Contributing Firms:
CJEU ruling establishes national tax rules as basis for analysis of state aid
In this issue of the Tax Monitor our panel analyses a significant ruling by the Court of Justice of the European Union (CJEU) on a State Aid case involving Luxembourg that looks likely to weaken the Commission’s appeal in the Apple case. Recent changes to guidance around section 110 companies, and the implications for same, are also examined.

A recent ruling by the CJEU has seen the likelihood of the Commission winning its appeal on similar grounds in the Apple Case recede with the ruling emphasising a fundamental aspect of taxation in the EU, namely that taxation is the responsibility of individual Member States, and that as such an individual states’ taxation rules should be considered, rather than the Commission’s own interpretation, when making decisions on matters of taxation.

The state aid case in question was against Luxembourg and involved a subsidiary of the former Italian-American car manufacturer Fiat-Chrysler. Maples Andrew Quinn writes in this month’s round table that the CJEU ‘held that the Commission “erred” under European law by applying external principles of an “arm’s length transfer pricing standard” (a “European standard”) that went beyond Luxembourg national law, when testing for the application of “selective advantage” and thus State Aid by Luxembourg.’ He adds that if such an approach had been taken in the earlier Apple state aid case against Ireland ‘that State Aid rules would not have been breached’ under Irish national law as it stood at the time.

Deloitte’s Tatiana Kelly, outlining the same ruling, writes ‘The CJEU emphasised that as taxation is a prerogative of individual Member States, and is not harmonised at EU-level, the existence of State aid must be reviewed by reference to national tax systems alone. The Court stated that only national laws applicable in the relevant Member State should be taken into account to identify the appropriate reference system for direct taxation. The CJEU has ruled that the Commission lacked authority to make this independent interpretation.’

Quinn says this ‘fundamental point’ has established further grounds against a successful appeal in the Apple case as ‘the application of the European standard is critical to the Commission’s case’.

Elsewhere, recent guidance from the Revenue Commissioners in relation to section 110 companies is examined. The guidance was to provide clarification on the ‘double trade’ test for section 110 companies and is relevant to whether certain tax provisions applicable to a trading company can be used by a section 110 company. Deloitte’s Colm Stringer writes that, in certain circumstances, the changes could lead to a higher tax charge, while Maples David Burke says as the Revenue Commissioners have not given any further colour on what constitutes a “double trade” test ‘the boundary around the application of trading treatment to a section 110 company is, for the time being, somewhat unclear’.

BDO’s Michelle Adams outlines the added complexity created by the change writing ‘The introduction of “double trade test” concept into the Section 110 guidance means that practitioners must consider the trading nature of a Section 110 company. This is the first time a distinction between a trading Section 110 company and a non-trading Section 110 has arisen.’

Also featuring in the month’s Irish Tax Monitor are the standout 2022 tax moments from Deloitte’s Mark Barrow and key rulings from the year by the Tax Appeals Commission from Deloitte’s Fiona McClafferty; and Deloitte’s Lavannia gives an update on Transfer Pricing changes, while the latest around digitalisation and VAT is analysed by BDO’s Philip Nolan and Deloitte’s John Stewart and Mary O’Toole, Deloitte, provides an update on Capital Acquisitions Tax changes.

Ireland’s reputation as a location for holding companies is explored by Deloitte’s Eugene O’Keeffe and Robert Farrington as the outline key features of Ireland’s taxation regime for this activity.