On July 15, 2020 the General Court of the EU annulled a Commission state aid decision against Apple ordering the company to repay alleged state aid and interest of around €14 billion.
The judgment and underlying Commission Decision form part of a tax rulings saga in which the Commission has since 2013 been investigating allegations of favourable tax treatment given to certain companies by so-called tax rulings: advanced clarifications of tax arrangements applicable to the companies in question by the tax authorities of Member States. Amongst others, the Commission opened formal proceedings against the Netherlands for aid granted to Starbucks, Ireland for aid granted to Apple, Luxembourg for aids granted to Fiat, McDonald’s and Amazon, and Belgium for operating an excess profit exemption scheme. The overall concern was that certain Member States were artificially reducing the tax base of certain companies by means of rulings relying on transfer prices and/or allocation of profits that did not reflect economic reality.
In the Apple Decision, the Commission decided in August 2016 that Ireland had granted tax benefits to Apple that were illegal under EU State Aid rules because they allowed Apple to pay substantially less tax than other businesses subject to the same national taxation. Accordingly, Ireland was ordered to recover the alleged illegal aid granted to Apple for the years 2003 to 2014 of up to €13 billion, plus interest (the Commission can order recovery of illegal state aid for a ten year period preceding the Commission’s first request for information, which in this case was issued in 2013).
Both Ireland and Apple appealed and won before the General Court, which annulled the Commission Decision, although that judgment of can now be appealed before the Court of Justice.
The judgment itself confirms that the Commission can target the provision of tax advantages under Article 107 of the Treaty on the Functioning of the European Union (TFEU) but in relation to the key question in the case, the existence of an advantage to Apple, the General Court made clear that the Commission has to prove every element of Article 107.1 and found that the Commission erred when declaring that Apple had been granted a selective economic disadvantage, and thus, State aid.
Ireland and Apple argued that the Commission assessed the concept of advantage and the concept of selectivity. The General Court noted that it is important to keep in mind that selectivity and advantage are two separate conditions of the existence of State Aid. In that sense, the Commission must show that the measure improves the financial situation of the recipient for that measure to be an advantage and, thus, State Aid. The Commission also bears the burden of proof when showing that the advantage is not enjoyed by other undertakings in a legal and factual situation comparable to that of the recipient in relation to the selectivity condition.
However, the General Court noted that, concerning tax measures, proving both conditions overlaps in practice, in so far as it must be shown that the contested tax measure leads to a reduction in the amount of tax which would normally have to be paid by the recipient of the measure under the ordinary tax regime, and than that which would be applicable to other taxpayers in the same situation (consisting of a “selective advantage”). The General Court acknowledged that the Commission examined both conditions and that it was irrelevant that a single examination covered both conditions simultaneously, backing the Commission’s approach. The General Court also endorsed the Commission’s assessment related to normal taxation under the applicable Irish tax law, in order to check whether chargeable profits endorsed by the Irish tax authorities would correspond to those which would have been obtained under market conditions.
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The crucial aspect, where the General Court differed from the Commission’s reasoning, is that Ireland had granted Apple an economic selective advantage by allowing the company not to allocate Apple’s trading income (including all the Apple Group intellectual property licenses), obtained from the sales outside of North and South America, to their Irish branches. The General Court noted that the Commission should have proven that that income represented the value of the activities actually carried out by the Irish branches themselves (activities in those branches or strategic decisions taken in those branches and then implemented elsewhere). The General Court considers that the Commission did not succeed in demonstrating that the contested tax ruling would lead to a reduction of Apple’s chargeable profits in Ireland. As a result, the Commission did not sufficiently prove the existence of an economic advantage under Article 107(1) TFEU.
The General Court concluded that neither did the Commission prove that the contested tax rulings were issued by the Irish tax authorities on a discretionary basis and, thus, that Apple had been granted a selective advantage. As mentioned, there is no problem with analyzing both conditions in order to be considered State aid but, in probably the most relevant issue of the judgment, the General Court underlined the importance of complying with the burden of proof of those conditions.
The immediate interest in the decision, understandably, focuses on the success of Apple and Ireland –so far at least– in overturning an unprecedentedly large recovery decision, and has been interpreted as an unfortunate reversal for the Commission. But the greater relevance of the judgment almost certainly lies in the reminder of the strength of a different institution. Specifically, that judicial review by the EU Courts in State Aid cases is demanding, and that the General Court in particular will not shy away from reviewing in detail if each of the conditions contained in Article 107.1 TFEU has been sufficiently argued and demonstrated by the Commission when declaring the existence of illegal State Aid. That reminder of the rude health of the rule of law in the EU courts is most welcome.
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