Santander Ruling vs. Apple Decision: Pure Coincidence or Fate?

April 5, 2017

In the State aid crusade against allegedly overly-generous tax rulings granted by a number of tax authorities in the EU, last year was admittedly a very positive one for the European Commission (EC) as it (i) adopted its final decision in the Apple case (C(2016) 5605 final), imposing the highest ever recovery order, and (ii) received support from the EU Court of Justice (CoJ) in the ‘Spanish goodwill’ case (joint cases C-20/15 P and C-21/15 P). Both cases are highly relevant for multinational companies resorting to complex tax structures, in particular in relation to the key notion of selective advantage, which is the cornerstone for determining whether a given tax break amounts to impermissible subsidy under EU State aid rules.

In a Nutshell

  • The Apple Commission decision

 On December 19, 2016 the EC published its decision regarding tax rulings granted by Ireland to two Irish entities of the Apple group.1 Neither of the entities were tax residents in Ireland (nor anywhere else in Europe for that matter), but were conducting their operations in Ireland through branches. The contested tax rulings (which were in the form of advance pricing agreements, “APAs”, granted by the Irish Revenue) allowed Apple to determine how profits were attributed to the branches. This resulted in only a small proportion of its overall EU profits being allocated to those branches. As a result, a significant amount of profits was not subject to any taxation in Europe.

According to the Commission, those tax rulings involved a selective advantage being granted to Apple, in so far as they provided a substantial reduction of taxable profits, thereby constituting unlawful State aid.

  • The Santander judgment by the CoJ

Forty-eight hours after the Apple decision was published, the CoJ issued its judgment in the “Spanish goodwill case.” In that case, the Spanish State had set up a tax scheme whereby Spanish undertakings acquiring shareholdings in legal entities domiciled abroad equal to at least 5% would be able to amortize the goodwill resulting from such equity interests and, in this way, reduce their taxable income in Spain. Spanish undertakings acquiring equity interests in legal entities domiciled in Spain were not entitled to the scheme, which resulted in a difference in treatment.

In the EC’s view, the measure at stake was selective as it derogated from the general Spanish tax system, and discriminated between 1) undertakings resident in Spain and acquiring shareholdings in other companies resident in Spain, and 2) those which were acquiring shareholdings abroad.

In the first instance, the EU General Court (GC) annulled the EC decision and concluded that any Spanish company acquiring an equity interest in a foreign company would be eligible to the scheme and could benefit from that measure; therefore there was no particular group of companies which could be treated in a ‘preferential’ manner, as the measure did not make any distinction in terms of eligibility. According to the GC, the mere existence of a scheme derogating from the general Spanish tax system does not in itself result in a selective advantage being granted to a specific category of undertakings.

Different Tax Measures but Same Extensive Approach

First of all, it should be noted that the EC decision in Apple and the CoJ judgment in Santander refer to two different types of tax measures: (i) the Apple decision regards an individual tax ruling, meaning a fiscal determination granted by the tax authorities to applying companies on a discretionary basis and which, according to the EC, provides a selective advantage amounting to an impermissible subsidy under EU State aid rules; (ii) the Santander case refers to a general aid scheme, i.e. a general measure which is ‘capable of conferring an advantage on all such undertakings’ carrying out specific transactions. As such, the scheme directly envisages the selective advantage which will apply automatically to eligible beneficiaries.

  • The Three-Step Test

According to settled case-law, the selectivity of a tax measure should be determined on the basis of a three-step analysis: (a) identifying the so-called ‘reference system,’ (b) determining the derogation instituted by the tax measure from that system and (c) examining possible redeeming justifications put forward by the State and the benefiting undertakings. In the two recent cases examined above, the EC and the CoJ gave considerable weight to the first two steps of the analysis, thereby rendering it very difficult in practice for the undertakings and their advisors to convincingly articulate a justification defense.

In the cases at issue, it appears that both the EC in Apple and the CoJ in Santander have adopted and endorsed the same extensive interpretation to the concept of ‘reference system’ and the derogation in order to identify a selective advantage. As a result, selectivity arises every time there is an advantage conferred to certain undertakings (in the context of tax rulings – e.g. Apple) or to specific cross-border transactions (as in the Spanish goodwill case) that derogate from the reference system (see also our previous briefing). Below, we consider those issues.

  • The ‘reference system’ and the derogation from that system

Regarding the identification of the reference system, an advantage may be established only when comparing operators who ‘in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation.’

In Apple, the reference system was defined very broadly as 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 Ireland.’ On that basis, it becomes trivial to establish that the tax ruling derogates from the ordinary rules. While the function of a tax ruling is ‘to establish in advance the application of the ordinary tax system to a particular case in view of its specific facts and circumstances,’ it may nonetheless confer a selective advantage when it ‘endorses a result that does not reflect in a reliable manner what would result from a normal application of the ordinary tax system, without justification.’ According to the EC, this was the case of the APAs granted by Ireland to Apple. The EC concluded that the tax measure at issue gave Apple a considerable advantage over other companies subject to the same national taxation rules, which despite being in a comparable factual and legal situation, were not treated in the same way.

In Santander, the reference framework appears to be the cornerstone of the entire case. In that case, the EC identified it to be the general “Spanish corporate tax system and, more precisely, the rules on the tax treatment of financial goodwill set out in the Spanish tax system.” According to the EC, the derogation was established by the fact that the amortization of financial goodwill was not possible for equivalent domestic equity investments. The EC did not identify a category of eligible undertakings, but instead a category of transactions that would benefit from the derogation.

On this point, the GC had concluded that ‘the measure at issue, even though it constitutes a derogation from the common or ‘normal’ tax regime, is potentially available to all undertakings.’ In the GC’s view, ‘it is not possible to compare […] the legal and factual situation of undertakings which are able to benefit from the measure with that of undertakings which cannot benefit from it.’ In short, since the EC had failed to identify the category of undertakings that were exclusively favoured by the tax measure, the mere finding of a derogation from the common or ‘normal’ tax regime cannot give rise to selectivity.

The CoJ, sitting in Grand Chamber, held that the GC misapplied the concept of selectivity. More precisely it held that in order to establish this condition:

  • It is not always required to identify a particular category of undertakings favored by the measure, as “the imposition of such a supplementary requirement […] cannot be inferred from the Court’s case-law;
  • It is necessary to take into account the discriminatory nature of the measure, as the subsidy “confers a tax advantage on certain resident undertakings and not on others who are subject to the same ordinary tax system from which the measure at issue is a derogation;”
  • Hence, the mere fact that the measure at issue is a derogation from the reference system and results in a discriminatory treatment in favor to certain Spanish undertakings making investments abroad is a very relevant aspect for the purposes of selectivity.

This judgment – which we read as a ruling of principle – is particularly interesting as the selectivity analysis has been expanded significantly so as to encompass the assessment of the ex post effects. While the GC engages in a narrow ‘ex ante analysis,’ thus concluding that the measure was available to any type of undertakings and the EC had to identify the specific category of undertakings exclusively favoured by the measure, the CoJ rather refers to an ‘ex post’ assessment, by calling for a consideration of the discriminatory nature of the subsidy.

Pure Coincidence or Fate?

The short time lapse between the publication of the EC decision’s public version and the CoJ judgment (forty-eight hours) leads to one tempting question: is it pure coincidence or fate that the EC’s extensive approach has been endorsed by the CoJ within a couple of days from its publication? Significantly, the Santander judgment corroborates the EC’s method in assessing whether a measure is selective or not. Regardless of the fact that the measures at hand are different (tax rulings versus tax measure of general application), it is widely expected that the EC will place heavy reliance on the Santander judgment in defending the Apple case before the GC. Going forward, with this ruling of principle, the CoJ has eased the task of the EU subsidy watchdog when vetting national tax measures that are departing from the general system of taxation.

While this outcome enables the EC to force further tax harmonization through the back door, i.e. through an unprecedented use of the State aid rules, it raises important concerns for companies and their tax advisors, not least by creating a much less predictable and more hazardous tax environment in Europe.

Which Measures Should Companies Take Now?

On a more practical note, the EC decision in Apple and the CoJ judgment in Santander send a powerful wake-up call for undertakings about what kind of adjustments, precautionary or corrective, should be taken. In particular, in the case of:

  • Individual tax rulings: going forward, companies willing to benefit from such individual tax measures should factor these new rules in their future discussions with tax authorities; current beneficiaries of tax rulings may also want to monitor them and if necessary, proactively review them;
  • General tax schemes: undertakings seeking to take advantage of derogatory tax schemes provided for in the national tax codes should carefully assess the impact of the potential advantage that they benefit from compared to undertakings that, in view of their corporate profile, are not eligible to similar breaks.


1 The decision has been issued after a two-year investigation and is part of a string of cases initiated against companies benefiting from tax rulings in Ireland, Luxembourg and the Netherlands. To date, three investigations on Luxembourgish tax rulings against Engie, McDonald’s, and Amazon are ongoing.