On 10 September 2024, the Court of Justice of the European Union (CJEU) sided with the European Commission and ruled that two Irish subsidiaries of the Apple group received unlawful State aid from Ireland. This judgment is final, and Ireland will have to finalise the recovery of more than EUR 13 billion. This judgment may boost the Commission’s investigations in other pending cases after it had suffered several losses in the Fiat, Amazon and ENGIE cases, all concerning Luxembourg. Taxpayers should pay attention to the CJEU’s approach to the functional analysis and supporting documentation.
Background
Through two tax rulings of 1991 and 2007, the Irish tax authorities confirmed that nearly all sales profits recorded by two Apple group subsidiaries, incorporated but not tax resident in Ireland, were attributable to head offices outside Ireland, rather than to their Irish trading branches. Ireland only taxed the profits of the branches.
The Commission’s decision argued that the allocation of profit to the foreign head offices was not arm’s length based on three lines of reasoning:
- The primary line of reasoning relied on the fact that the foreign head offices had no employees and substance and therefore could not perform the functions and bear the risks related to certain IP assets that are key value-generating assets. The Commission argued that the functions and risks were therefore necessarily to be allocated to the Irish branches which, in its view, performed much more than low value-adding routine functions.
- The subsidiary line of reasoning accepted the allocation of the IP assets (and related share of profits) outside of Ireland but claimed there were several mistakes in the application of the transfer pricing method known as ‘TNMM’ (transactional net margin method).
- The alternative line of reasoning in part relied on the subsidiary line and also argued that the discretion of the Irish tax authorities in granting the rulings was excessively broad, thereby resulting in a selective advantage granted to the two Apple group companies.
The General Court (EU first instance court) had annulled the Commission’s decision in July 2020, considering the Commission had misinterpreted the Irish tax system and failed to demonstrate the existence of a selective advantage (see our prior newsletter). The Commission appealed this judgment.
The cjeu judgment
The CJEU sided with the Commission and found that:
- The Commission’s decision contained an appropriate functional analysis of the Irish branches and did not rely on a presumption that the activities had to be performed in the Irish branches because of the lack of substance in the offshore head offices.
- Under its interpretation of Irish law, the functions of Apple Inc. are irrelevant to the functional analysis for purposes of splitting the two subsidiaries’ profits between the Irish branches and the offshore head offices. Also, Apple and Ireland should have provided proof during the administrative procedure of the role played by Apple Inc. employees on behalf of the two Irish subsidiaries.
- If board minutes do not mention certain decisions or topics, the Commission is entitled to use this fact as argument to support a finding that the functions allegedly performed by the board of directors did not exist.
- The Commission was entitled to rely on the Authorised OECD Approach when interpreting Irish law provisions on the taxation of Irish incorporated, non-Irish-resident companies, in particular as regards the allocation of profits between the Irish branch and the foreign head office.
- The two tax rulings provided a selective advantage as they reduced the tax burden of the two Irish subsidiaries of the Apple group compared to Irish standalone companies (who are taxed on their profits reflecting “prices determined on the market and negotiated arm’s length”.
Consequences for taxpayers
This judgment, whilst somewhat surprising in respect of certain arguments raised, brings lessons for other taxpayers, in particular as regards:
- The role of OECD guidance in applying the arm’s length principle – contrary to its stance in the Fiat and Amazon cases, it seems that the CJEU accepts the use of the Authorised OECD Approach even if it was not directly implemented in Irish law.
- The need to carefully document decision-making and ensure that functions allocated to specific entities (or parts of entities) are actually performed in a demonstrable way.
- The need to properly distinguish the roles played by group employees for different entities of the group, in particular if they are both employees of the group headquarters and managers of specific subsidiaries.
Other key pending state aid tax cases
There are still ongoing formal investigations into the tax treatment of Nike and Inter IKEA in the Netherlands, Huhtamäki in Luxembourg and 39 Belgian companies which benefited from an “excess profit” ruling. Following this win in the Apple case, the Commission may be emboldened to open further cases. There is also a second pending appeal before the CJEU in the Belgian excess profit ruling scheme case, following the General Court’s judgments of 20 September 2023.
