This is in relation to VAT classification. Bread is a staple food product and is exempt of VAT.

There was a similar story with Jaffa Cakes in the UK a few years back with an even more interesting tax rule specifically for biscuits covered in chocolate, but not cakes covered in chocolate. So they argued whether Jaffa Cakes (which are covered in chocolate) were biscuits or cakes...

To be fair to Subway, in this instance, a layman would have never considered the question. What's more, this ruling would obviously lead to an exploration of the classification of a huge number of products from many large, and small businesses. From McDonalds, to artisan bakers.

That's said, I can also see the point the Irish law addresses, but it goes against common sense.

I mean, if you progress along this line of jurisprudence, you could possibly propose a law to ensure that sour dough bakers pay for pets licenses :3

This stems from tax law that taxes different food differently. Usually this is because the legislator considers that staple food should be kept as cheap as possible for everyone to be able to afford it.

So they decide that bread, biscuits, cakes, 'luxury food' should be taxed differently.

Right, but then they need to define each category.

In this case Irish law puts a limit on the amount of sugar and fat that 'bread', defined for tax purpose only, can contain. This is most likely in order to draw a line between 'bread' and 'cake', again only for tax purpose.

The law is from 1972 so this is not new, and this case is not ground breaking. It's rather that Subway Ireland seems not to have read the local tax law. That's what happens when a multinational standardises a product globally.

This sort of issue is unavoidable as long as different products are taxed differently.