Case C 465/20 P Commission v Ireland and Others The Apple Tax case against Ireland - A saga of lurking issues, unintended consequences and legal uncertainty

During the height of the 1970’s economic crisis the government of the Republic of Ireland passed revenue measures aimed at making it attractive for non-resident foreign enterprises to operate in the Republic. Apple Inc. (which is incorporated in California, USA) took advantage of these, including other incentives, and established in Ireland wholly owned subsidiaries.

To assess the compatibility with the State Aid rules, the EU Commission has, since 2013, gathered information on tax ruling practices in several Member States, notably Ireland, The Netherlands and Luxembourg. These investigations resulted in a series of protracted litigations between the EU Commission and those Member States. The hearing took place in both the General Court and the Court of Justice of the European Union. The focus of this blog is on the resulting effects of that litigation, which was partly resolved in September this year when the Court of Justice handed down its judgment on the Commission’s appeal over the judgment of the General Court in Commission v Ireland and Others..

It should be noted that for some time, the Commission had revealed a lurking issue regarding favourable tax regimes and their inconsistency with the underlying principles of the EU internal market. The Commission noted that aggressive tax planning practices were widespread in a few Member States. According to the Commission’s Annual Reports on taxation but also according to other studies, a few Member States used tax concessions amounting to profit shifting. It noted that in 2022, the profits of multinationals global corporations amounted to about USD16 trillion. Of those profits approximately USD2.8 trillion were made outside of their global headquarters (usually the USA). About half of that profit was shifted to low-tax countries, including countries within the European Union (notably Ireland, the Netherlands, Luxembourg and Belgium).^[1] The Apple Group was one of these multinationals.

Within the Apple Group, Apple Operations International is a fully owned subsidiary of Apple Inc. (incorporated in California). Apple Operations International fully owns the subsidiary Apple Operations Europe (AOE), which in turn fully owns the subsidiary Apple Sales International (ASI). ASI and AOE are both companies incorporated in Ireland, but were not tax, initially, resident in Ireland. The activities of ASI and AOE included dealing with Ireland Apple’s IP. However, the strategic decision making in relation to this activity was performed by Apple Inc., from the USA. The Irish Revenue, in two tax rulings, applied Section 23A Taxes Consolidation Act 1997[2] (TCA 97) and deemed ASI and AOE ought not be considered tax resident in Ireland (which effectively meant they were no resident  in any other tax jurisdiction) and, therefore, gave ASI and AOE  more favourable taxation status than companies resident in Ireland. The policy behind the TCA 97 provision was to attract business to Ireland during a time of a severe economic downturn.

Tax rulings are comfort letters issued by the tax authorities to an individual company on a specific tax matter. They are intended to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions and are, in themselves, perfectly legal and not problematic under the State Aid rules. Problems only arise if the ruling  provides a selective advantages to specific companies or groups of companies. If so, this can amount to State Aid within Article 107(1) of the Treaty on the Functioning of the European Union (TFEU). In particular, the State Aid regime requires that profits must be allocated under the arm’s length principle[3]: i.e. between companies in a corporate group, and between different parts of the same company, in a way that reflects economic reality. This means that the allocation between group companies should be in line with arrangements that take place under commercial conditions between other independent businesses.

The controversy between the European Commission and Apple began in 2016 when, after two years of investigations, the former ordered the Apple  to pay EUR13 billion in taxes, retrospectively, to Ireland. The issue centred on the two tax rulings mentioned above. In its investigations the Commission contested the Irish Revenue’s acceptance of Apple’s assertions, particularly those in relation to the allocation of the profits for the IP licences, and found that they were actively managed by ASI and AOE from Ireland. In its investigation the Commission found that the Irish Revenue’s profit allocation methods in calculating the taxable income of ASI  and AOE were faulted, because they excluded for the calculation of the tax base the profits generated by the use of intellectual property licences held by the two Apple subsidiaries. Consequentially, the calculation method in the tax rulings ended up lowering the taxable base. ‘As a result, the Commission reached the preliminary conclusion that those rulings result in a lower tax burden for those companies constituting an advantage for the purposes of Article 107(1) of the Treaty.’^[4]

In other words, the Commission found that, by excluding from the domestic tax liability all the profits generated by the use of intellectual property licences held by ASI and AOE solely on the ground that the head office of those companies was located outside Ireland and the management of those licences depended on decisions taken at the level of the Apple Group in the United States, the tax rulings had, from 1991 to 2014, conferred on those companies State Aid that was unlawful and incompatible with the internal market, and from which the Apple Group as a whole had over-favourably benefited.

In this way, the Commission categorised the rulings not as a tax subject to national sovereignty but as a State Aid, hence, falling within the umbrella of EU law. According to well established case law, the discriminant between a tax that remains within the realm of national sovereignty and a tax that amounts to a State Aid is the remit of the advantage conferred: if the advantage is general, then it is a measure of general taxation, if the advantage is selective, it is State Aid. The Commission found that the advantage was selective. It also found, following the definition of State Aid provided by Art 107(1) TFEU, meant that a selective  advantage  granted by a Member State, distorted competition as it  had an effect on the internal market.

In its decision in 2016, the Commission concluded that the two Irish tax rulings constituted illegal State Aid, as they had artificially lowered taxes paid by Apple in Ireland since 1991. The Commission considered this to be a misapplication of Irish tax rules and ordered Ireland to recover up to EUR13 billion from Apple. These tax rulings attributed the bulk of taxable profits - of the two Irish subsidiaries of Apple - to stateless “head offices”, existing only on paper. The profits were thus not taxable anywhere. As an example, in 2011, one of Apple’s Irish subsidiaries recorded profits of approximately EUR16 billion. Of these, thanks to the tax rulings, only around 50 million euros were taxable in Ireland. So, this subsidiary paid less than EUR10 million of taxes in Ireland in 2011 - an effective tax rate of about 0.05% of the overall annual profits. The rest attracted no taxes anywhere in the world.

Apple and Ireland appealed the decision of the Commission to the General Court. The General Court annulled it in 2020. One of the General Court’s grounds was that the Commission failed to prove that the adoption of the rulings triggered a selective advantage for Apple. The Commission appealed to the Court of Justice, seeking to have the General Court’s decision be set aside. On 10 September 2024 the Court of Justice confirmed the Commission’s approach and reversed the General Court’s decision.^[5]  In essence, what this means is that the Court of Justice’s decision confirms the Commission’s approach to the intellectual property licences held by Apple’s Irish subsidiaries and related profits, deeming that they should have been allocated to the Irish branches and that Apple should have paid taxes worth EUR13 billion on all related profits in Ireland.

This judgment raises some points for reflection. First, the judgment endorses the application of the arm’s length principle to determine the accuracy of the profit allocation within the Apple group and, crucially, whether Apple received a selective advantage by the tax rulings. Indeed, the Court of Justice followed Advocate General Pitruzzella ’s opinion, confirming that the Commission had correctly proved that the rulings triggered a selective advantage for Apple, based on the application of the arm’s length principle for the allocation of profits within a group.

Pelekis explains that there are relevant limitations ‘in the methodology and rationale’^[6] of this principle. For example, it is often difficult to compare transactions between two related parties to those of two unrelated parties due to lack of all the available information^[7]. In its ruling the Court of Justice sides with the Commission in applying the principle even if, at the time of the tax rulings, this was not directly implemented by Ireland. This is because of the earlier  case of Belgium and Forum 187 v Commission^[8]. However, it is controversial whether this case can really be considered a precedent for the introduction of a European arm’s length principle^[9], and there is also no consistency in the way the Commission applied the principle, following the case.^[10] This is problematic because inconsistency triggers issues surrounding legal certainty and legitimate expectations. Indeed, if the rules of the game are not clear, both Member States and even the most diligent undertakings will find it very difficult to detect, in their tax agreements, the presence of State Aid elements.^[11] 

It is suggested that the Court of Justice’s judgment in Apple places State Aid case law in an arena of legal uncertainty, making it difficult for the revenue bodies in Member States and for companies to understand how they should act in the future, or should have acted in the past. For example, in the previous case of Fiat^[12], the Court rejected the Commission decision and application of the arm’s length approach as the principle had not been directly incorporated by Luxembourg. Likewise, the Court decided in favour of Amazon in another case^[13], annulling the decision of the Commission on similar grounds. The Apple case appears to be in striking contrast with the previous Court’s jurisprudence and it is yet to be seen whether it will set a new line of case law on State Aid, or whether it will be relegated to an exceptional ruling, which allows it to be distinguished in future pronouncements of the Court.

Currently, there are several high profile Commission investigations open, so the answer to whether the Commission v Ireland  case will set a precedent may be apparent in the next few years. In the meantime, it is advisable for undertakings to keep information as clear and complete as possible when making decisions on arrangements and allocations of functions between holding company headquarters and their subsidiaries. Importantly, they need to be mindful to liaise not only with the tax authorities of the Member States , but also with the European Commission, in order to avoid missing critical tax elements that might trigger the application of European State Aid rules.

Jack Sheehan said that we should ‘Spare a thought for poor Ireland – forced to collect €13bn from Apple against its will’^[14]. As far as it might sound crazy to force a country to collect money that they did not want, EU law requires Member States to recover the fruits of favourable tax treatment in contravention of State Aid rules from the beneficiaries of favourable treatment. The recovery order is not a punishment, but a way to restore internal  market conditions to the situation in which they were before the State Aid was granted.^[15] The finality of the judgment in the Ireland case was somewhat surprising, as most expected the case to be remitted back to the General Court for a new determination. However, the Court of Justice declared that the decision is now definitive so the money, like it or not, will have to be recovered. It is to be hoped that it will be used wisely, and not to buy 16m iPhones with apologies to Apple.^[16]

What is clear is that the Couirt of Justice’s decision finally settles years of dispute and litigation. The money held in escrow, pending the decision of the Commission, will be soon transferred to the Revenue in Ireland. Notably, from an attracting foreign investment perspective, tax legislation in Ireland has not been used to incentivise investment into Ireland for many years. That said, the unintended consequence of this ruling could be the fact that, since the Irish Government was willing to stand with a company that invested in Ireland, companies may still conclude that Ireland remains a safe place within the EU to harbour their operations.

Dr Chiara Berneri

Dr Chiara Berneri is a Law Lecturer and joined The OU in September 2021. Her interests focus on EU law, International Law, Human Rights and Constitutional Law.

Chiara holds a law degree from Universita' Cattolica del Sacro Cuore (Italy), an LLM in European Union law from the University of Edinburgh and a PhD from City, University of London.

Chiara published two books with Hart. She also published in leading journals, such as the European Journal of Migration and Law and the European Journal of Law and Economics.

Edwin Parks 

Edwin is a Senior Lecturer in Law. Edwin’s research interests include constitutional histories, the law’s treatment, at supranational and state level, of nationhood for marginalised communities.

His current research interests include the relationships between commonwealth, colonies, and empire. His work explores the historical development of legal concepts and the histories of case law and judiciary. 

Edwin’s research interests are influenced by his practice across both civil and common law jurisdictions.