Cases T‑778/16 and T‑892/16

Ireland and Others

v

European Commission

 Judgment of the General Court (Seventh Chamber, Extended Composition), 15 July 2020

(State aid – Aid implemented by Ireland – Decision declaring the aid incompatible with the internal market and unlawful and ordering recovery of the aid – Advance tax decisions (tax rulings) – Selective tax advantages – Arm’s length principle)

1.      State aid – Concept – State intervention in areas which have not been harmonised in the European Union – Direct taxation – Included – Designation of the tax base and allocation of the tax burden – Powers of the Member States – Limits – Powers of the Commission

(Art. 107(1) TFEU)

(see paragraphs 105-109)

2.      State aid – Concept – Existence of an advantage – Tax relief measure – Criteria for assessment

(Art. 107(1) TFEU)

(see paragraphs 110-111, 115)

3.      State aid – Concept – Tax measures – Joint examination of the conditions of selectivity and economic advantage – Whether permissible

(Art. 107(1) TFEU)

(see paragraphs 134-138)

4.      State aid – Concept – Selective advantage – Advance tax decisions (tax rulings) – Reference framework for determining the existence of an advantage – Delimitation ratione materiae – Criteria – Identifying the ordinary or ‘normal’ tax regime – General corporation tax regime, the objective of which is to tax the chargeable profits of resident or non-resident companies carrying on activities in the territory of the Member State

(Art. 107(1) TFEU)

(see paragraphs 149-163)

5.      State aid – Concept – Selective advantage – Advance tax decisions (tax rulings) – Determining the chargeable profits – Commission decision allocating, using an ‘exclusion’ approach, profits derived from trading activity stemming from intellectual property to the branches of non-resident companies – Error in assessing the national tax law

(Art. 107(1) TFEU)

(see paragraphs 174-187, 361-362)

6.      State aid – Concept – Selective advantage – Advance tax decisions (tax rulings) – Designation of the tax bases and allocation of the tax burden – Application of the arm’s length principle – Scope

(Art. 107(1) TFEU)

(see paragraphs 221-224)

7.      State aid – Concept – Selective advantage – Advance tax decisions (tax rulings) – Allocation of profits to the branch of a non-resident company – Possibility of relying on the Authorised Approach of the Organisation for Economic Cooperation and Development (OECD) – Whether permissible – Conditions

(Art. 107(1) TFEU)

(see paragraphs 235-239, 323-324)

8.      State aid – Concept – Selective advantage – Advance tax decisions (tax rulings) – Examination of the approved profit allocation method in the light of the arm’s length principle – Identified methodological errors not necessarily leading to favourable tax treatment

(Art. 107(1) TFEU)

(see paragraphs 319, 332-333, 348-350, 416, 434-435, 479-480)

9.      State aid – Concept – Selective nature of the measure – Derogation from the general tax system – Measure of a general nature applicable without discrimination to all economic operators – Alleged broad discretion in granting the tax advantage – Discretion of the public authorities limited by objective criteria

(Art. 107(1) TFEU)

(see paragraphs 496-499)

Résumé

On 11 June 2014, the European Commission opened a formal investigation procedure concerning the tax rulings adopted by the Irish tax authorities regarding the chargeable profits allocated to the Irish branches of Apple Sales International (ASI) and Apple Operations Europe (AOE), on the ground that those rulings could constitute State aid. ASI and AOE, subsidiaries of the Apple Group, (1) are companies governed by Irish law, managed and controlled outside Ireland, which are not tax resident in Ireland and which have set up Irish branches. (2)

Following its investigation, by a decision of 30 August 2016 (3) (‘the contested decision’), the Commission concluded that the tax rulings issued by the Irish tax authorities constituted unlawful State aid incompatible with the internal market that had to be recovered from ASI and AOE. In order to come to that conclusion, concerning the selective advantage condition, the Commission used three separate lines of reasoning (primary, subsidiary and alternative) intended to demonstrate that the contested tax rulings had enabled ASI and AOE to reduce the amount of tax for which they were liable in Ireland during the period when those rulings were in force, namely the period from 1991 to 2014.

Hearing actions brought by Ireland, ASI and AOE, the General Court annulled the contested decision. That judgment, which follows on from other cases relating to advance tax decisions (tax rulings), (4) provides clarification regarding the condition of selectivity of aid measures where Member States adopt such decisions.

In its judgment, the Court recalled that instances of intervention by the Member States in the field of direct taxation, even if they concern issues that have not been harmonised in the European Union, are not excluded from the scope of the rules on State aid control. In that regard, as the Commission is competent to ensure that those rules are complied with, it cannot be said to have exceeded its competences when assessing whether, in issuing the contested tax rulings, the Irish tax authorities had granted ASI and AOE favourable tax treatment by enabling them to reduce their chargeable profit as compared with the chargeable profit of other corporate taxpayers in a comparable situation. When the Commission exercises that power, regarding tax measures, the examination of advantage overlaps with the examination of selectivity in so far as, for those two conditions to be satisfied, it must be shown that the contested tax measure leads to a reduction in the amount of tax which would normally have been payable by the recipient of the measure under the ordinary tax regime which would, therefore, be applicable to other taxpayers in the same situation.

In this instance, the Court ruled that the Commission had not succeeded in showing that there was a selective advantage that had led to a reduction in the amount payable by ASI and AOE in the form of corporation tax in Ireland. According to the Court, each of the lines of reasoning used by the Commission in that regard was vitiated by errors affecting, by extension, the legality of the contested decision.

In the first place, regarding the Commission’s primary line of reasoning, the Court endorsed that line of reasoning as regards the determination of the reference framework, the use of the arm’s length principle and the Authorised OECD Approach. (5)

First, the Court found that the Commission had not erred in determining the reference framework for the purposes of examining the selective advantage condition. That reference framework is the ordinary rules of taxation of corporate profit, the objective of which is to tax the chargeable profits of companies carrying on activities in Ireland, be they resident or non-resident, integrated or stand-alone. In addition to providing for the taxation of resident companies, Irish tax law provides that non-resident companies are not to be taxed in Ireland, unless they carry on a trade there through a branch or agency, in which case they are to be taxed on any trading income arising directly or indirectly through or from the branch or agency, and from property or rights used by, or held by or for, the branch or agency, as well as on capital gains attributable to the branch or agency. (6) Accordingly, resident and non-resident companies carrying on a trade in Ireland through a branch are in a comparable situation in the light of the objective pursued by the Irish tax regime, namely the taxation of chargeable profits.

Second, the Court ruled that, since, under Irish tax law, the profit resulting from the trading activity of a branch of a non-resident company is to be taxed as if it were determined under market conditions, the Commission could validly rely on the arm’s length principle in order to ascertain whether there was a tax advantage, even though that principle has not been formally incorporated into Irish law. The application of that principle enables the Commission to ascertain, in the exercise of its powers under Article 107(1) TFEU, whether the chargeable profit of a branch of a non-resident company is determined, for the purposes of corporation tax, in a manner that ensures that non-resident companies operating through a branch in Ireland are not granted favourable treatment as compared with resident stand-alone companies whose chargeable profits reflect prices negotiated at arm’s length on the market. Regarding the scope of the arm’s length principle in the context of State aid control, the Court recalled that, although in this instance that principle is a tool enabling the Commission to ascertain whether there is a tax advantage, nevertheless the Commission cannot contend that there is a freestanding obligation for Member States to apply it horizontally and in all areas of their national tax law. In the absence of EU rules regarding the designation of bases of assessment and the spreading of the tax burden across the different factors of production and economic sectors, at the current stage of development of EU law, the Commission does not have the power independently to determine what constitutes the ‘normal’ taxation of an integrated undertaking while disregarding the national rules of taxation.

Third, the Court ruled that the Commission could validly rely, in essence, on the Authorised OECD Approach (7) when it considered that, for the purposes of applying Irish tax law, the allocation of profits to the Irish branch of a non-resident company had to take into account the allocation of assets, functions and risks between the branch and the other parts of that company. In the contested decision, although the Commission did not directly apply the provisions of the OECD Model Tax Convention or the guidance provided by the OECD on profit allocation or transfer pricing, nevertheless it relied, in essence, on the Authorised OECD Approach. In that regard, the Court found that, although the Authorised OECD Approach has not been incorporated into Irish tax law, in essence, there is an overlap between the functional and factual analysis conducted as part of the first step of the analysis proposed by that approach, on the one hand, and the application of the provisions of Irish tax law relating to non-resident companies, on the other.

By contrast, the Court noted that the Commission had erred regarding the application of the provisions of Irish tax law relating to non-resident companies. According to those provisions, profits derived from property, such as intellectual property licences, that is controlled by a non-resident company cannot be regarded as such as being chargeable profits attributable to the Irish branch of that company even if that property has been made available to that branch. When determining the profits of the branch, the question that is relevant is whether the Irish branch has control of that property. However, the Court found that, when it considered that the Apple Group’s intellectual property licences should have been allocated to the Irish branches in so far as ASI and AOE were regarded as having neither the employees nor the physical presence to manage them, the Commission had allocated profits using an ‘exclusion’ approach, which is inconsistent with the provisions of Irish tax law relating to non-resident companies. Moreover, according to the Court, when conducting its assessments concerning the activities within the Apple Group, the Commission had not succeeded in showing that, in the light, first, of the activities and functions actually performed by the Irish branches of ASI and AOE and, second, of the strategic decisions taken and implemented outside of those branches, the Apple Group’s intellectual property licences should have been allocated to those Irish branches when determining the annual chargeable profits of ASI and AOE in Ireland. Accordingly, the Court ruled that, in its primary line of reasoning, the Commission had not succeeded in showing that, by issuing the tax rulings, the Irish tax authorities had granted ASI and AOE an advantage.

In the second place, the Court came to the same conclusion regarding the subsidiary line of reasoning, according to which the profit allocation methods endorsed in the tax rulings had led to a result departing from a reliable approximation of a market-based outcome in line with the arm’s length principle. The Court emphasised, in its reasoning, that the mere non-observance of methodological requirements, in particular in connection with the OECD Transfer Pricing Guidelines, is not a sufficient ground for concluding that the calculated profit is not a reliable approximation of a market-based outcome, let alone that the calculated profit is lower than the profit that should have been obtained if the method for determining transfer pricing had been correctly applied. Thus, merely stating that there has been a methodological error is not sufficient, in itself, to demonstrate that the tax measures at issue have conferred an advantage on the recipients of those measures. Indeed, the Commission must also demonstrate that the methodological errors that have been identified have led to a reduction in the chargeable profit and thus in the tax burden borne by those recipients, in the light of the tax burden which they would have borne pursuant to the normal rules of taxation under national law had the tax measures in question not been adopted.

In that regard, although the Court pointed out the incomplete and occasionally inconsistent nature of the tax rulings resulting from defects in the methods for calculating the chargeable profits of ASI and AOE, nevertheless it ruled that the Commission had not succeeded in showing that the methodological errors to which it had referred with regard to the profit allocation methods endorsed by the tax rulings, in particular concerning the choice of the operating costs as the profit level indicator and the levels of return accepted by the tax rulings, had led to a reduction in ASI and AOE’s chargeable profits in Ireland.

In the third and last place, regarding the alternative line of reasoning, the Court ruled, inter alia, that, in so far as the Commission had not succeeded in showing that there was an advantage through its primary and subsidiary lines of reasoning, it could not, solely through its alternative line of reasoning, show that there was a selective advantage. Thus, according to the Court, even assuming that it were established that the tax authorities had discretion, the existence of such discretion did not necessarily mean that it had been used to reduce the tax liability of the recipient of the tax ruling as compared with the liability to which that recipient would normally have been subject. In any case, the Court maintains that the Commission did not succeed in showing that the Irish tax authorities had exercised a broad discretion likely to favour ASI and AOE. In that regard, in order to set aside the Commission’s argument that those authorities’ application of the tax provisions does not involve the use of any consistent criterion in order to determine the profits to be allocated to the Irish branches of non-resident companies, the Court emphasised that, in order to apply those provisions, it is necessary to carry out an objective analysis of the facts, which corresponds, in essence, to the approach proposed by the OECD. In addition, the Court notes that the methodological defects that have been identified in the calculation of ASI and AOE’s chargeable profits are, in themselves, insufficient to show that the tax rulings were the result of a broad discretion exercised by the Irish tax authorities.

1      Within the Apple Group, Apple Operations International is a fully owned subsidiary of Apple Inc., Apple Operations International fully owns the subsidiary AOE, which, in turn, fully owns the subsidiary ASI.

2      ASI’s Irish branch is responsible for, inter alia, carrying out procurement, sales and distribution activities associated with the sale of Apple-branded products to related parties and third-party customers in the regions covering Europe, the Middle East, India and Africa and the Asia-Pacific region. AOE’s Irish branch is responsible for the manufacture and assembly of a specialised range of computer products in Ireland, such as iMac desktops, MacBook laptops and other computer accessories, which it supplies to related parties for Europe, the Middle East, India and Africa.

3      Commission Decision (EU) 2017/1283 of 30 August 2016 on State aid SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP) implemented by Ireland to Apple (OJ 2017 L 187, p. 1).

4      See, inter alia, judgments of 14 February 2019, Belgium and Magnetrol International v Commission (T‑131/16 and T‑263/16, EU:T:2019:91); of 24 September 2019, Luxembourg and Fiat Chrysler Finance Europe v Commission (T‑755/15 and T‑759/15, EU:T:2019:670); and of 24 September 2019, Netherlands and Others v Commission (T‑760/15 and T‑636/16, EU:T:2019:669).

5      OECD 2010 Report on the Attribution of Profits to Permanent Establishments of 22 July 2010.

6      Section 25 of the Taxes Consolidation Act 1997.

7      The Authorised OECD Approach is based on work carried out by groups of experts and reflects international consensus regarding profit allocation to permanent establishments; it is of practical significance when interpreting questions relating to that profit allocation.