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The European Commission (EC) has made a landmark ruling that US tech giant Apple received up to €13bn of illegal tax benefits from Ireland, which it says the country must now recover.

The move has prompted angry responses from the US, which claims the ruling could jeopardise its trade relations with the European Union (EU), while in Europe some are touting the idea of the UK taking Ireland’s place, following Brexit and its potential independence from the bloc’s rules.

The commission, which launched an in-depth investigation into Apple in 2014, says it has concluded that two tax rulings issued by Ireland to Apple have “substantially and artificially” lowered the tax paid by the company in the country since 1991.

This “sweetheart” treatment of Apple gives it a significant advantage over other businesses that are subject to the same national taxation rules, making it illegal under EU state aid rules. Apple’s preferential treatment meant it paid a 1% corporate tax rate on profits in 2003, which dropped to as low as 0.005% in 2014.

The commission accused the multinational corporation of side-stepping taxes by channelling its European sales through a non-existing entity that was not liable to pay taxes anywhere.

“Member states cannot give tax benefits to selected companies – this is illegal under EU state aid rules,” says head of the investigation and commissioner in charge of competition policy, Margrethe Vestager (pictured).

The commission can order recovery of illegal state aid for a 10-year period preceding its first request for information in 2013, and says Ireland must now recover the unpaid taxes for the years 2003 to 2014 of up to €13bn, plus interest.

“The EC ruling is more punitive than expected. The case has been brought under competition law, but the heart of the issue is how intellectual property is treated by the tax authorities and what this means for where profits are created and therefore taxable,” chief economist at Global Counsel Gregor Irwin, tells GTR.

“Other tech companies will be looking closely at the ruling to see what it might mean for them and their tax arrangements. At the very least they will need to consider whether any comfort letters they have received from national tax authorities are vulnerable to a reappraisal by the EC.”

Apple and Ireland have strongly contested the ruling and pledged to appeal the decision.

“I disagree profoundly with the commission’s decision.  Our tax system is founded on the strict application of the law, as enacted by the Oireachtas, without exception,” says Irish finance minister Michael Noonan.

“The decision leaves me with no choice but to seek Cabinet approval to appeal the decision before the European Courts. This is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign Member State competence of taxation.”

In a letter to Apple customers, Apple CEO Tim Cook denied any preferential treatment, saying: “We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid”.

The ruling received sharp responses from the other side of the Atlantic with the US Treasury warning that “the Commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the US and the EU”.

Meanwhile, speaker of the US House of Representatives, Paul Ryan, issued a statement saying: “This decision is awful. Slamming a company with a giant tax bill — years after the fact — sends exactly the wrong message to job creators on both sides of the Atlantic. This is precisely the kind of unpredictable and heavy-handed taxation that kills jobs and opportunity.”

He added that it called for the US to “fix” its own tax system so that more American companies invested their money to create jobs in the US. The US has one of the highest global corporate tax rates of 35%, compared to 12.5% in Ireland.

In Europe, some market commentators pitched the UK as being a “winner” in the situation, as it would be able to position itself as an attractive alternative to current EU tech hotspots such as Ireland, the Netherlands and Luxembourg.

“The ruling is a blow to those EU countries that have encouraged companies to shift profits by offering very low effective tax rates in arrangements that are not open to public scrutiny. It means that countries that offer low tax rates, but are also more transparent and able to offer more policy certainty, will be more competitive in attracting international investment in future. The UK will be among the countries positioning themselves in this way,” says Irwin.