Judgment summary
This appeal concerned the Commission's Decision (EU) 2017/1283 of 30 August 2016, which found that Ireland had granted unlawful State aid to Apple Sales International (ASI) and Apple Operations Europe (AOE, later merged into Apple Operations International) through tax rulings issued in 1991 and 2007. The General Court had annulled that decision in 2020, finding the Commission had not shown to the requisite legal standard that the tax rulings conferred a selective advantage.
On appeal by the Commission, the Court of Justice found that the General Court had erred in law, in particular by misinterpreting the Commission's primary line of reasoning as an 'exclusion approach', by wrongly taking into account functions performed by Apple Inc. (a separate entity) rather than only the functions of ASI's and AOE's head offices and Irish branches, and by relying on inadmissible evidence and imposing an excessive burden of proof on the Commission.
Having set aside the judgment under appeal in relevant part, the Court of Justice decided to give final judgment itself. It examined the pleas raised at first instance by Ireland and by ASI and AOE and rejected them all, including those relating to the reference framework, the arm's length principle, selectivity, State intervention, procedural rights, legal certainty and legitimate expectations, fiscal autonomy, and the statement of reasons. The Court concluded that the Commission had established to the requisite legal standard, through its primary line of reasoning, that the contested tax rulings had conferred a selective advantage on ASI and AOE, and dismissed the actions brought by Ireland and by ASI and AOE against the decision at issue.
Background
The Apple Group, founded in 1976 and established in Cupertino, United States, is composed of Apple Inc. and its controlled companies (para 3). ASI and AOE (formerly ACAL and ACL) are Irish-incorporated but not Irish tax resident companies, each fully owned indirectly by Apple Inc. through Apple Operations International (para 4).
Apple Inc., on the one hand, and ASI and AOE, on the other, were bound by a cost-sharing agreement under which they shared the costs and risks of research and development, with Apple Inc. remaining official legal owner of the cost-shared intangibles, including Apple's IP rights, and granting ASI and AOE royalty-free licences to use that IP outside North and South America (paras 6-7). In 2008 ASI also concluded a marketing services agreement with Apple Inc. (para 8).
ASI and AOE each had a branch in Ireland without separate legal personality, responsible respectively for procurement, sales and distribution activities, and for manufacture and assembly of computer products (paras 9-11).
By letters of 29 January 1991 and 23 May 2007, the Irish tax authorities issued tax rulings determining the chargeable profits of ASI's and AOE's Irish branches, based on proposals from the Apple Group's tax advisors (paras 12-22). Following an investigation opened on 11 June 2014 under Article 108(2) TFEU, the Commission adopted Decision (EU) 2017/1283 on 30 August 2016, finding that these tax rulings constituted unlawful State aid incompatible with the internal market, and ordering recovery of aid for the period from 12 June 2003 to 27 September 2014 (paras 27-46).
Ireland (Case T-778/16) and ASI and AOE (Case T-892/16) brought actions before the General Court for annulment of that decision. By judgment of 15 July 2020 (T-778/16 and T-892/16), the General Court annulled the decision, finding the Commission had not shown to the requisite legal standard that an advantage under Article 107(1) TFEU existed (paras 48-63).
Core dispute
The core dispute was whether the Commission had correctly demonstrated, in its decision at issue, that the 1991 and 2007 Irish tax rulings for ASI and AOE conferred a selective advantage within the meaning of Article 107(1) TFEU by allocating the profits derived from the Apple Group's IP licences to the non-Irish head offices of ASI and AOE rather than to their Irish branches, contrary to the arm's length principle applicable under section 25 of the TCA 97.
The Commission's primary line of reasoning was that, because the head offices of ASI and AOE had no employees or physical presence outside their Irish branches, and could not control or manage the Apple Group's IP licences, those licences and the associated profits should have been allocated to the Irish branches. The General Court had rejected this reasoning, finding the Commission had applied an incorrect 'exclusion approach' inconsistent with Irish law, and that the Commission had not shown that the Irish branches actually performed the functions that would justify allocating IP-related profits to them.
On appeal, the central legal question was whether the General Court was entitled to rely on functions performed by Apple Inc. (a separate legal entity, parent of the Apple Group) when rejecting the Commission's findings that ASI's and AOE's Irish branches, rather than their head offices, should have been allocated the IP licences and related profits, and whether the General Court had otherwise erred in its assessment of the Commission's primary and subsidiary lines of reasoning.
Court findings
The Court of Justice upheld the Commission's first ground of appeal in its entirety. It found that the General Court had misinterpreted the decision at issue by ruling that the Commission had relied solely on an 'exclusion' approach (based on the head offices' lack of employees and physical presence) rather than on an actual analysis of functions performed by the Irish branches; this constituted a distortion of the decision's content and an error of law (paras 117-132).
The Court found that the General Court had wrongly taken into account functions performed by Apple Inc., a separate entity, when assessing whether ASI's and AOE's Irish branches or their head offices should be allocated the IP licences, applying a different legal test from the one it had itself identified as correct under section 25 of the TCA 97, namely a comparison confined to the allocation of assets, functions and risks between the branch and the other parts of the same company (paras 194-222).
The Court also found that the General Court had committed a breach of procedure by relying on inadmissible evidence, namely certain powers of attorney and email exchanges that had not been produced during the administrative procedure, or were produced only at a late stage of the proceedings (paras 180-193). Further, the General Court had imposed an excessive burden of proof on the Commission by holding that the absence of certain decisions from board minutes did not mean those decisions had not been taken (paras 243-245).
Having set aside the judgment under appeal on these points, the Court of Justice proceeded to give final judgment. It rejected the various pleas raised by Ireland and by ASI and AOE at first instance, including on: joint examination of advantage and selectivity; identification of the reference framework and application of the arm's length principle; the Commission's factual assessment of activities within the Apple Group; the selective nature of the tax rulings; State intervention and use of State resources; breach of procedural rights including the right to be heard; legal certainty and legitimate expectations; fiscal autonomy of Member States; and adequacy of reasoning (paras 268-397). The Court concluded that the selective nature of the advantage granted to ASI and AOE had been established to the requisite legal standard on the basis of the Commission's primary line of reasoning, making it unnecessary to examine the subsidiary and alternative lines of reasoning (para 397).
Outcome
The Court of Justice set aside the General Court's judgment of 15 July 2020 (T-778/16 and T-892/16) in so far as it upheld the complaints raised by Ireland in the first to third pleas in Case T-778/16 and by ASI and AOE in the first to fifth pleas in Case T-892/16, annulled Commission Decision (EU) 2017/1283, and ruled on costs.
Giving final judgment itself, the Court dismissed the actions brought by Ireland and by ASI and Apple Operations International Ltd against the decision at issue.
Ireland, ASI and AOI were ordered to bear their own costs and to pay those incurred by the European Commission in the appeal and at first instance. The Grand Duchy of Luxembourg, the Republic of Poland and the EFTA Surveillance Authority were ordered to bear their own costs.
Tp method highlighted
The dispute centred on the allocation of chargeable profits between the Irish branches of ASI and AOE and their non-resident head offices under section 25 of the TCA 97, which taxes non-resident companies in Ireland only on trading income arising directly or indirectly through an Irish branch, without specifying a profit allocation method.
The Commission argued that Article 107(1) TFEU required this allocation to be based on the arm's length principle, treating the branch and the rest of the company as if they were separate and independent enterprises, and relied in part on the Authorised OECD Approach for allocating profit to a permanent establishment, which requires a functional analysis of the assets used, functions performed and risks assumed.
Under the contested 1991 and 2007 tax rulings, ASI's chargeable profit was calculated using cost-plus style margins on operating costs (e.g. 12.5% of branch operating costs in 1991, revised in 2007), and AOE's chargeable profit was calculated as a percentage of operating costs plus an amount reflecting an 'IP return' on accumulated manufacturing process technology (paras 14-22).
The Commission's primary line of reasoning was that the Apple Group's IP licences held by ASI and AOE, and the profits generated by their exploitation, should have been allocated to the Irish branches rather than to the head offices, since the head offices lacked the capacity (no employees, no physical presence) to control or manage those licences, whereas the branches performed functions crucial to that IP's use. The Court of Justice held that this comparison had to be confined to the head offices and branches of ASI and AOE themselves, and that functions performed by Apple Inc., a separate group entity, were irrelevant to that intra-company allocation exercise, even though Apple Inc. undertook the group's IP development and cost-sharing arrangements.
Major issues / areas of contention
- Whether the General Court correctly interpreted the Commission's decision as relying solely on an 'exclusion approach' (absence of employees/physical presence at ASI's and AOE's head offices) rather than on an actual functional analysis of the Irish branches.
- Whether functions performed by Apple Inc., as a separate legal entity and parent company of the Apple Group, were relevant to determining how profits from the exploitation of IP licences held by ASI and AOE should be allocated between their head offices and Irish branches under section 25 of the TCA 97.
- Whether the General Court applied the correct legal test under Irish law (comparing the branch to the 'other parts of the company') or an incorrect test (comparing the branch to Apple Inc.).
- Whether the General Court relied on inadmissible evidence, including powers of attorney and email exchanges not produced (or not fully produced) during the Commission's administrative procedure.
- Whether the General Court imposed an excessive burden of proof on the Commission by holding that the absence of references to certain decisions in board minutes did not prove those decisions had not been taken.
- Whether the contested tax rulings conferred a selective advantage on ASI and AOE for the purposes of Article 107(1) TFEU, including whether the Commission's identification of the reference framework (ordinary Irish corporate tax rules including section 25 of the TCA 97) and application of the arm's length principle were correct.
- Whether the Commission's investigation and decision-making process breached Ireland's and Apple's procedural rights, including the right to be heard and the principle of good administration.
- Whether ordering recovery of the aid breached the principles of legal certainty, non-retroactivity and protection of legitimate expectations.
- Whether the Commission exceeded its competences and encroached on Member States' fiscal autonomy by applying the arm's length principle to Irish tax law.
- Whether the Commission's decision was adequately reasoned under Article 296 TFEU.