Background
In 2016, the European Commission decided that two Irish incorporated companies belonging to the Apple Group (Apple Sales International – ASI - and Apple Operations Europe – AOE) had, based on two tax rulings issued in 1991 and 2007, received undue tax benefits of up to €13 billion that constituted illegal State aid (case SA.38373).
According to the Commission, Apple set up their sales operations in Europe in such a way that customers were contractually buying products from ASI in Ireland rather than from the shops that physically sold the products to customers. In this way, Apple recorded all sales, and the profits stemming from these sales, directly in Ireland.
The two tax rulings in question concerned the internal allocation of these profits within ASI (rather than the wider set-up of Apple's sales operations in Europe). Specifically, they endorsed a split of the profits for tax purposes in Ireland Only a fraction of the profits of ASI were allocated to its Irish branch and subject to tax in Ireland. The remaining vast majority of profits were allocated to the "head office" (within ASI), where they remained untaxed.
On the basis of the same two tax rulings of 1991 and 2007, AOE benefitted from a similar tax arrangement over the same period of time. The majority of the profits of this company were also allocated internally to its "head office" and not taxed anywhere.
The Commission concluded that these tax rulings enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid rules. It ordered Ireland to recover the aid, plus interest.
In 2020, the General Court annulled the Commission’s decision, holding that the Commission had failed to demonstrate that those companies enjoyed a selective advantage (case T-778/16).
The CJEU’s judgement
By its recent judgement, the CJEU confirmed the Commission’s decision (case C-465/20 P).
According to the Court of Justice:
- 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, and when it relied, in essence, on the Authorised OECD Approach in so far as it offers valuable guidance for that purpose.
- It was appropriate for the Commission to compare the functions performed, respectively, by the head offices and by the Irish branches of those companies in relation to the IP licences. Following that comparison, the Commission found, on the one hand, an absence of ‘active or critical’ functions performed and risks assumed by the head offices and, on the other, a multiplicity and centrality of functions actually performed and risks assumed by the branches in relation to those licences.
- The Court confirmed the Commission’s approach according to which, under the relevant provision of Irish law relating to the calculation of tax payable by non-resident companies, the activities of the branches of ASI and AOE in Ireland had to be compared not to activities of other Apple Group companies, for example a parent company in the United States, but to those of other entities of those companies, particularly their head offices outside Ireland.
- The Commission has demonstrated to the requisite standard that those tax rulings had the effect that ASI and AOE enjoyed favourable tax treatment compared to resident companies taxed in Ireland which were not in position to benefit from such advance rulings by the tax administration, that is, in particular, companies non-integrated into a group, 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 de facto and de jure situation with regards to the objective of that tax reference system, which is to tax profits generated in Ireland.
This judgement is final, so that the recovered taxes, which have been in an escrow account in Ireland during the ongoing court proceedings and have grown to €13.8 billion, now must be released to the Irish State.
The Commission’s response
In a statement issued on the same day as the judgement by the CJEU, Commissioner Vestager welcomed the CJEU position mentioning, in particular, that it “marks a step forward”. Recalling that “[the Commission’s] investigations have decisively contributed to a mind shift, a change of attitudes among Member States. They have helped to trigger or accelerate regulatory and legislative reforms”, Vestager insisted that “the Commission will continue its work on harmful tax competition and aggressive tax planning. Both in terms of legislative proposals and enforcement” and invited “Member States to advance on [its] proposals on transfer pricing and the use of shell companies”.
Following the successful outcome in the Apple case and after having suffered losses in the Fiat (C‑885/19 P et C‑898/19 P), Amazon (C-457/21 P) and Engie (C-451/21 P) cases, the Commission could be willing to open further cases…
