AOE each have a branch in Ireland. Those branches do not have a separate legal personality. ASI’s Irish branch is responsible for carrying out procurement, sales and distribution activities associated with the sale of Apple-branded products. AOE’s Irish branch is responsible for the manufacture and assembly of a specialised range of computer products in Ireland.
In the 1990s and 2000s, the Irish tax authorities issued tax rulings concerning the determination of ASI’s and AOE’s chargeable profits in Ireland. In particular, in 1991 the Irish authorities agreed that AOE’s chargeable profit, attributable to income from its Irish branch, would be calculated using the following method: The net profit attributable to the Irish branch would correspond to 65% of that branch’s operating costs and the operating costs would include all operating expenses of that branch, excluding costs for intangibles charged from companies affiliated with the Apple Group. With respect to the taxation of the ASI branch, it was agreed that the calculation of the branch’s profit was to be based on a margin of 12.5% of branch operating costs, excluding material for resale.
In 2007, the Irish authorities agreed to a request by the Apple Group to the following revision of the tax base of the Irish branches of ASI and AOE. As regards the ASI branch, the chargeable profit would be equal to a certain percentage of its operating costs, excluding charges from affiliated companies. As regards the AOE branch, the chargeable profit would be determined by adding to its operating costs, excluding charges from affiliated companies, a certain percentage of its turnover, representing the IP return in respect of the technology of that branch.
After a formal investigation, the Commission concluded in August 2016 that the tax rulings constituted State aid on the ground that they led to a reduction in ASI’s and AOE’s tax bases. Because they were granted only to ASI and AOE, they were selective in nature. For the sake of completeness, the Commission also found that those tax rulings constituted a derogation from the reference system which was made up of the ordinary rules of corporation tax in Ireland.
The limits of Member States’ tax autonomy
The Court of Justice began its analysis by noting that “(73) action by Member States in areas that are not subject to harmonisation by EU law is not excluded from the scope of the provisions of the FEU Treaty on monitoring State aid. The Member States must thus refrain from adopting any tax measure liable to constitute State aid that is incompatible with the internal market”.
For a measure to constitute State aid, it must, among other things, confer a selective advantage. This “(75) requires a determination as to whether, under a particular legal regime, the national measure at issue is such as to favour ‘certain undertakings or the production of certain goods’ over other undertakings which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which accordingly suffer different treatment that can, in essence, be classified as discriminatory”.
It is well-established in the case law that in order to determine whether a tax measure is selective a three-step test must be applied:
Identification of the reference system
Assessment of whether a tax measure is a derogation requires first identification of the reference system which is the normal system of taxation. Derogation exists where there is differentiation between operators who, in the light of the objective of that system, are in a comparable factual and legal situation.
The CJEU stressed that the “(78) determination of the set of undertakings which are in a comparable factual and legal situation depends on the prior definition of the legal regime in the light of whose objective it is necessary, where applicable, to examine whether the factual and legal situation of the undertakings favoured by the measure in question is comparable with that of those which are not”.
Moreover, an error made in that determination of the reference system “(79) necessarily vitiates the whole of the analysis of the condition relating to selectivity”.
The identification of the reference framework “(80) must follow from an objective examination of the content, the structure and the specific effects of the applicable rules under the national law of that State”.
This means that the Commission must respect the discretion of Member States to determine their own tax systems and may not introduce extraneous concepts that are not existent in any given tax system. Indeed, the CJEU pointed out that “(81) outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, by exercising its own competence in the matter of direct taxation and with due regard for its fiscal autonomy, the characteristics constituting the tax, which define, in principle, the reference system or the ‘normal’ tax regime, from which it is necessary to analyse the condition relating to selectivity.” “(82) It follows that only the national law applicable in the Member State concerned must be taken into account in order to identify the reference system for direct taxation”.
However, it is also possible that “(83) the reference framework itself, as it results from national law, is incompatible with EU law on State aid, [if] the tax system at issue has been configured according to manifestly discriminatory parameters intended to circumvent that law”. This was not at issue in the case of Ireland.
Then the CJEU recalled the main points of the Commission’s assessment of selectivity “(85) The Commission actually found, in the context of its primary line of reasoning, that […] the Irish tax authorities had conferred an advantage on those companies for the purposes of Article 107(1) TFEU in the form of a reduction in their respective annual chargeable profits, by not allocating to the branches of those companies the profits generated by the exploitation of the Apple Group’s IP, thereby acting in breach of the arm’s length principle. As a subsidiary point, the Commission found that, even assuming that the Irish tax authorities were justified in allocating those profits outside Ireland, the profit allocation methods approved by the contested tax rulings had, in any event, resulted in the annual chargeable profits for ASI and AOE in Ireland departing from a reliable approximation of a market-based outcome in line with the arm’s length principle.”
The primary line of reasoning concerning the existence of an advantage
The General Court had held that, by allocating profits generated by the exploitation of IP licences, for tax purposes, to the Irish branches on the ground that the head offices of ASI and AOE had no employees or physical presence to ensure their control and management, the Commission had allocated profits using an “exclusion” approach which was inconsistent the arm’s length principle.
The CJEU, first, observed that “(123) the application of the arm’s length principle in the present case is based, […], on Irish tax rules on the taxation of companies and, accordingly, on the reference system identified by the Commission and confirmed by the [General] Court. In that regard, the [General] Court explicitly acknowledged, […], that, contrary to Ireland’s contention, the application of […] [the Irish tax law], corresponded in essence to the functional and factual analysis […] [whose aim was] to identify the assets, functions and risks that must be allocated to a company’s permanent establishment.”
The General Court also held that “(124) the Commission had not erred when it relied on the arm’s length principle as a tool in order to check whether, […], the level of profit allocated to the branches of ASI and AOE for their trading activity in Ireland as accepted in the contested tax rulings corresponded to the level of profit that would have been obtained by carrying on that trading activity under market conditions, […], while taking into account the allocation of assets, functions and risks between those branches and the other parts of those companies.”
The Commission concluded “(125) with regard to the profit allocation method based on the arm’s length principle which, in its view, the Irish tax authorities should have followed under [the relevant section of the Irish tax law], that the profits to be allocated to the branch of a non-resident company pursuant to that section are ‘the profits that that branch would have earned at arm’s length, in particular in its dealings with the other parts of the company, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the assets used, the functions performed and the risks assumed by the company through its branch and through the other parts of the company’ […] In order to do so, they should have compared the functions performed, the assets used and the risks assumed by ASI and AOE through their head offices and their Irish branches”.
“(129) Therefore, […], it was not the finding that the head offices had neither employees nor physical presence outside the Irish branches that led the Commission to conclude that the IP licences and related profits had to be allocated to those branches. The Commission drew that 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”.
On the basis of the above reasoning, the CJEU found that the General Court had erred in law and that the appeal of the Commission on this issue had to be upheld.
Allocation of activities between Apple Inc. and ASI and AOE and their branches
First, the CJEU established the legal test applicable under Irish law for the purposes of determining the profits of a non-resident company.
The CJEU noted that “(194) while the parties agree that the relevance of functions performed by an entity – in this case by Apple Inc. – that is separate from the non-resident company whose chargeable profit in Ireland is to be assessed must be excluded in the context of the functional analysis […], the parties’ positions diverge as regards the scope and content of the analysis required under Irish law.”
The CJEU recalled that “(198) the General Court found […] that […] the arm’s length principle require[s], for the purpose of determining the chargeable profits in Ireland of a non-resident company, the use of a ‘functional’ analysis to identify the activities performed, the assets used and the risks assumed by the branch of that company in Ireland.”
“(200) Such an interpretation is consistent with the actual wording of [the relevant section of the Irish tax law] which requires, for the purpose of determining the chargeable profits of a non-resident company in Ireland, that the ‘trading income arising directly or indirectly through or from the branch […] and any income from property or rights used by, or held by or for, the branch […]’ be identified. It follows […] that such an interpretation requires, […], in essence, […], a comparison of the activities performed in relation to those assets by the various parts of that company; such a comparison makes it possible to verify whether the allocation of assets within the non-resident company, accepted by the tax authorities as the basis for determining chargeable profits in Ireland, is consistent with the actual allocation of functions, assets and risks between the various parts of that company.”
In this respect, the CJEU concluded that “(222) the Commission’s argument that functions performed by Apple Inc. were erroneously taken into account [by the General Court] is therefore well founded.”
Furthermore, the CJEU held that the General Court “(256) by focusing, in its examination of the Commission’s findings with regard to activities within the Apple Group, on the functions and risks assumed by Apple Inc. in relation to IP, instead of concentrating solely on the activities performed by the Irish branches and by the head offices, respectively, of ASI and AOE in relation to the management and exploitation of the IP licences, the General Court proceeded to characterise the facts examined by applying a different legal test from that which the Court had itself considered applicable under [the relevant section of the Irish tax law]. That reference framework requires account to be taken of the allocation of assets, functions and risks between the branch and the other parts of the non-resident company and, in accordance with the tax principles applicable under Irish law, precludes the role of separate entities, such as a parent company of the non-resident company, from being taken into consideration”.
In view of the errors committed by the General Court, the CJEU set aside the judgment at first instance and proceeded to render final judgment itself by re-examining each of the criteria of Article 107(1) TFEU that were subject to appeal.
Identification of the reference framework
Since, as explained earlier, the CJEU considered that the General Court was right in finding that the Commission had correctly identified the reference framework, the CJEU did not have to rule itself on this point.
Determination of the tax base of the Irish branches
Ireland and ASI and AOE argued that the activities and functions performed by their Irish branches represented only a tiny part of the economic activity and profits of ASI and AOE and that, in any event, those activities and functions included neither management nor strategic decision-making concerning the development or marketing of the IP.
However, the CJEU held that, following the examination carried out earlier, “(284) the General Court wrongly accepted the relevance of the functions performed by Apple Inc. to the allocation of the profits of ASI and AOE between their respective head offices and branches […] and, moreover, erred in law when it found that the management bodies of ASI and AOE had, directly or under a power of attorney, performed essential functions in respect of the IP licences”.
“(286) Thus, the need to take into account, […], the allocation of assets, functions and risks between the Irish branches and the other parts of ASI and AOE, without regard to any role that may have been played by Apple Inc., arises solely from the Apple Group’s decision to transfer the costs and risks related to that group’s IP under the cost-sharing agreement.”
“(287) Contrary to what the General Court held […], the Commission has therefore succeeded in showing that, in the light of, first, the activities and functions actually performed by the Irish branches of ASI and AOE and, secondly, the absence of consistent evidence establishing that strategic decisions were taken and implemented by the head offices of those companies outside Ireland, the profits generated by the exploitation of the Apple Group’s IP licences should have been allocated to those branches when determining the annual chargeable profits of ASI and AOE in Ireland.”
Selectivity
The CJEU, first, summarised the arguments of the applicants. “(294) Ireland and ASI and AOE criticise the Commission’s conclusions regarding the selective nature of the contested tax rulings, in so far as, first, such selectivity cannot be presumed in the present case and, secondly, ASI and AOE were not granted a derogation and did not receive selective treatment as compared to other undertakings in a comparable situation.”
The CJEU clarified at the outset that “(295) the requirement as to selectivity under Article 107(1) TFEU must be clearly distinguished from the concomitant detection of an economic advantage”.
However, with respect to tax measures “(296) the examination of advantage overlaps with the examination of selectivity in so far as, for those two conditions to be satisfied, it must be shown that the contested tax measure leads to a reduction in the amount of tax which would normally have been payable by the recipient of the measure if that recipient had been subject to the ‘normal’ tax system applicable to other taxpayers in the same situation.”
“(299) With regard, in the first place, to the applicants’ arguments that the Commission wrongly relied on the presumption of selectivity that attaches to individual measures, which has emerged from the case-law […], those arguments must be declared ineffective.”
As explained earlier, the Commission did not rely solely on the individual character of the advance tax rulings. It also had a second line of argument that was based on the application of the three-step test.
“(304) Secondly, the complaint that the Commission did not demonstrate that the contested tax rulings constitute a derogation from the reference framework which it identified cannot succeed.”
“(305) In fact, the Commission has demonstrated to the requisite standard that those 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, integrated group companies that carry out transactions with third parties or integrated group companies that carry out transactions with group companies with which they are linked by fixing the price of those transactions at arm’s length, even though those companies are in a comparable factual and legal situation as regards the objective of that reference system, which is to tax profits generated in Ireland.”
At a later point in the judgment, the CJEU explained the presence of a selective advantage slightly differently. “(379) The Commission found that there was a selective advantage, primarily, […], because the Apple Group’s IP licences were not allocated to the Irish branches of ASI and AOE; on a subsidiary basis, […], because of the inappropriate choice of methods of allocating profits to those Irish branches; and, alternatively, […], because the contested tax rulings derogated, on a discretionary basis, from [the relevant section of the Irish tax law].”
“(306) Thus, in so far as the contested tax rulings reduce the annual amount of tax which ASI and AOE are required to pay in Ireland – as compared, in particular, to non-integrated companies whose taxable profit reflects prices determined on the market and negotiated at arm’s length – those tax rulings involve different treatment that can, in essence, be classified as a derogation and as discriminatory”.
“(307) In the third place, as regards the question whether the discrimination caused by the contested tax rulings is justified by the nature and logic of the system of taxation in Ireland, it is well established that a measure which creates an exception to the application of the general tax system may be justified if that measure results directly from the basic or guiding principles of that tax system. In that connection, a distinction must be made between, on the one hand, the objectives attributed to a particular tax regime, which are extrinsic to it, and, on the other hand, the mechanisms inherent in the tax system itself, which are necessary for the achievement of such objectives. Consequently, tax advantages which are the result of an objective that is unrelated to the tax system of which they form part cannot circumvent the requirements under Article 107(1) TFEU”.
“(308) In the present case, it should be noted that […], the Commission found that none of the arguments put forward during the administrative procedure, based, in essence, on the exercise of the discretion enjoyed by Irish Revenue, the Irish tax administration, Irish Revenue’s practice, and the ‘effectiveness of the tax system’ to which the contested tax rulings are supposed to contribute, justified the treatment of ASI and AOE, which consisted in granting those companies a selective advantage.”
“(309) Ireland has been unable to explain on what grounds the Commission’s findings in that part of the decision at issue are incorrect. In particular, Ireland does not indicate why the territoriality principle, on which it relies, necessarily requires favourable treatment for non-resident companies. It is, however, for the Member State which has introduced a differentiation between undertakings in relation to tax charges to show that it is actually justified by the nature and general scheme of the system in question”.
The CJEU also rejected the argument of the applicants that the contested measures did not result in a transfer of state resources.
Breach of the principles of legal certainty and protection of legitimate expectations
Ireland and ASI and AOE claimed that the Commission breached the principles of legal certainty by adopting a novel interpretation of Article 107(1) TFEU. The Commission’s interpretation could not have been foreseen at the time the contested tax rulings were issued in 1991 and 2007. Ireland also maintained that the Commission disregarded the principle of the protection of legitimate expectations.
The CJEU, first, recalled that “(353) the principle of legal certainty – which is one of the general principles of EU law – requires that rules of law be clear and precise and predictable in their effect, so that interested parties can ascertain their position in situations and legal relationships governed by EU law”.
“(356) It must, however, be stated that that principle cannot be invoked unless the Commission is shown to have clearly breached its duty of diligence and manifestly failed to exercise its supervisory powers. In particular, where an aid measure was granted without having been notified, the mere fact that there was a delay by the Commission in ordering recovery of the aid does not in itself suffice to render that recovery decision unlawful on the basis of the principle of legal certainty”.
“(358) In the present case, while the Commission’s reasoning did indeed apply to tax rulings, it appears not only that it was not novel in its decision-making practice, as illustrated by the decisions cited by the Commission in its written submissions at first instance, but, above all, it could not have appeared to be unforeseeable in the light of the principles established by the earlier case-law relating to State aid of a fiscal nature.”
“(360) In the second place, the same finding must be made with regard to the principle of the protection of legitimate expectations, a fundamental principle of EU law, which allows any trader whom an institution has caused to entertain justified expectations to rely on those expectations”.
“(361) In view of the mandatory nature of the supervision of State aid by the Commission, undertakings to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid is in conformity unless it has been granted in compliance with the procedure laid down in Article 108 TFEU”.
The tax rulings had not been notified to the Commission, nor was the Commission aware of their existence. Consequently, the CJEU held that “(363) the Commission did not breach the principle of the protection of legitimate expectations by ordering recovery of the State aid.”
The CJEU rejected several other pleas of Ireland and AOE and ASI and went on to dismiss the appeal at first instance.
The full text of the judgment can be accessed at: