On 10 September 2024, the ECJ ruled in favour of the EU Commission in case C-465/20 P, European Commission v Ireland and Apple Sales International relating to State aid granted by Ireland to Apple. Contrary to other State aid decisions involving transfer pricing, the ECJ accepted OECD transfer pricing guidance as relevant to assess whether an advantage has been granted even if not integrated into domestic law.
Background
On 30 August 2016, the EU Commission (“EC”) found that Ireland granted illegal State aid to Apple through two tax rulings in 1991 and 2007. The latter concerned the determination of taxable profits for the Irish branches of two Irish incorporated but non-tax resident companies, Apple Operations Europe (“AOE”) and Apples Sales International (“ASI”), two indirect subsidiaries of Apple Inc, a US company. AOE and ASI had entered into a cost sharing agreement (“CSA”) with Apple Inc under which the participants agreed to share the costs in relation to Apple’s IP development and granted AOE and ASI a royalty free license outside of North and South America.
ASI’s Irish branch engaged mainly in sales and procurement activities while AOE’s Irish branch engaged in manufacturing IT related products. Under the tax rulings, the Irish tax authorities agreed that the taxable profit of the branches should be computed as a percentage of their operating costs.
The EC found that the tax rulings reduced the tax base of both branches and constituted a derogation from the relevant reference framework, the Irish tax law. In assessing the level of profits that should have been attributed to the branches, the EC relied on the arm’s length principle and the Authorised OECD Approach (“AoA”), despite the latter being adopted only in 2010, thus posterior to the rulings.
Apple and Ireland challenged the EC decision before the Court of Justice of the European Union (“CJEU”). On 15 July 2020, the General Court (“GC”), delivered a decision in favour of Ireland and Apple. The GC found “that there is essentially some overlap” between applicable Irish tax law and the AoA, thus siding with the EC on the relevant framework, but considered that the EC misapplied these rules to conclude on the presence of an advantage. This decision was appealed by the EC.
Findings of the European Court of Justice (“ECJ”)
In his opinion, delivered on 9 November 2023, Advocate General Pitruzzela recommended to set aside the GC judgment and refer the case back to the GC. The ECJ set aside the GC judgment but gave final judgement on the case, finding that:
- The GC was not correct in concluding that the EC relied on an exclusion approach to allocate the licensing income. While the GC retained that the EC allocated the IP income to the branches solely because the head offices had no substance, the ECJ considered that the EC had performed appropriate functional analysis to reach the allocation.
- The GC should not have relied on the functions exercised by Apple Inc. to allocate the profits realised by the Irish branches.
- The EC was entitled to rely on the content of board minutes and the absence of certain subjects to conclude that certain decisions were not taken by the entity and concluding otherwise like the GC did, would impose an excessive burden of proof on the EC.
The outcome of the case departs from the previous State aid cases involving transfer pricing where the ECJ dismissed the EC’s decisions on the ground that it did not rely on domestic legislation as the applicable reference system to assess the existence of an advantage (Fiat, joined Cases C-885/19 P and C-898/19 P of 8 November 2022 and Amazon, C-457/21 P of 14 December 2023) and that the arm’s length principle with related OECD guidance are to be considered within the reference system only if integrated into national law. In the Apple case, the ECJ relied on the GC’s findings and the absence of cross-appeal on this aspect (applying the res judicata principle) to apply the OECD AoA as they “corresponded in essence” to the method applicable under Irish tax law.
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