On 10 September 2024, the Court of Justice of the European Union (CJEU) issued a final judgment in the Apple state aid case setting aside the 2020 decision of the General Court and confirming the 2016 decision of the European Commission. The Commission had concluded that from 1991 to 2014 two subsidiaries of the Apple group, Apple Sales International (ASI) and Apple Operations Europe Ltd (AOE), received tax advantages in Ireland that constituted unlawful state aid in an amount exceeding EUR 13 billion. Based on the CJEU’s decision, the Irish tax authorities are now obliged to recover this amount from Apple.
Although ASI and AOE are incorporated under the law of Ireland, they are not Irish tax residents. However, both entities have branches in Ireland. The ASI Irish branch is in charge of the procurement, sale and distribution of Apple products to third-party customers in the EMEIA region and the AOE Irish branch is responsible for the manufacture and assembly of certain Apple products to related entities in the EMEIA region. In 1991 and 2007, ASI and AOE obtained tax rulings from the Irish tax authorities that their tax liability in Ireland was limited to the profits of their branches. Because of the cost sharing agreement, the profits reported by the foreign head offices were significantly higher than the profits reported by the Irish branches.
In its 2016 decision, the European Commission determined that the Irish tax authorities granted ASI and AOE tax advantages that constituted unlawful state aid because the allocation of profits between the foreign head offices and the Irish branches was not at arm’s length. Since the foreign head offices had no employees and substance, they could not carry out the functions and bear the risks related to the intangible assets, which are key in generating value. Consequently, these functions and risks must be allocated to the Irish branches.
In 2020, the EU General Court annulled the decision of the European Commission, holding that the Commission did not sufficiently establish that the Irish branches enjoyed a selective advantage. According to the General Court, the Commission should have demonstrated the amount of income related to the intangible assets earned by the Irish branches instead of focusing on demonstrating that no functions were carried out by the head offices outside of Ireland. The General Court also ruled that the Irish branches only carried out supportive activities that did not lead to the allocation of the intangible assets to them. In reaching this conclusion, the General Court made its own assessment of the facts entailing a comparison of the functions of the Irish branches and the functions of Apple Inc. as the company ultimately holding ASI and AOE and that had entered into the cost sharing agreement with them. Now on appeal, the CJEU has set aside the General Court’s judgment and rendered a final judgment in the matter, confirming the Commission’s decision.
The outcome of Apple case could also shape future tax disputes involving the EU foreign subsidies regulation addressing distortions to the internal market from foreign subsidies providing their recipients with unfair advantages.
Potentially affected taxpayers should be familiar with and understand the Apple decision with respect to potential distortive tax advantages received in EU member states or third countries provided the advantages received in third countries are granted to companies active within the EU.
Frederik Boulogne
Lisanne Rijff
Nathalie Bravo
BDO in Netherlands
Background of Apple rulings
ASI, AOE and Apple Inc., entered into a cost sharing agreement under which Apple Inc. remained the legal owner of intangibles developed for the production of Apple products, and ASI and AOE were granted royalty-free licenses to use Apple’s intangibles to manufacture and sell products in all territories, excluding the Americas.Although ASI and AOE are incorporated under the law of Ireland, they are not Irish tax residents. However, both entities have branches in Ireland. The ASI Irish branch is in charge of the procurement, sale and distribution of Apple products to third-party customers in the EMEIA region and the AOE Irish branch is responsible for the manufacture and assembly of certain Apple products to related entities in the EMEIA region. In 1991 and 2007, ASI and AOE obtained tax rulings from the Irish tax authorities that their tax liability in Ireland was limited to the profits of their branches. Because of the cost sharing agreement, the profits reported by the foreign head offices were significantly higher than the profits reported by the Irish branches.
In its 2016 decision, the European Commission determined that the Irish tax authorities granted ASI and AOE tax advantages that constituted unlawful state aid because the allocation of profits between the foreign head offices and the Irish branches was not at arm’s length. Since the foreign head offices had no employees and substance, they could not carry out the functions and bear the risks related to the intangible assets, which are key in generating value. Consequently, these functions and risks must be allocated to the Irish branches.
In 2020, the EU General Court annulled the decision of the European Commission, holding that the Commission did not sufficiently establish that the Irish branches enjoyed a selective advantage. According to the General Court, the Commission should have demonstrated the amount of income related to the intangible assets earned by the Irish branches instead of focusing on demonstrating that no functions were carried out by the head offices outside of Ireland. The General Court also ruled that the Irish branches only carried out supportive activities that did not lead to the allocation of the intangible assets to them. In reaching this conclusion, the General Court made its own assessment of the facts entailing a comparison of the functions of the Irish branches and the functions of Apple Inc. as the company ultimately holding ASI and AOE and that had entered into the cost sharing agreement with them. Now on appeal, the CJEU has set aside the General Court’s judgment and rendered a final judgment in the matter, confirming the Commission’s decision.
CJEU decision
The main findings of the CJEU are as follows:- Irish domestic law requires that trading income arising through a branch, as well as any income from property or rights used by the branch, be identified. The Irish government took the position that this means that a one-sided approach (i.e., looking only at the branch activities) can be applied to determine the taxable profits of Irish branches. However, the CJEU concluded that a comparison of the activities carried out by the various parts of a company (i.e., head office and branches) is necessary. Differently to what the General Court had decided, this comparison does not require any account of the role played by other group entities, such as the parent entity. Consequently, to verify whether the allocation of assets accepted by the Irish tax authorities in its tax rulings was consistent with the actual allocation of functions, assets and risks, only the foreign head offices and the Irish branches have to be considered. Apple Inc.’s functions were not relevant when allocating the profits to the Irish branches, as they are separate legal entities.
- The decision of the European Commission contained an appropriate functional analysis of the foreign head offices and the Irish branches based on the arm’s length principle. According to this functional analysis, the licenses to use Apple’s intangibles held by ASI and AOE and the related profits generated from the sales of Apple products in the EMEIA region should have been allocated to the Irish branches because the head offices did not assume the associated functions and risks. Additionally, the Commission correctly applied the Authorized OECD Approach when interpreting Irish domestic tax law on the allocation of profits between foreign head offices and Irish branches.
- The Commission demonstrated that ASI and AOE were granted favorable tax treatment in the tax rulings granted in 1991 and 2007. Under these rulings, the tax burden of the Irish tax subsidiaries was substantially reduced in comparison to (1) non-integrated standalone Irish resident companies or (2) Irish group companies carrying out transactions with other group companies but whose profits are taxed in Ireland on an arm’s length basis.
What’s next?
The CJEU’s judgement represents a turn in the jurisprudence on similar state aid cases and represents a big win for the European Commission. It is likely that the Commission will continue to place an emphasis on state aid cases in the future; examples of some ongoing investigations due to tax advantages that potentially constituted unlawful state aid include the Nike (Netherlands), Inter IKEA (Netherlands) and Huhtamäki (Luxembourg) cases.The outcome of Apple case could also shape future tax disputes involving the EU foreign subsidies regulation addressing distortions to the internal market from foreign subsidies providing their recipients with unfair advantages.
Potentially affected taxpayers should be familiar with and understand the Apple decision with respect to potential distortive tax advantages received in EU member states or third countries provided the advantages received in third countries are granted to companies active within the EU.
Frederik Boulogne
Lisanne Rijff
Nathalie Bravo
BDO in Netherlands