On 15 July 2020, the European General Court annulled the decision taken by the European Commission (Commission) regarding Irish tax rulings in relation to Apple.
What is State aid?
Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) sets out the meaning of State aid. It essentially states that five elements must be met for there to be unlawful State aid, namely that:
- an advantage must be granted;
- by a Member State or through State resources;
- which is selective, ie not available to businesses in a comparable position;
- which distorts or threatens to distort competition; and
- which affects trade between Member States.
The Apple case centred around the first and third elements, ie whether Ireland had granted Apple an advantage and whether that advantage was selective.
Background to the Case
The Commission considered in its 2016 decision that tax rulings by Irish tax authorities in relation to two Apple subsidiaries in Ireland constituted unlawful State aid and demanded the recovery of the aid, calculated to amount to €13 billion.
The tax rulings stated that two Apple subsidiaries, which were incorporated but not tax resident in Ireland, would be taxed on the basis of the income generated by their Irish branches only. This effectively allowed Apple to allocate profits from Apple's IP licences, which were held by the subsidiaries, to Apple's head office in America.
The Commission argued that the IP licences should have been allocated to the Irish branches of the Apple subsidiaries. This would have meant that profits from those IP licences would be taxable in Ireland. The Commission concluded that the Irish tax rulings therefore reduced Apple's tax liability, thus giving Apple an economic advantage which was not available to other companies.
Judgment of the European General Court
The European General Court annulled the Commission decision as it had not been shown that Apple had been granted a selective advantage within the meaning of Article 107(1) TFEU. The judgment is lengthy and complex but the main conclusions can be summarised as follows:
- The Court upheld the use of the Commission's reference framework. When analysing tax measures in the context of Article 107(1) TFEU, the determination of the reference framework is relevant for examining both the advantage condition and the selectivity condition referred to above. The reference framework therefore essentially sets the parameters against which the tax treatment in question will be assessed. In this case, the General Court held that the Commission had been entitled to compare the two Apple subsidiaries with ordinary Irish tax resident companies because Irish corporation tax does not distinguish between companies which are tax resident and those which are not. The reference framework was therefore the ordinary rules of corporation tax in Ireland.
- The General Court upheld the use of the arm's length principle but stated that Apple's tax treatment was not incompatible with the principle. The arm's length principle essentially determines whether a particular tax treatment corresponds to a 'market-based outcome'. In other words, whether the level of profit allocated to the branches for their trading activity in Ireland corresponded to the level of profit that would have been obtained by carrying on that trading activity under market conditions.As noted above, the Commission argued that Apple's IP licences should have been allocated to the Irish branches.
The General Court disagreed and stated that the Commission had not shown that the IP licences should have been allocated to the Irish branches. This was largely due to the fact that Irish tax laws only required the profits from the licences to be allocated to the Irish subsidiaries where the licences were controlled by the Irish branches. This meant that the Commission had not shown that Apple had been granted an advantage as the allocation of the IP licences did not deviate from the ordinary rules of Irish corporation tax and was not contrary to the outcome which would have been arrived at under normal market conditions.
- While the Court acknowledged the incomplete and occasionally inconsistent nature of the Irish tax rulings, it held that this was not in itself sufficient to prove the existence of an advantage. The Commission did not demonstrate that the methodological errors to which it had referred with regard to the profit allocation methods endorsed by the tax rulings had led to a reduction in chargeable profits in Ireland. Accordingly, it did not succeed in demonstrating that those rulings had granted those companies an advantage for the purposes of Article 107(1) TFEU.
- No discretion granted to Apple by the Irish tax authorities, therefore Apple had not been granted a selective advantage. The Commission did not succeed in showing that the Irish tax authorities had exercised a broad discretion in the present instance. The Court held that, even assuming that the tax authorities had discretion, the existence of such discretion does not necessarily mean that it was used to reduce the tax liability of the company in question as compared to the liability to which it would normally have been subject.
The judgment is a significant blow for the Commission who must now decide whether to appeal the judgment to the European Court of Justice. If the Commission does not appeal, Ireland must return the €13 billion to Apple.
The case will undoubtedly impact on on-going and future State aid cases relating to tax treatments. While the General Court described the tax rulings in relation to Apple as incomplete and inconsistent it ultimately concluded that these defects were not in themselves sufficient to prove the existence of unlawful State aid. This follows the judgment of the Commission in the Starbucks State aid case earlier this year where the General Court held, similarly to the Apple case, that the Commission had not shown that Starbucks had received an economic advantage from the Netherlands tax authorities. The General Court has therefore set a high standard of proof which the Commission must meet in order to prove the existence of State aid in tax cases.