McDonald’s – Luxembourg – Photo by tiger rus.jpg
(BRUSSELS) – The non-taxation of certain McDonald’s profits in Luxembourg did not lead to illegal State aid, being in line with national tax laws and the Luxembourg-United States Double Taxation Treaty, the EU has ruled.
“The Commission investigated under EU State aid rules whether the double non-taxation of certain McDonald’s profits was the result of Luxembourg misapplying its national laws and the Luxembourg-US Double Taxation Treaty, in favour of McDonald’s,” said the EU’s Competition Commissioner Margrethe Vestager.
EU State aid rules prevent Member States from giving unfair advantages only to selected companies, including through illegal tax benefits. However, Ms Vestager says the EU executive’s in-depth investigation showed that the reason for double non-taxation in this case is “a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, Luxembourg did not break EU State aid rules,” she said.
However, she added: “the fact remains that McDonald’s did not pay any taxes on these profits and this is not how it should be from a tax fairness point of view. That’s why I very much welcome that the Luxembourg Government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future.”
Following its probe launched in 2015 – based on doubts that Luxembourg might have misapplied its Double Taxation Treaty with the United States – the Commission concluded that Luxembourg’s tax treatment of McDonald’s Europe Franchising does not violate the Double Taxation Treaty with the United States. On that basis the tax rulings granted to McDonald’s do not infringe EU State aid rules.
McDonald’s Europe Franchising is a subsidiary of McDonald’s Corporation, based in the United States. The company is tax resident in Luxembourg and has two branches, one in the United States and the other in Switzerland. In 2009, McDonald’s Europe Franchising acquired a number of McDonald’s franchise rights from McDonald’s Corporation in the United States, which it subsequently allocated internally to the US branch of the company.
As a result, McDonald’s Europe Franchising receives royalties from franchisees operating McDonald’s fast food outlets in Europe, Ukraine and Russia for the right to use the McDonald’s brand.
McDonald’s Europe Franchising also set up a Swiss branch responsible for the licensing of the franchise rights to franchisors and through which royalty payments flowed from Luxembourg to the US branch of the company.
In March 2009, the Luxembourg authorities granted McDonald’s Europe Franchising a first tax ruling confirming that the company did not need to pay corporate tax in Luxembourg since the profits would be subject to taxation in the United States. This was justified by reference to the Luxembourg US Double Taxation Treaty, which exempts income from corporate taxation in Luxembourg, if it may be taxed in the United States. Under this first ruling, McDonald’s Europe Franchising was required to submit proof every year to the Luxembourg tax authorities that the royalties transferred to the United States via Switzerland were declared and subject to taxation in the United States and in Switzerland.
Following this first tax ruling, the Luxembourg authorities and McDonald’s engaged in discussions concerning the taxable presence of McDonald’s Europe Franchising in the United States (a so-called “permanent establishment”). McDonald’s claimed that although the US branch was not a “permanent establishment” according to US tax law, it was a “permanent establishment” according to Luxembourg tax law. As a result, the royalty income should be exempt from taxation under Luxembourg corporate tax law.
The Luxembourg authorities ultimately agreed with this interpretation and, in September 2009, issued a second tax ruling according to which McDonald’s Europe Franchising was no longer required to prove that the royalty income was subject to taxation in the United States.
The non-confidential versions of the decision will be made available under the case number SA.38945 in the State aid register on the Commission’s competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.
