General Court, 15-07-2020, nr. T‑778/16, nr. T‑892/16

Within the Apple Group, Apple Operations International is a fully owned subsidiary of Apple Inc. Apple Operations International fully owns the subsidiary Apple Operations Europe (AOE), which in turn fully owns the subsidiary Apple Sales International (ASI). ASI and AOE are both companies incorporated in Ireland, but are not tax resident in Ireland.

As stated in recitals 113 to 115 of the contested decision, a significant number of members of the boards of directors of AOE and ASI were directors employed by Apple Inc. and based in Cupertino. Excerpts from resolutions and minutes from annual general meetings and board meetings of ASI and AOE are reproduced in recital 115 (Tables 4 and 5) of that decision. The resolutions of the boards of directors concerned, inter alia, on a regular basis, the payment of dividends, the approval of directors' reports, and the appointment and resignation of directors. Less frequently, those resolutions concerned the incorporation of subsidiaries and powers of attorney authorising certain directors to carry out various activities such as managing banking, relationships with governments and other public offices, audits, insurance, renting, purchase and sale of assets, taking delivery of goods, and commercial contracts.

Apple Inc., on the one hand, and ASI and AOE, on the other, were bound by a cost-sharing agreement (‘the cost-sharing agreement’). The shared costs concerned, inter alia, the research and development (R&D) of technology incorporated in the Apple Group's products. The initial cost-sharing agreement was signed in December 1980. The parties to that agreement were Apple Inc. (then Apple Computer Inc.) and AOE (then Apple Computer Ltd (ACL)). In 1999, ASI (then Apple Computer International) became a party to that agreement. During the period relevant to the investigation referred to in the contested decision, various amendments were made to the cost-sharing agreement, in order in particular to take into account changes in the applicable regulatory framework.

Under that agreement, the parties agreed to share the costs and the risks associated with the R&D concerning intangibles following development activities connected with the Apple Group's products and services. The parties also agreed that Apple Inc. remained the official legal owner of the cost-shared intangibles, including the Apple Group's intellectual property (‘IP’) rights. In addition, Apple Inc. granted ASI and AOE royalty-free licences enabling those companies, inter alia, to manufacture and sell the products concerned in the territory that had been assigned to them, that is to say, the world apart from North and South America. Furthermore, the parties to the agreement were required to bear the risks resulting from that agreement, the main risk being the obligation to pay the development costs relating to the Apple Group's IP rights.

In 2008, ASI concluded a marketing services agreement with Apple Inc., in connection with which Apple Inc. undertook to provide marketing services to ASI, including the creation, development and production of marketing strategies, programmes and advertising campaigns. ASI undertook to remunerate Apple Inc. for those services by payment of a fee corresponding to a percentage of the ‘reasonable costs incurred’ by Apple Inc. in relation to those services, plus a mark-up.

By letter of 12 October 1990, addressed to the Irish tax authorities, the Apple Group's tax advisors described ACL's operations in Ireland, indicating the functions performed by its Irish branch established in Cork (Ireland). In addition, it was stated that the branch was the owner of the assets relating to the manufacturing activities, but that AOE retained ownership of the materials used, works in progress and finished products.

Following the letter from the Apple Group's representatives to the Irish tax authorities of 16 January 1991 and the response from those authorities of 24 January 1991, those authorities confirmed, by letter of 29 January 1991, the terms proposed by the Apple Group, as described below. Thus, pursuant to those terms, confirmed by the Irish tax authorities, ACL's chargeable profit in Ireland, relating to income from its Irish branch, was calculated on the basis of the following elements:

By letter of 2 January 1991, the Apple Group's tax advisors informed the Irish tax authorities of the existence of a new company, Apple Computer Accessories Ltd (ACAL), the Irish branch of which was described as being responsible for sourcing products intended for export from Irish manufacturers.

On 16 January 1991 the Apple Group's representatives sent a letter to the Irish tax authorities summarising the terms of the agreement which had been concluded during a meeting between that group and those authorities on 3 January 1991 as regards ACAL's chargeable profit. According to that letter, the calculation of the branch's profit had to be based on a margin of 12.5 % of operating costs (excluding materials for resale).

By letter of 29 January 1991, the Irish tax authorities confirmed the terms of the agreement as expressed in the letter of 16 January 1991.

In recitals 227 to 243 of the contested decision, the Commission considered that the reference framework consisted of the ordinary rules of taxation of corporate profit in Ireland, the objective of which was to tax the profits of all companies subject to tax in Ireland. In light of that objective, the Commission considered that integrated companies and stand-alone companies were in a comparable factual and legal situation. Accordingly, section 25 of the Taxes Consolidation Act 1997 (‘the TCA 97’), which provides for the taxation of non-resident companies in respect of trading income arising directly or indirectly through the active branch in Ireland, had to be regarded as forming an integral part of the reference framework and not as a separate reference framework.

In recitals 244 to 263 of the contested decision, the Commission stated that, under section 25 of the TCA 97, in light of its intended purpose, that provision had to be applied in connection with a profit allocation method. In that regard, it noted that Article 107(1) TFEU required the profit allocation method to be based on the arm's length principle, regardless of whether or not the Member State concerned had incorporated the arm's length principle into its national legal system. The Commission based that consideration on two premisses. First, it recalled that any tax measure adopted by a Member State had to comply with the rules on State aid. Secondly, it contended that it followed from the judgment of 22 June 2006, Belgium and Forum 187 v Commission (C-182/03 and C-217/03, EU:C:2006:416), that a reduction in the tax base resulting from a tax measure enabling a taxpayer to employ transfer pricing in intra-group transactions that did not resemble prices that would have been charged in conditions of free competition would confer a selective advantage on that taxpayer for the purposes of Article 107(1) TFEU.

Thus, the Commission contended, on the basis of the judgment of 22 June 2006, Belgium and Forum 187 v Commission (C-182/03 and C-217/03, EU:C:2006:416), that the arm's length principle constituted a benchmark for establishing whether an integrated company was receiving a selective advantage for the purposes of Article 107(1) TFEU as a result of a tax measure determining its transfer pricing and thus its tax base. That principle was intended to ensure that intra-group transactions be treated, for tax purposes, in the same way as those carried out between non-integrated stand-alone companies, so as to avoid unequal treatment of companies in a similar factual and legal situation, having regard to the objective of such a system, which was to tax the profits of all companies falling within its fiscal jurisdiction.

As regards the guidelines developed within the framework of the Organisation for Economic Cooperation and Development (OECD), the Commission indicated that these constituted simply useful guidance for tax authorities, to ensure that the profit allocation and transfer pricing methods produce outcomes in line with market conditions.

Primarily, in recitals 265 to 321 of the contested decision, the Commission contended that the fact that the Irish tax authorities had accepted, in the contested tax rulings, the premiss that the Apple Group IP licences held by ASI and AOE had to be allocated outside Ireland had led to ASI and AOE's annual chargeable profits in Ireland departing from a reliable approximation of a market-based outcome in line with the arm's length principle.

In essence, the Commission considered that the IP licences held by ASI and AOE for the procurement, manufacture, sale and distribution of the Apple Group's products outside North and South America, which it had identified as ‘the Apple IP licences’, had contributed significantly to those two companies' income.

Thus, the Commission criticised the Irish tax authorities for having incorrectly allocated assets, functions and risks to the head offices of ASI and AOE, although those head offices had no physical presence or employees. More specifically, regarding the functions related to the IP licences, the Commission contended that such functions could not have been performed only by ASI and AOE's boards of directors, without any staff, as shown by the lack of references to discussions and decisions in that regard in the board minutes provided to the Commission. Therefore, according to the Commission, in so far as the head offices of ASI and AOE had been unable to control or manage the Apple Group's IP licences, those head offices should not have been allocated, in an arm's length context, the profits derived from the use of those licences. Accordingly, those profits should have been allocated to ASI and AOE's branches, which alone would have been in a position effectively to perform functions related to the Apple Group's IP that were crucial to ASI and AOE's trading activity.

Consequently, by failing to allocate the profits deriving from the Apple Group's IP to ASI and AOE's branches, thereby acting in breach of the arm's length principle, the Irish tax authorities had conferred an advantage on ASI and AOE for the purposes of Article 107(1) TFEU in the form of a reduction in their respective annual chargeable profits. According to the Commission, that advantage was of a selective nature, because it entailed a reduction in ASI and AOE's tax liability in Ireland as compared with non-integrated companies whose chargeable profits reflected prices negotiated at arm's length on the market.

As a subsidiary argument, in recitals 325 to 360 of the contested decision, the Commission contended that, even if the Irish tax authorities had been correct in accepting the assumption that the Apple IP licences held by ASI and AOE had to be allocated outside Ireland, the profit allocation methods approved by the contested tax rulings had nonetheless resulted in an annual chargeable profit for ASI and AOE in Ireland which departed from a reliable approximation of a market-based outcome in line with the arm's length principle. According to the Commission, those methods were based on inappropriate methodological choices, which had led to a reduction in the amount of tax that ASI and AOE were required to pay as compared with non-integrated companies whose chargeable profits under those rules were determined by prices negotiated at arm's length on the market. Therefore, according to the Commission, the contested tax rulings, by approving those methods, had conferred a selective advantage on ASI and AOE for the purposes of Article 107(1) TFEU.

Using an alternative line of reasoning, in recitals 369 to 403 of the contested decision, the Commission argued that, even if it had to be considered that the reference framework consisted solely of section 25 of the TCA 97, the contested tax rulings had conferred a selective advantage on ASI and AOE in the form of a reduction of their tax base in Ireland. First, the Commission contended that the application of section 25 of the TCA 97 in Ireland was based on the arm's length principle. However, in the present instance, the Commission had shown that the contested tax rulings had departed from a reliable approximation of a market-based outcome in line with the arm's length principle, which had conferred an economic advantage on ASI and AOE. Secondly and in any event, the Commission argued that, even if it had to be considered that the application of section 25 of the TCA 97 was not based on the arm's length principle, it was necessary to conclude that the contested tax rulings had been issued by the Irish tax authorities on a discretionary basis, in the absence of objective criteria related to the Irish tax system, and that, as a result, they conferred a selective advantage on ASI and AOE.

The Commission concluded that the contested tax rulings gave rise to a reduction in the charges that ASI and AOE would normally have been required to bear in the course of their business operations and that, accordingly, those rulings had to be regarded as having granted those two companies operating aid. However, it contended that, in so far as ASI and AOE were part of the Apple Group, which is multinational in nature, and in so far as that group had to be regarded as a single economic unit for the purposes of case-law, that group had benefited as a whole from the State aid granted by Ireland by way of the contested tax rulings (Section 8.3 of the contested decision).

In recitals 227 to 243 of the contested decision, the Commission stated that the relevant reference framework for its analysis of whether there was a selective advantage was the ordinary rules of taxation of corporate profit under the Irish corporate tax system, which have as their intrinsic objective the taxation of profit of all companies subject to tax in that Member State.

The Commission considered that that reference framework included both non-integrated and integrated companies because Irish corporation tax does not distinguish between those companies.

In addition, the Commission considered that even though resident and non-resident companies were taxed on different sources of income, in the light of the intrinsic objective of those rules, namely the taxation of profit of all companies subject to tax in Ireland, both types of company were in a comparable factual and legal situation. Consequently, those rules included section 25 of the TCA 97, which therefore could not be considered to constitute a separate reference framework in itself.

Ireland and ASI and AOE contest that definition of the reference framework and claim, in essence, that the relevant reference framework in the present instance is section 25 of the TCA 97, a separate charging provision applicable specifically to non-resident companies which are not in a situation comparable to that of resident companies. In addition, according to Ireland and ASI and AOE, the matter of whether an undertaking is integrated or non-integrated is not the issue in the present instance; instead, the issue is the taxation of non-resident companies.

It should be noted that, when analysing tax measures in the context of Article 107(1) TFEU, the determination of the reference framework is relevant for examining both the advantage condition and the selectivity condition.

As has been noted in paragraph 110 above, in the case of tax measures, the very existence of an advantage can be established only by comparison with so-called ‘normal’ taxation. It is precisely that so-called ‘normal’ taxation that is established by the reference framework.

In addition, in order to classify a domestic tax measure as selective, it is necessary to begin by identifying and examining the ordinary or normal tax regime applicable in the Member State concerned (judgment of 8 September 2011, Paint Graphos and Others, C-78/08 to C-80/08, EU:C:2011:550, paragraph 49).

Moreover, the Court of Justice has confirmed its case-law according to which it is sufficient, in order to establish the selectivity of a measure that derogates from an ordinary tax system, to demonstrate that that measure benefits certain operators and not others, although all those operators are in an objectively comparable situation in the light of the objective pursued by the ordinary tax system (judgment of 21 December 2016, Commission v World Duty Free Group and Others, C-20/15 P and C-21/15 P, EU:C:2016:981, paragraph 76).

Indeed, while it is not always necessary, in order for it to be established that a tax measure is selective, that it should derogate from an ordinary tax system, the fact that it can be so characterised is highly relevant in that regard where the effect of that measure is that two categories of operators are distinguished and are subject, a priori, to different treatment, namely those who fall within the scope of the derogating measure and those who continue to fall within the scope of the ordinary tax system, although those two categories are in a comparable situation in the light of the objective pursued by that system (judgment of 21 December 2016, Commission v World Duty Free Group and Others, C-20/15 P and C-21/15 P, EU:C:2016:981, paragraph 77).

In addition, the Court of Justice has held that the legislative means used are not a decisive element for the purpose of determining the reference framework (judgment of 28 June 2018, Lowell Financial Services v Commission, C-219/16 P, not published, EU:C:2018:508, paragraphs 94 and 95).

It is apparent from case-law that it is the rules of taxation to which the recipient of the measure that is regarded as constituting State aid is subject that form the reference framework. It is also apparent from case-law that the substantive scope of the reference framework can be defined only in relation to the measure that is regarded as constituting State aid. Therefore, the purpose of the measures at issue and the legal framework of which they form part must be taken into consideration when determining the reference framework.

Moreover, the Commission explained its interpretation of the concept of reference framework in the notice on the notion of State aid as referred to in Article 107(1) TFEU (OJ 2016 C 262, p. 1). Although that notice cannot bind the Court, it may nevertheless serve as a useful source of guidance (see, to that effect and by analogy, judgment of 26 July 2017, Czech Republic v Commission, C-696/15 P, EU:C:2017:595, paragraph 53).

Paragraph 133 of the notice referred to in paragraph 151 above states, inter alia, that the reference system is composed of a consistent set of rules that generally apply — on the basis of objective criteria — to all undertakings falling within its scope as defined by its objective. Typically, those rules define not only the scope of the system, but also the conditions under which the system applies, the rights and obligations of undertakings that are subject to it and the technicalities of the way in which it functions.

Therefore, it is in the light of the foregoing considerations that the Court must assess whether the Commission correctly identified the relevant reference framework for examining the selectivity of the contested tax rulings.

In the present instance, upon reading the contested tax rulings, as described in paragraphs 11 to 21 above, it is clear that they were issued in order to allow ASI and AOE to determine their chargeable profits in Ireland for the purposes of corporation tax in that Member State.

Accordingly, the contested tax rulings form part of the general Irish corporation tax regime, the objective of which is to tax the chargeable profits of companies carrying on activities in Ireland, be they resident or non-resident, integrated or stand-alone.

It must be noted that, under that general Irish regime, according to the description — which is not contested by the parties — set out in recital 71 of the contested decision, corporation tax in Ireland is charged on the profits of companies (section 21(1) of the TCA 97). In addition, Ireland applies a different rate to trading income, non-trading income and capital gains. Section 21 of the TCA 97 sets the general rate of corporation tax at 12.5 %. That rate applies to the trading income of companies taxed under the TCA 97, while non-trading income is taxed at a rate of 25 % and capital gains are taxed at a rate of 33 %. However, capital gains on disposals of certain shareholdings are subject to an exemption.

Moreover, as is stated in recital 72 of the contested decision, under section 26 of the TCA 97, resident companies are subject to corporation tax calculated on the basis of their worldwide profits and capital gains, excluding most distributions received from other companies resident in Ireland.

Lastly, under section 25 of the TCA 97, the wording of which is set out in recital 73 of the contested decision, a non-resident company is not to be within the charge to corporation tax unless it carries on a trade in Ireland through a branch or agency. If it does so, that company is to be taxed on all of its trading income arising directly or indirectly from the branch or agency and from the property or rights used by or held by or for the branch or agency as well as on capital gains attributable to the branch or agency.

Under section 25(1) of the TCA 97, non-resident companies are not to be taxed in Ireland unless they carry on a trade there through a branch or agency; if they do so, they must pay corporation tax on all of their chargeable profits. Section 25(2)(a) of the TCA 97 defines chargeable profits as any trading income arising directly or indirectly through or from the branch or agency, and any income from property or rights used by, or held by or for, the branch or agency.

Therefore, although the first part of the first sentence of section 25(1) of the TCA 97 could be understood as establishing a derogation from the normal taxation regime in favour of non-resident companies, the second part of that sentence makes that regime applicable to non-resident companies carrying on a trade in Ireland through a branch, which must pay corporation tax on all of their chargeable profits. Thus, in accordance with that provision, those companies are also subject to the conditions for the application of corporation tax.

When seen from that perspective, resident and non-resident companies carrying on a trade in Ireland through a branch are in a comparable situation in the light of the objective pursued by that regime, namely the taxation of chargeable profits. The fact that the latter's chargeable profits are specifically defined in section 25(2)(a) of the TCA 97 does not establish that section as the reference framework; rather, that provision is the legislative means used for the purpose of applying corporation tax to that category of company. As is apparent from the case-law cited in paragraphs 148 and 149 above, the fact that, pursuant to those legislative means, one category of company is treated differently as compared with other companies does not mean that those two categories of company are not in a comparable situation in the light of the objective pursued by that regime.

Therefore, the provisions concerning the chargeable profits of companies that are not resident in Ireland laid down in section 25 of the TCA 97 cannot in themselves constitute a specific regime that is separate from the ordinary rules. That provision in isolation is insufficient for the purpose of consistently applying corporation tax to those non-resident companies.

In those circumstances, it is appropriate to consider that the Commission did not err when it concluded that the reference framework in the present instance was the ordinary rules of taxation of corporate profit in Ireland, the intrinsic objective of which was the taxation of profit of all companies subject to tax in that Member State, and, consequently, that that framework included the provisions applicable to non-resident companies laid down in section 25 of the TCA 97.

Therefore, the complaints raised by Ireland and ASI and AOE concerning the reference framework defined in the contested decision must be rejected.

In view of the reference framework defined in the contested decision, namely the ordinary rules of taxation of corporate profit, which include, in particular, the provisions of section 25 of the TCA 97, it is necessary to analyse the complaints raised by Ireland and ASI and AOE regarding the Commission's interpretation of those provisions.

In the contested decision (in particular in recitals 319 to 321 of that decision), as part of its primary line of reasoning, the Commission maintained that the fact that the Irish branches of ASI and AOE were not allocated the profits derived from the Apple Group IP licences held by ASI and AOE meant that the determination of the annual chargeable profits of ASI and AOE in Ireland departed from a reliable approximation of a market-based outcome in line with the arm's length principle, with the result that the amount that would otherwise have been payable by ASI and AOE as corporation tax in Ireland was reduced.

The Commission's analysis in this regard is based on the consideration, outlined in recitals 244 to 263 of the contested decision, that the application of section 25 of the TCA 97 for the purpose of allocating profits to a branch required the application of a profit allocation method which, under Article 107(1) TFEU, had to be based on the arm's length principle. In addition, in recital 272 of the contested decision, the Commission referred to the Authorised OECD Approach when it stated that the profits to be allocated to a branch were the profits that that branch would have earned at arm's length if it had been a separate and independent enterprise engaged in identical or similar activities under identical or similar conditions, taking into account the functions performed, the assets used, and the risks assumed by the company through its branch.

Ireland and ASI and AOE contest each element of the reasoning described in paragraphs 166 and 167 above.

First, Ireland and ASI and AOE take issue with the Commission's application of section 25 of the TCA 97 in connection with its primary line of reasoning in so far as it complained, in essence, that the Irish tax authorities had not required all of ASI and AOE's profits to be allocated to their Irish branches.

Secondly, Ireland and ASI and AOE dispute that Article 107 TFEU gives rise to an arm's length principle as relied on by the Commission in its reasoning and, consequently, argue that no such principle is applicable in Ireland.

Thirdly, Ireland and ASI and AOE submit that the Authorised OECD Approach does not apply to Irish tax law. They argue that, in any event, even if it were assumed that the Authorised OECD Approach could be applied in the present instance, the Commission was wrong to conclude, on the basis of that approach, that the profits relating to the Apple Group IP licences held by ASI and AOE should have been allocated to their Irish branches.

Therefore, it is necessary to examine, first, the complaints raised by Ireland and ASI and AOE concerning the application of section 25 of the TCA 97, then, the matter of whether the Commission was entitled to rely on an arm's length principle arising from Article 107 TFEU in its analysis and, lastly, the application in the present instance of the Authorised OECD Approach.

As has been stated in paragraph 9 above, ASI's Irish branch is responsible for, inter alia, carrying out procurement, sales and distribution activities associated with the sale of Apple-branded products to related parties and third-party customers in the areas covering the EMEIA and APAC regions.

In recitals 289 and 290 of the contested decision, the Commission referred to product quality control, R&D facilities management and business risk as being functions that necessarily had to be allocated to the Irish branches given that, outside those branches, ASI and AOE had no staff capable of carrying out those functions.

More specifically, the Commission emphasised that, in so far as the Irish branch of ASI was authorised to distribute Apple-branded products, its activities necessitated access to that brand, which was granted to ASI as a whole in the form of the Apple Group's IP licences (recital 296 of the contested decision).

The Commission then asserted that ASI's Irish branch performed a number of functions crucial for the development and maintenance of the Apple brand on the local market and for ensuring customer loyalty to that brand in that market. By way of example, it stated that ASI's Irish branch had incurred local marketing costs directly with marketing service providers (recital 297 of the contested decision). In addition, ASI's Irish branch was responsible for gathering and analysing regional data to estimate the expected demand forecast for Apple-branded products (recital 298 of the contested decision). Moreover, the Commission highlighted the fact that there were [confidential] full-time equivalent employees (‘FTEs’) categorised as R&D personnel based in Ireland (recital 300 of the contested decision).

First, with regard to the ‘exclusion’ approach to allocation adopted by the Commission in recitals 289 to 295 of the contested decision, which involved attributing to the Irish branches of ASI and AOE the quality control, R&D facilities management and business risk management functions solely on the basis that ASI and AOE had no staff outside their Irish branches, it is necessary to recall the considerations set out in paragraphs 243 and 244 above, which states that such an approach is inconsistent with Irish law and with the Authorised OECD Approach. The Commission did not succeed, by that reasoning, in showing that those functions had actually been carried out by the Irish branches.

In order to substantiate its assessment, the Commission relies on Exhibit B to the cost-sharing agreement as amended in 2009 which includes two tables, reproduced in Figures 8 and 9 of the contested decision (recital 122 of the contested decision), concerning all of the relevant functions relating to intangible property subject to the agreement in question and the related risks. Each of those functions and risks has an ‘x’ next to it in the columns for, respectively, Apple Inc. (identified as ‘Apple’) and ASI and AOE (identified collectively as ‘International Participant’), except for IP Registration and Defence, which is solely associated with Apple Inc.

In respect of the intangible property that is subject to the cost-sharing agreement, that is to say essentially all of the Apple Group's IP, the functions listed in Exhibit B to that agreement cover R&D, quality control, forecasting, financial planning and analysis in relation to development activities, R&D facilities management, contracting with related parties or third parties in relation to development activities, contract administration in relation to development activities, selection, hiring and supervision of employees, contractors and subcontractors to perform development activities, IP registration and defence, and market development.

The risks listed in Exhibit B to the cost-sharing agreement relating to all of the Apple Group's IP include, inter alia, product development risk, product quality risk, market development risk, product liability risk, fixed and tangible asset risk, IP protection and infringement risk, brand development and recognition risk, and risks related to changes in regulatory regimes.

As Apple Inc. claimed in the administrative procedure and as ASI and AOE have argued before the Court, it is apparent from the exhibit in question that it lists the functions that the parties to the cost-sharing agreement were authorised to perform and the associated risks that they might have been required to assume. However, the Commission provided no evidence to show that ASI or AOE, let alone their Irish branches, had actually performed any of those functions.

In addition, with regard to those functions and risks, the Commission contends that it is ‘clear’ that, with no employees outside their Irish branches, ASI and AOE would not have been able to monitor such risks. However, the Commission provides no evidence that demonstrates that the staff of the branches in question actually performed those functions and managed those risks.

Moreover, Ireland — supported in this regard by Apple Inc. in the administrative procedure and by ASI and AOE before the Court — claimed that ASI's branch had had no staff until 2012, before which all of the staff had been employed by the Irish branch of AOE. That information is stated in recital 109 of the contested decision and was confirmed during the hearing. If the Commission's argument that ASI would not have been able to perform such functions outside its branch given its lack of staff had to be followed, this would mean that, for a large part of the period covered by the Commission's examination, ASI's Irish branch, which also had no staff, would have been equally unable to perform those functions.

In the same vein, the Commission relies on the fact that ASI's board of directors would not have been in a position to perform those functions or assume those risks purely through occasional board meetings. However, the Commission did not attempt to establish that the management bodies of the Irish branches of ASI and AOE had actually actively managed, on a day-to-day basis, all of the functions and risks relating to the Apple Group's IP listed in Exhibit B to the cost-sharing agreement.

Lastly, it can be concluded that the activities and risks listed in Exhibit B to the cost-sharing agreement, mentioned in paragraphs 261 and 262 above are, in essence, all of the functions at the heart of the Apple Group's business model, which is centred on the development of technological products. With regard, in particular, to the risks listed in Exhibit B, they can be regarded as key risks which are inherent to that business model. The Commission argues, in essence, that ASI's Irish branch performed all of those functions and assumed all of those risks relating to the Apple Group's activities outside North and South America without providing evidence of the actual performance of those functions or assumption of those risks by the branch in question. Given the extent of the Apple Group's activities outside North and South America, which represent approximately 60 % of the group's turnover, the Commission's assertion in that regard is not reasonable.

Secondly, with regard to the activities and functions that the Commission listed in recitals 296 to 300 of the contested decision as having actually been performed by ASI's Irish branch, it should be noted that, in the present instance, none of those activities or functions, regardless of whether they are taken individually or as a whole, justifies allocating the Apple Group's IP licences to that branch.

With regard to quality control, ASI and AOE claimed, without being challenged by the Commission on the point, that thousands of people around the world worked in the quality control function, while only one person was employed in that function in Ireland. In addition, they stated that those functions could even be outsourced through agreements with third-party manufacturers.

In that regard, it is clear that, in the absence of other evidence, it cannot be concluded from the fact that a function such as quality control is crucial for the reputation of the Apple brand, whose products were distributed by ASI's Irish branch, that that function was necessarily performed by that branch.

As regards the management of risk exposure in connection with the branches' normal activity, the Commission put forward only a single argument, in which it claimed that it was ‘clear’ that, in so far as ASI had no employees, it could not control and monitor commercial risks. In that regard, it is sufficient to refer to paragraph 266 above, according to which it was for the Commission to prove with specific evidence that the branches of ASI and AOE had performed the functions and assumed the risks that were allocated to them. Consequently, the Commission's reasoning, far from leading to a clear result, is insufficient to prove that that type of function was actually performed by ASI's Irish branch.

ASI and AOE claimed, without being challenged on the point by the Commission, that no one employed by the Irish branches was responsible for R&D facilities management.

With regard to the [confidential] FTEs categorised as employees in the R&D function, ASI and AOE provided detailed explanations regarding the specific tasks performed by those employees, namely ensuring products meet safety and environmental standards in the region [confidential], testing products to ensure they meet technical standards in the region [confidential], assisting a Cupertino-based team with software delivery [confidential], translating software into various languages of the region [confidential] and administrative support [confidential]. They argue that those activities are clearly support roles and, as important as they may be, they cannot be regarded as key functions that determine that the Apple Group's IP licences should be allocated to the Irish branches in question.

With regard to the local marketing costs incurred directly with marketing service providers, the fact that ASI's Irish branch incurred those costs does not mean that that branch is responsible for designing the marketing strategy itself. As ASI and AOE claim, without being challenged on the point by the Commission, ASI's Irish branch had no staff assigned to the marketing function.

As for the activities involving gathering and analysing regional data, Ireland and ASI and AOE do not dispute that ASI and AOE were involved in such activities during the relevant period. However, as Ireland and ASI and AOE submit, without being challenged on the point by the Commission, those activities seem to have consisted of merely gathering data which was to be added to a database of worldwide scope. Those statistical data treatment activities seem to be support activities rather than activities that are essential for all of ASI's trading activity. In any event, the fact that the Irish branches are responsible for gathering data is insufficient to justify allocating the Apple Group's IP licences to those branches.

With regard to the activities relating to the AppleCare service, in recital 299 of the contested decision the Commission stated, on the basis of the ad hoc report submitted by Ireland, that these were after-sales support and repair services for Apple-branded products covering the entire EMEIA region, for which ASI's Irish branch was responsible. The Commission considered that, in so far as the objective of that function was to ensure customer satisfaction, it had a direct link to the Apple brand.

In that regard, it is apparent from the ad hoc report submitted by Ireland, on which the Commission itself relied, that ASI's Irish branch performed a number of so-called ‘execution’ functions, operating in accordance with the guidance and strategy decided in the United States, including some relating to the AppleCare service. As part of that service, the responsibilities of ASI's Irish branch were described as being linked to the warranty and repair programmes for Apple-branded products, repair network management, and telephone support for customers. The tasks specifically performed by ASI's branch were described as the collection of data on product failures and the monitoring of those failures and of returned products, which were sent to the analytics teams in the United States. The report also notes that ASI's branch was responsible for managing suppliers of repair services, which were centrally approved by the Apple Group, and for distributing spare parts within the supplier network. That description matches the description in the ad hoc report submitted by Apple Inc. The Commission did not challenge that description of the tasks relating to the AppleCare service performed by ASI's Irish branch.

At the hearing, ASI and AOE confirmed that AppleCare was a service provided by the Irish branch, which bore the costs of the infrastructure and staff connected with that service. That staff was, inter alia, responsible for answering questions from users of Apple-branded products through a call centre.

On the basis of the description of the AppleCare service given by Ireland and ASI and AOE, to which the Commission makes reference in the contested decision, it can be summarised as after-sales support for users of Apple-branded products, which includes the repair and exchange of defective products. The nature of the support service provided by the Irish branch involves assisting in the implementation of the warranty itself, for which ASI is responsible. Moreover, such an after-sales service is not linked to the design, development, manufacture or sale of the products themselves.

Although the quality of an after-sales service may have a significant impact on the perception of the brand and may be the impetus for product improvements, the fact that those activities were performed by ASI's Irish branch does not necessarily mean that the Apple Group's IP licences should be allocated to it. After-sales services are often outsourced without it being necessary to allocate the IP of the company in question to the external supplier in question.

Thirdly, the analysis of the activities of ASI's Irish branch, including the functions assessed by the Commission as justifying the allocation of the Apple Group's IP licences to that branch, indicates that they are routine functions performed in accordance with instructions from executives based in the United States which do not contribute significant added value to ASI's activities taken as a whole. In that regard, it should be noted, in particular, that the ad hoc reports submitted by Apple Inc. and Ireland include a detailed analysis of the activities of ASI's Irish branch. Those two reports concluded that those activities were routine and characterised them as supply, sale and distribution activities that were of limited risk. Although the Commission disputes the latter assessment, it has not, as such, challenged the description of those activities and functions provided by Ireland and Apple Inc.

Fourthly, the Commission argued that those activities and functions performed by ASI's Irish branch necessitated access to the Apple brand. Although the activities of ASI's Irish branch may have had an impact on the image and prestige of the Apple brand and it may even have been necessary to use the Apple Group's IP in order to perform those activities, that access to and use of the brand by the branch could have been assured through licences specific to that branch's needs without it being necessary to allocate all of the IP licences in question to that branch. Therefore, the Commission did not succeed in showing, through its arguments, that the Apple Group IP licences held by ASI had to be allocated to its branch.

After analysing the functions and activities performed by ASI's Irish branch which the Commission had identified as justifying allocating the Apple Group IP licences held by ASI to that branch, it must be concluded that these are support activities for implementing policies and strategies designed and adopted outside of that branch, in particular with regard to the research, development and marketing of Apple-branded products.

In those circumstances, it must be concluded, as was argued by Ireland and ASI and AOE, that the Commission erred when it considered that the functions and activities performed by ASI's Irish branch justified allocating the Apple Group's IP licences and the income arising from those licences to that branch.

As has been stated in paragraph 10 above, AOE's Irish branch is responsible for the manufacture and assembly of iMac desktops, MacBook laptops and other computer accessories. Those activities take place in Ireland. It supplies its products to related parties within the Apple Group.

In recital 301 of the contested decision, the Commission stated that AOE's Irish branch developed specific processes and manufacturing expertise and ensured quality assurance and quality control functions which were needed to preserve the value of the Apple brand.

In addition, in recitals 301 and 302 of the contested decision, the Commission stated that the costs covered by the cost-sharing agreement associated with that branch were taken into account in the 1991 tax ruling and that in the 2007 tax ruling [confidential] of its turnover had been allocated as IP return. On the basis of those factors, the Commission inferred that the Irish authorities should have concluded that AOE's Irish branch was involved in IP development or in the management and control of the Apple Group's IP licences.

First, the findings in paragraphs 259 to 272 above apply equally to AOE's Irish branch, in so far as the Commission's arguments concerning quality control, R&D facilities management and business risk management functions refer indiscriminately to ASI and AOE's Irish branches.

Secondly, concerning, more specifically, the specific processes and manufacturing expertise, the parties agree that those functions were actually performed by AOE's Irish branch. However, Ireland and ASI and AOE dispute the conclusions that the Commission draws from that fact.

In that regard, it should be noted that those specific processes and that expertise were developed by AOE's Irish branch itself in the context of its manufacturing activities. Although those processes and that expertise may benefit from protection through certain IP rights, they are limited in scope and are specific to the activities performed by that Irish branch. Consequently, those processes and that expertise are insufficient to justify allocating all of the Apple Group's IP licences to that branch.

Thirdly, as Ireland and ASI and AOE claim and the Commission acknowledges, the contested tax rulings took account of the contributions made by AOE's Irish branch to the Apple Group's IP.

First, in the 1991 tax ruling, as the Commission notes in recital 302 of the contested decision, the contribution made by AOE's Irish branch to the costs associated with the cost-sharing agreement was included in the operating costs on the basis of which AOE's chargeable profits were calculated. Consequently, part of AOE's chargeable profits was deemed to be calculated by taking into account part of the Apple Group's IP. However, the Commission has provided no evidence to substantiate its argument set out in recital 302 of the contested decision according to which, given that part of the costs relating to the Apple Group's IP had been taken into account when AOE's chargeable profits were calculated, the Irish tax authorities should have allocated all of the Apple Group's IP licences to AOE's Irish branch.

Second, in the 2007 tax ruling, the existence of IP specific to the manufacturing activities of AOE's Irish branch and the corresponding remuneration were recognised expressly when the return on the IP developed by that branch was included in the formula for the calculation of AOE's chargeable profits. In that regard, the Commission provided no evidence to substantiate its argument set out in recital 303 of the contested decision that, in the light of the remuneration relating to the IP developed by AOE's Irish branch, that branch must have been involved in the development, management or control of the licences covering all of the Apple Group's IP. The fact that remuneration for the IP developed specifically in the context of the manufacturing activities of AOE's Irish branch was allocated to that branch does not mean that the licences covering all of the Apple Group's IP must also be attributed to it.

Consequently, the Commission cannot base its conclusion that the profits from all of the Apple Group's IP should have been allocated to AOE's Irish branch solely on the involvement of that branch in the creation of specific processes and the development of expertise in the manufacture of the products for which it is responsible.

In those circumstances, it must be concluded, as Ireland and ASI and AOE argued, that the Commission erred when it considered that the functions and activities performed by AOE's Irish branch justified allocating the Apple Group's IP licences and the income arising from them to that branch.

As has been stated in paragraphs 37 to 40 above, the Commission's primary line of reasoning in the contested decision is based on the contention that the Apple Group IP licences held by ASI and AOE should have been allocated to their Irish branches because, aside from those branches, ASI and AOE had no physical presence and no employees capable of performing key functions and managing the licences in question, whereas the branches of ASI and AOE were the only part of those companies with a tangible presence and employees.

It is necessary to examine the arguments put forward by Ireland and ASI and AOE in which they contest the Commission's contention and claim, in essence, that the Apple Group's strategic decision-making was centralised in Cupertino and that ASI and AOE implemented those decisions through their management bodies without the Irish branches actively having taken part in that decision-making.

It is apparent from the foregoing considerations that, in the present instance, the Commission has not succeeded in showing that, in the light, first, of the activities and functions actually performed by the Irish branches of ASI and AOE and, second, of the strategic decisions taken and implemented outside of those branches, the Apple Group's IP licences should have been allocated to those Irish branches when determining the annual chargeable profits of ASI and AOE in Ireland.

In those circumstances, it is necessary to uphold the complaints raised by Ireland in the first plea in law in Case T-778/16 and by ASI and AOE in the third and fourth pleas in law in Case T-892/16 regarding the Commission's factual assessments concerning the activities of the Irish branches of ASI and AOE and the activities outside of those branches.

Regarding, specifically, the Irish branch of ASI (recital 336 of the contested decision), the Commission considered that it was inappropriate to rely on the operating costs, which would be ‘generally’ recommended for analysing the profits of low-risk distributors. It contended that the Irish branch of ASI was not such a distributor, in so far as that branch had assumed risks connected with turnover, warranties, and third-party contractors.

It should be noted at the outset that the Commission did not specifically state the source on which it was relying in order to make such an assertion. In addition, the use of the term ‘generally’ indicates that it was not ruling out the use of operating costs as a profit level indicator in certain situations.

Besides the fact that the argument presented by the Commission is imprecise, it should be noted that such an argument is not in line with the OECD Transfer Pricing Guidelines, on which the Commission relied in connection with its subsidiary line of reasoning, as is correctly argued by Ireland and ASI and AOE. It follows from paragraph 2.87 of those guidelines that the profit level indicator must be focused on the value of the functions of the tested party, taking account of its assets and its risks. Therefore, according to those guidelines, the choice of profit level indicator is not fixed for any type of function, provided that that indicator reflects the value of the function in question.

In any event, it is necessary to examine whether the Commission succeeded in demonstrating that the choice of the operating costs as the profit level indicator was not appropriate in the present instance and, in so far as the risks assumed by the branches must be taken into account, whether it was correct to conclude that the Irish branch of ASI had assumed risks connected with turnover, warranties, and third-party contractors.

Regarding AOE, in recitals 343 and 344 of the contested decision, the Commission noted that, in view of the fact that AOE had no physical presence and had no employees capable of managing the risks outside its Irish branch, that branch had to be regarded as assuming all the risks, in particular those relating to inventories. In those circumstances, it considered that a profit level indicator including the total costs would have been more appropriate than the operating costs.

The Commission bases its arguments on the OECD Transfer Pricing Guidelines. However, it should be noted that, as has been stated in paragraph 357 above, those guidelines do not recommend the use of any particular profit level indicator, such as the total costs, and do not preclude the use of operating costs as a profit level indicator.

In addition, according to paragraph 2.93 of the OECD Transfer Pricing Guidelines, to which the Commission refers in recital 343 of the contested decision, ‘in applying a cost-based [TNMM], fully loaded costs are often used’. Accordingly, it is not inconceivable, in principle, that operating costs may constitute an appropriate profit level indicator.

Furthermore, the Commission's argument that a profit level indicator including the total costs is better suited to a manufacturing company such as AOE cannot succeed in the present instance. Indeed, as has been stated in paragraph 12 above, it is AOE and not its Irish branch that has ownership of the materials used, works in progress and finished products. In so far as the total costs take into account the costs of all those elements, the use of the total costs as the profit level indicator does not seem, contrary to the Commission's assertions, the most suitable way of reflecting the value of the functions actually performed by AOE's Irish branch, taking into account in particular that branch's assets.

In those circumstances, the Commission did not succeed in demonstrating that its recommended profit level indicator based on the total costs would be more appropriate in the present instance for the purpose of determining the arm's length profits for the Irish branch of AOE.

Having regard to the foregoing considerations, it must be concluded that the Commission did not succeed in demonstrating, in the contested decision, that the choice of the operating costs of the Irish branches of ASI and AOE as the profit level indicator when applying a one-sided profit allocation method was inappropriate.

In addition and in any event, the Commission also did not submit evidence demonstrating that such a choice, as such, necessarily had to lead to the conclusion that the contested tax rulings had reduced ASI and AOE's tax liability in Ireland.

In that regard, the Court finds that neither the exchanges preceding the issuing of the contested tax rulings, nor Ireland and ASI and AOE when questioned on that point in the context of the present proceedings, were able to provide a sufficient explanation of the reason for the inconsistencies detected in those rulings concerning the operating costs, used as the basis for calculating the chargeable profit of the branches in the 1991 tax ruling and which were no longer included as the basis for calculating the chargeable profit of the branches in the 2007 tax ruling.

However, even where there are inconsistencies which show defects in the methodology used to calculate the chargeable profits in the contested tax rulings, it is necessary to recall the considerations set out in paragraph 348 above, from which it follows that the Commission cannot confine itself to invoking a methodological error but must prove that an advantage has actually been granted, inasmuch as such an error has actually led to a reduction in the tax burden of the companies in question as compared to the burden which they would have borne had the normal rules of taxation been applied. However, it must also be specified that the Commission did not argue in the contested decision that the exclusion of certain categories of operating costs used as a basis for calculating the profit allocated to the branches of ASI and AOE had given rise to an advantage for the purposes of Article 107(1) TFEU.

Accordingly, the complaints raised by Ireland and by ASI and AOE in relation to the Commission's statements regarding the methodological error relating to the choice of the operating costs as the profit level indicator for the Irish branches of ASI and AOE in connection with its subsidiary line of reasoning must be upheld.

In the first place, the Commission complains that the Irish tax authorities accepted, in the contested tax rulings, the levels of return for the Irish branches of ASI and AOE without such levels of return being substantiated by any reports.

First, it should be noted that Ireland and ASI and AOE argue that, at the time the contested tax rulings were issued, the submission of a profit allocation report was not required under the applicable Irish tax law, which has not been contested by the Commission.

Second, it should be noted that the Commission's complaint relates to an error of methodology (or a lack thereof), in so far as it concerns defects in the method for calculating the chargeable profits endorsed by the contested tax rulings, resulting from a lack of profit allocation reports.

It is true that the explanations provided by the Apple Group to the Irish tax authorities as justification for the proposed levels of return, as reproduced in recital 64 of the contested decision, were brief. The Apple Group asserted that the proposed levels were above a mark-up of 15 %, which would ordinarily have been achieved by a ‘cost center’, but below a mark-up of 100 %, which could be common in the pharmaceutical industry, which was not comparable to the IT sector. In addition, it should be borne in mind that the Apple Group acknowledged before the Irish tax authorities that its proposal was not based on any scientific grounds, but that it considered that such a proposal resulted in a sufficiently high amount of chargeable profits.

In that regard, the Court notes that neither the exchanges preceding the issuing of the contested tax rulings nor Ireland and ASI and AOE when questioned on that point in the context of the present proceedings were able to provide a sufficient explanation of the exact reason for the indicators and figures used to calculate the chargeable profits of ASI and AOE. Thus, there is no concrete and contemporary piece of evidence explaining the reasons for the level of the percentages of the operating costs accepted in the contested tax rulings, let alone for the changes in those percentages over time.

However, it must be pointed out that, apart from raising the issue of the lack of profit allocation reports, the Commission did not conduct its analysis in such a way as to demonstrate that, as a result of that calculation, the tax actually paid by ASI and AOE on the basis of the contested tax rulings was less than that which should have been paid under the normal rules of taxation, had the contested tax rulings not been issued.

Thus, for the same reasons as those set out in paragraph 332 above, the mere finding of an error as regards the methodology leading to the calculation of the profits to be allocated to the branches is not sufficient to demonstrate that the contested tax rulings conferred an advantage on ASI and AOE.

In the second place, the Commission complained that the Irish tax authorities had accepted, without justification, a threshold for AOE's chargeable profits, namely [confidential], beyond which the chargeable profits no longer corresponded to 65 % of the Irish branch's operating costs, but to [confidential] of those costs. According to the Commission, a rational economic operator would not accept lower returns and forgo a part of its profits, if its operating costs were increasing, which indicated an increase in the volume of its activities, even if those returns were sufficient to cover its costs and achieve a certain level of profit.

The Commission argued that that threshold constituted tax relief which had been granted on the basis of criteria unrelated to the tax system, such as employment considerations, and that, accordingly, it was deemed to confer a selective advantage.

In that regard, Apple Inc. claimed, in its observations following the Opening Decision, that that departure was justified by the fact that the incremental fixed investment necessary for expansion was greater at the start of operations than when those operations were ongoing. Furthermore, in the responses to the written questions from the Court, ASI and AOE confirmed that the threshold of [confidential] had never been reached and that, accordingly, the second, lower percentage had never been used for the purpose of calculating AOE's chargeable profits. The Commission has not contested that information.

In the first place, it should be noted that, while it is true that it has been held that, if the competent authorities have a broad discretion to determine, inter alia, the conditions under which the financial assistance is provided on the basis of criteria unrelated to the tax system, such as maintaining employment, the exercise of that discretion may be regarded as giving rise to a selective measure (judgment of 18 July 2013, ., C-6/12, EU:C:2013:525, paragraph 27), the fact remains that, in order to determine whether State measures may constitute State aid, regard must primarily be had to the effects of those measures on the undertakings favoured (see judgment of 13 September 2010, Greece and Others v Commission, T-415/05, T-416/05 and T-423/05, EU:T:2010:386, paragraph 212 and the case-law cited).

In any event, the mere allusion, during the exchanges between the Irish tax authorities and the Apple Group preceding the 1991 tax ruling, to the fact that the Apple Group was one of the largest employers in the region where the Irish branches of ASI and AOE were established does not prove that ASI and AOE's chargeable profits were determined on the basis of employment-related issues. Indeed, it is apparent from the report of the exchange in question, reproduced in recital 64 of the contested decision, that the allusion to employees of the Apple Group in the region in question was made to provide information regarding the background to and expansion of the group's operations in the region and not to provide consideration for the proposal regarding the allocation of the profits to the Irish branches in question.

Thus, in the absence of other evidence, the Commission cannot argue that the tax ruling in question was issued as consideration for the potential creation of jobs in the region.

In the second place, it should be noted that the threshold in question was never reached and that, accordingly, the profits of AOE's Irish branch were never allocated on the basis of the lower percentage provided for by the 1991 tax ruling.

Indeed, AOE's turnover significantly decreased between the period preceding the 1991 tax ruling, namely USD 751 million in 1989, as stated in recital 64 of the contested decision, and 2006, the last year in which the 1991 tax ruling was applied, namely USD 359 million, as stated in recital 97 of the contested decision.

Therefore, even assuming that the Commission's assertions regarding a lack of justification from an economic perspective for the threshold laid down by that ruling are proved, it cannot argue that an advantage was granted as a result of the inclusion of a threshold in the 1991 tax ruling, when such a mechanism was not actually implemented.

In the third place, even if the Commission's argument were to be understood as meaning that the levels of return accepted by the Irish tax authorities were too low for the functions performed by the branches, in view of the assets and risks relating to those functions, that argument cannot succeed without other evidence.

The Commission's subsidiary line of reasoning is based on the premiss that the Irish tax authorities could have correctly allocated the Apple Group's IP licences to the head offices, which, according to the OECD Transfer Pricing Guidelines, implies the performance of complex or unique functions. However, as can be seen from the conclusions expressed in paragraph 348 above, the Commission did not succeed in demonstrating that the Irish branches of ASI and AOE had performed the most complex functions.

In addition, particularly as regards ASI, the Commission bases its reasoning on the consideration that the Irish branch assumed very significant risks in relation to the Apple Group's activities. However, as can be seen from the conclusions expressed in paragraph 407 above, the Commission did not succeed in demonstrating that those risks had actually been borne by the Irish branch of ASI.

Accordingly, in the absence of other evidence, the Commission did not succeed in demonstrating that the levels of return established under the 1991 tax ruling had been too low to remunerate the functions actually performed by the Irish branches of ASI and AOE, in view of their assets and their risks.

Besides the complaint relating to the lack of a profit allocation report in support of the 2007 tax ruling, which has been set aside for the same reasons as those set out in paragraphs 430 to 435 above, the Commission challenged the remuneration of the Irish branches of ASI and AOE, in the form of the profits allocated to those branches, under the 2007 tax ruling, by contesting the ad hoc reports submitted by Ireland and Apple Inc. in order to provide ex post evidence of the fact that those profits fell within arm's length ranges. In particular, the Commission called in question the reliability of the ad hoc reports submitted by Ireland and Apple Inc. because the companies chosen for the comparability study on which those reports were based were not comparable to ASI and AOE.