UK and International Tax news

EC Investigation Did Not Find That Luxembourg Gave Selective Tax Treatment To McDonalds

Monday 24th September 2018

The European Commission has recently confirmed that the non taxation of certain McDonald’s profits in Luxembourg did not lead to illegal State aid as it was in line with national tax laws and the Luxembourg –  US double tax agreement.

In 2015, the EC opened a formal probe into Luxembourg’s tax treatment of McDonald’s following its preliminary view that tax rulings granted by Luxembourg may have granted McDonald’s an advantageous tax treatment in breach of EU State aid rules.

On the basis of two tax rulings given by the Luxembourg authorities in 2009, McDonald’s Europe Franchising had paid no corporate tax in Luxembourg despite recording large profits (over €250m in 2013). These profits were derived from royalties paid by franchisees operating restaurants in Europe and Russia for the right to use the McDonald’s brand and associated services. The company’s head office in Luxembourg was designated as responsible for the company’s strategic decision making, but the company also had two branches, a Swiss branch, with a limited activity related to the franchising rights, and a US branch, which had no real activities. The royalties received by the company were transferred internally to the US branch of the company.

A first tax ruling given by the Luxembourg authorities in March 2009 confirmed that McDonald’s Europe Franchising was not due to pay corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the US. This was justified by reference to the Luxembourg – US DTA. Under the ruling, McDonald’s was required to submit proof every year that the royalties transferred to the US via Switzerland were declared and subject to taxation in the US and Switzerland.

However, contrary to the assumption of the Luxembourg tax authorities when they granted the first ruling, the profits were not to be subjected to tax in the US. While under the proposed reading of Luxembourg law, McDonald’s Europe Franchising had a taxable presence in the US, it did not have any taxable presence in the US under US law. Therefore McDonald’s could not provide any proof that the profits were subject to tax in the US, as required by the first ruling.

McDonald’s clarified this in a submission requesting a second ruling, insisting that Luxembourg should nevertheless exempt the profits not taxed in the US from taxation in Luxembourg. The Luxembourg authorities issued a second tax ruling in September 2009 according to which McDonald’s no longer required proof that the income was subject to taxation in the US. This ruling confirmed that the income of McDonald’s Europe Franchising was not subject to tax in Luxembourg even if it was confirmed not to be subject to tax in the US either.

With the second ruling, Luxembourg authorities agreed to exempt almost all of McDonald’s Europe Franchising’s income from taxation in Luxembourg.

Overall, the Luxembourg authorities recognised the McDonald’s Europe Franchising’s US branch as the place where most of their profits should be taxed, whilst US tax authorities did not recognise it. The Luxembourg authorities therefore exempted the profits from taxation in Luxembourg, despite knowing that they in fact were not subject to tax in the US.

The EC has confirmed that the role of EU State aid control is to ensure that Member States do not give selected companies a better treatment than others through tax rulings or otherwise. In this context, the EC assessed whether the Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg – US DTA and gave McDonald’s an advantage not available to other companies subject to the same tax rules. The Commission concluded that this was not the case.

In particular, it could not be established that the interpretation given by the second tax ruling to the Luxembourg – US DTA was incorrect, even though it resulted in the double non-taxation of the royalties attributed to the US branch. The EC found that the Luxembourg authorities did not misapply the Luxembourg – US DTA and that the tax advantage conferred to McDonald’s Europe Franchising could not be considered State aid.

The EC notes in its press release that the Luxembourg government has presented draft legislation to amend the tax code to bring the relevant provision into line with the OECD’s BEPS project and to avoid similar cases of double non-taxation in the future. This is currently being discussed by the Luxembourg Parliament.

Under the proposed new provision, the conditions to determine the existence of a permanent establishment under Luxembourg law would be strengthened. In addition, Luxembourg would be able to, under certain conditions, require companies that claim to have a taxable presence abroad to submit confirmation that they are indeed subject to taxation in the other country.


For more detail on the above, please contact Keith Rushen on 0207 486 2378.

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