The European Commission Prevails in its Apple State Aid Action Against Ireland

What you need to know

• The CJEU ruling in Apple should not impact Ireland’s attractiveness as a hub for global business and does not affect Ireland’s current tax laws or policies. This is because it relates to historic rules and practice – Ireland’s current tax regime is aligned with EU and OECD rules and guidelines on corporate taxation.
• Transfer pricing remains crucial, requiring proper documentation and functional analysis within multinational groups. Businesses should ensure that their transfer pricing is reflective of their operations on the ground and is supported by appropriate intercompany documentation and other records, to ensure that they are well placed to defend potential challenges to pricing policies by tax authorities.

The Court of Justice of the European Union (CJEU) has, contrary to the expectations of many observers, found in favour of the European Commission (the Commission) in the Apple case. In its judgment, the CJEU held that historic Irish tax rulings granted to Apple Inc. entities were unlawful state aid. These rulings were granted in the context of historic tax residence rules which are no longer in force in Ireland.

Background to the decision

The Commission began a series of state aid investigations related to Member State tax practices in 2013. These investigations concerned:

• Starbucks in the Netherlands
• FIAT, Engie and Amazon in Luxembourg, and
• Apple in Ireland.

Following the Apple investigation, it concluded that Ireland had granted unlawful state aid worth €13 billion.

The Commission’s decision related to two tax rulings issued by the Irish tax authorities in 1991 and 2007 in favour of Apple Sales International (ASI) and Apple Operations Europe (AOE).

ASI and AOE were companies incorporated in Ireland but not tax resident in Ireland, albeit each company had an Irish branch subject to tax in Ireland. The contested tax rulings approved the methods used by ASI and AOE to calculate the profits attributable to their respective Irish branches for tax purposes. The Commission’s state aid decision was appealed to the EU’s General Court by both Apple and Ireland.

The General Court, in 2020, annulled the Commission’s decision on the basis that the Commission failed to prove that ASI and AOE had been granted a selective economic advantage and, by extension, unlawful State aid. This decision was appealed by the Commission to the CJEU, which issued its final judgment on 10 September 2024.

Key findings of the Court

The CJEU decided that the General Court erred when it ruled that the Commission had not sufficiently proved that intellectual property licences held by ASI and AOE and related profits should have been allocated to the Irish branches for tax purposes. After setting aside the judgment of the General Court, the CJEU had the option to refer the case back to the General Court but decided instead to give final judgment on the matter.

In that final judgment, the CJEU, confirmed the Commission’s approach in arriving at its decision that Ireland provided unlawful State aid to ASI and AOE including:

• Carrying out a functional analysis of the Irish branches which did not rely on the lack of substance in the head offices. In particular, the CJEU dismissed the finding of the General Court that the Commission had allocated profits using an ‘exclusion’ approach, finding that it had misinterpreted the Commission’s decision in that regard, which constituted an error of law.
• Disregarding the functions of Apple Inc. in attributing profits between the Irish branches and the head offices.
• Relying on the arm’s length principle and the Authorised OECD Approach for the purposes of applying the branch profit allocation rules in Irish law.

The CJEU agreed with the Commission that the tax rulings provided a selective advantage to ASI and AOE. This was on the basis that those tax rulings reduced the chargeable profits of ASI and AOE for Irish tax purposes and, therefore, the amount of corporation tax which they were required to pay in Ireland. This was in contrast to other companies taxed in Ireland whose chargeable profits reflect prices determined in the market in line with the arm’s length principle.

Does this impact Ireland’s attractiveness as a hub for global business?

In short, no. This decision has no impact on current Irish tax law, policy or practice. The judgment of the CJEU concerns Irish tax laws and practices that are no longer in force. Ireland has in the meantime introduced changes to the law regarding corporate residence rules and the attribution of profits to branches of non-resident companies operating in Ireland.

Ireland has also positively contributed to international tax reform including the implementation of:

• The EU anti-tax avoidance directive
• The OECD BEPS process, and
• The global minimum effective tax rate, known as Pillar II

In addition, Ireland has modernised its transfer pricing regime and adopted the OECD transfer pricing guidelines.

Ireland’s transparent and predictable tax regime and its sophisticated business environment continue to provide a unique platform from which to establish international business operations.

What action should multinational groups take?

The ruling does not have a general impact. However, it does emphasise the importance of the correct analysis of functions, assets and risks in pricing transactions within multinational groups - particularly those between branches and head offices of the same company. Transfer pricing is not usually a state aid matter but one between taxpayers and Revenue authorities. It continues to be the source of many tax disputes.

Clients should ensure that their transfer pricing is reflective of the operations on the ground and is supported by appropriate intercompany documentation and other records. This approach should provide assurance that they are well placed to defend potential challenges to pricing policies by Revenue authorities.

Businesses with any concerns about the potential implications of this judgment are invited to contact a member of our Tax team.

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The content of this article is provided for information purposes only and does not constitute legal or other advice.