Guest post: The Apple State-Aid Case. The First Milestone

The European General Court decided last week that the Irish tax ruling agreements with Apple do not infringe European Union Law (Judgement of 15.07.2020, T-778/16 and T-892/16). The tax benefits obtained do not constitute unlawful state aid as prohibited under Article 107(1) TFEU. The Court hence annulled the decision of the European Commission that Ireland granted illegal state aid. In consequence, Apple does not have to repay taxes plus interest and saves approximately 14 bn USD.

Infographic of the EC

Tax rulings came into the focus of the European Commission since 2013. The state aid control formed a major part of its new strategy to discover and prevent tax abuse in the European Union. Article 107(1) TFEU prohibits the grant of selective advantages by a Member State, which at least threatens to distort competition and affect trade between Member States. The investigations included tax rulings of several countries granted amongst others to Amazon, Apple, Fiat, McDonald’s and Starbucks.

The Apple case concerned tax rulings adopted by the Irish tax authorities in 1991 and 2007. The tax rulings determined in advance the profit allocation of two Apple subsidiaries. Apple Operations Europe and its fully owned subsidiary Apple Sales International were incorporated in Ireland without being tax resident therein. A cost-sharing agreement with the parent Apple Inc. granted them royalty-free Apple licences to manufacture and sell products outside from North and South America. Each subsidiary established a branch for this purpose in Ireland. The company structure differed thereby from the typical “double Irish” tax scheme, which includes two separate Irish enterprises and not the use of separate branches within an enterprise. The latter is a particularity of the Apple case, whereas both schemes result in a low effective taxation. The subsidiary Apple Sales International was managed and controlled from a head office outside from Europe but sold products through its separate branch in Ireland. Nevertheless, profits were allocated to the head office outside from Ireland and determined in accordance with the tax rulings. As a result, only a small part of the profits was considered taxable in Ireland.

In 2014, the European Commission started a formal investigation procedure against Ireland pursuant to Article 108(2) TFEU and adopted its decision in 2016. Accordingly, the tax advantages received through the tax rulings gave rise to unlawful state aid under Article 107(1) TFEU.

The European General Court came to a different conclusion and ruled that the Irish tax rulings do not fulfill the requirements for unlawful state aid. In particular, the European Commission had not fulfilled its burden of proof as it “did not succeed in showing the requisite legal standard that there was a selective advantage for the purpose of Article 107(1) TFEU”, the European General Court stated. But the Court also confirmed that Member States must exercise their exclusive competence in the field of direct taxation in consistence with European Union Law likewise in the Fiat and Starbucks judgements.

The European Commission based its argumentation on the breach of the arm’s length principle and the failure of Ireland to allocate profits to the branches rather than to the subsidiaries. The arm’s length principle is a profit allocation method applied for intra-group transactions in order to determine prices under market conditions. The allocation of Apple IP licences to either the subsidiaries or the branches was in this case a decisive issue. Even if the arm’s length principle is not part of the Irish domestic law, the European General Court agreed in so far with the European Commission that the principle is a general rule setting a benchmark (see also Judgement of 22.06.2006, C-182/03 and C-217/03). However, the Court rejected the argumentation that the Irish tax authorities should have allocated the IP licences to the branches for the profit determination of the subsidiaries in Ireland. The European Commission had not proved sufficiently that the actual activities, functions as well as strategic decisions lead to an allocation to the branches. In conclusion, the Court hold that the tax rulings did not constitute illegal state aid under Article 107(1) TFEU. Still, the judgement is not legally effective as the European Commission may submit its appeal to the European Court of Justice.

The judgement of the European General Court is a victory for Apple and Ireland. However, the victory is only short-term and might turn into a defeat. The European Commission will most likely submit its appeal to the European Court of Justice. Nevertheless, the judgement strengthens the state aid control through the confirmation of the arm’s length principle as benchmark and the application of state aid rules in the field of direct taxation. The arm’s length principle originates though from the OECD and is not (yet) established under European Union Law. This could have implications for future investigations on the restructured Apple company structure as of 2014 as well as the required high evidentiary standard of proof for the European Commission. The European Union and OECD adopted since 2015 several anti-tax avoidance measures in order to prevent profit shifting and base erosion. The application of these measures may thus give rise to further judgements concerning multi-national companies.

Author: Stella Langner

Stella Langner, Ref. iur., is a PhD candidate and research assistant at the chair of Prof. Dr. Matthias Valta in the field of international tax law at the University of Düsseldorf. She completed her law studies at Heidelberg University and Yeditepe University (Turkey) in 2017.