In July 2020, the General Court of the European Union ruled that, while the European Commission has the power to scrutinise tax rulings issued by Member States to taxpayers, to do so it must meet a surprisingly high evidential threshold.
The case in question was a landmark one concerning two tax rulings issued by Ireland in favour of two Apple group companies (ASI and AOE), which are incorporated, but not tax resident, in Ireland. In 2016, the Commission decided that these tax rulings resulted in an effective corporate tax rate of less than 1%, which constituted unlawful State aid. Ireland was ordered to recover €13 billion from Apple.
Ireland, ASI and AOE later brought an action for an annulment of that decision and the dispute was heard by the General Court in 2019. On 15 July 2020, the General Court's judgment was released.
The General Court confirmed that the Commission could scrutinize tax rulings under State aid rules in order to determine whether they gave rise to more favourable tax treatment than for other taxpayers. However, the Court found there was insufficient proof that Ireland had given Apple preferential tax treatment.
The Court concluded that no selective advantage was given to Apple under the arm's length principle for the following reasons:
- The Commission had failed to undertake a sufficient assessment of whether the profits generated outside of North and South America should have been attributed to Apple's Irish branches under national law. In this case, since activities and functions were found to be undertaken outside Ireland, the small level of effective income from them that was attributed to Ireland did not constitute a selective advantage.
- The alleged incomplete and occasionally inconsistent defects in the two tax rulings had not led to a reduction in Apple's taxable profits in Ireland.
- The Commission had not proved that Ireland had exercised a broad discretion that was not based on objective or consistent criteria when issuing its rulings.
The Commission will now have to undertake a more thorough analysis of any ruling in order to meet its burden of proof. In having to meet higher evidential standards, the Commission's job of policing tax rulings for State aid breaches is now more difficult.
It is understood that the Commission has not yet decided whether to appeal.