The European Central Court judgement relates to the 2016 decision by the European Commission about the legality of two tax rulings issued by the Irish tax authorities in January 1991 and May 2007 in favour of Apple Sales International (ASI) and Apple Operations Europe (AOE), which were companies incorporated in Ireland but not tax resident in Ireland.

These rulings agreed by the Revenue endorsed the methods used by ASI and AOE to determine their chargeable profits in Ireland, relating to the trading activity of their respective Irish branches.

The Commission argued that this so-called ‘sweetheart’ deal constituted state aid unlawfully put into effect by Ireland, on the grounds that it allowed Apple to attribute nearly all its EU earnings to an Irish head office that existed only on paper, thereby avoiding paying tax on EU revenues, and demanded the recovery of what it deemed to be €13bn in unlawful tax advantages.

Calculations suggest the US company paid an effective corporate tax rate of 1% on its European profits in 2003, dropping to 0.005% in 2014.

Both Ireland and Apple contested the decision, with the €13.1bn in back taxes and €1.2bn in interest eventually paid into an escrow account while legal challenges took place.

In its judgment the General Court has now annulled the Commission’s decision on the basis it had not shown ‘to the requisite legal standard’ that there was a tax advantage.

 According to the General Court, the Commission was wrong to declare that ASI and AOE had been granted a selective economic advantage and, by extension, state aid.

It said that the Commission incorrectly concluded, in its primary line of reasoning, that the Irish tax authorities had granted ASI and AOE an advantage as a result of not having allocated the Apple Group intellectual property licences held by ASI and AOE, and, consequently, all of ASI and AOE’s trading income, obtained from the Apple Group’s sales outside North and South America, to their Irish branches.

 According to the General Court, the Commission should have shown that that income represented the value of the activities actually carried out by the Irish branches themselves, in view of the activities and functions actually performed by the Irish branches of ASI and AOE, on the one hand, and the strategic decisions taken and implemented outside of those branches, on the other.

In addition, the General Court considered that the Commission did not succeed in demonstrating, in its subsidiary line of reasoning, methodological errors in the contested tax rulings which would have led to a reduction in ASI and AOE’s chargeable profits in Ireland.

 Furthermore, the General Court said that the Commission did not prove, in its alternative line of reasoning, that the contested tax rulings were the result of discretion exercised by the Irish tax authorities and that, accordingly, ASI and AOE had been granted a selective advantage.

In its initial response to the decision, the Irish Department of Finance said in a statement:  ‘We welcome the judgment by the General Court of the European Union annulling the decision of the European Commission of August 2016, which alleged Ireland provided state aid to Apple.

‘Ireland has always been clear that there was no special treatment provided to the two Apple companies - ASI and AOE. The correct amount of Irish tax was charged in line with normal Irish taxation rules.

‘Ireland appealed the Commission decision on the basis that Ireland granted no state aid and the decision today from the Court supports that view.’

In a statement Apple said: ‘This case was not about how much tax we pay, but where we are required to pay it.

‘We're proud to be the largest taxpayer in the world as we know the important role tax payments play in society.’

European Commission reaction

The decision is a blow to EU Competition Commissioner Margrethe Vestager, who brought the case, and who has been active in efforts to challenge multinationals over their shifting of profits to low tax jurisdictions. She said she would ‘study the judgment and reflect on possible next steps’.

Vestager said as a result of the Irish tax rulings, in 2011, Apple's Irish subsidiary recorded European profits of $ 22bn (€19bn) but under the terms of the tax ruling only around €50m were considered taxable in Ireland.

She said: ‘The Commission stands fully behind the objective that all companies should pay their fair share of tax. If member states give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the EU.

‘In previous judgments on the tax treatment of Fiat in Luxembourg and Starbucks in the Netherlands, the General Court confirmed that, while member states have exclusive competence in determining their laws concerning direct taxation, they must do so in respect of EU law, including state aid rules.

‘Furthermore, the General Court also confirmed the Commission's approach to assess whether a measure is selective and whether transactions between group companies give rise to an advantage under EU State aid rules based on the so-called “arm's length principle”.

‘The Commission will continue to look at aggressive tax planning measures under EUsState aid rules to assess whether they result in illegal State aid.

‘At the same time, state aid enforcement needs to go hand in hand with a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.

‘We have made a lot of progress already at national, European and global levels, and we need to continue to work together to succeed.’

The Commission has the option to appeal the decision to Europe's highest court, the European Court of Justice.

Jason Collins, partner and head of tax at law firm Pinsent Masons, said:  ‘Apple’s victory shows that European courts are unwilling to call beneficial tax regimes state aid, even when designed to attract foreign investment – provided they apply the rules consistently.

‘This will be a very welcome outcome for other multi-nationals who have been watching this case closely.

‘Brussels will no doubt appeal. This isn’t the end of the story.  In addition, reports suggest that the EU is looking at other ways to stop member states, such as Ireland, from offering low effective rates of corporate tax going forward. We expect the EU to continue applying pressure in this area.

‘Although raising taxes on corporate profits remains under the competence of each member state, the EU continues to want to try to centralise policy, to stop member states competing with each other.’

Laurence Field, corporate tax partner at Crowe UK said: ‘Apart from the staggering amounts of cash at stake, the case was seen as key in trying to stop tax competition between member states, which the EU frowns upon and member states get away with what they can.

With the advent of Digital Services Tax which countries are now rolling out with varying levels of enthusiasm, some think that the sting has gone out of the immediate pressure to be seen to make global companies pay their fair share of tax – and this is last year’s battle. However, the issues are quite different and a Digital Services Tax only goes so far.

We can expect an Appeal against the decision – there’s a lot at stake here both financially and politically. Strap yourself in for round two.’

The European Central Court’s ruling