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EC Investigates Luxembourg's Tax Rulings For McDonald's

by Ulrika Lomas, Tax-News.com, Brussels

04 December 2015


The European Commission has launched a formal investigation into Luxembourg's tax treatment of McDonald's and said that its preliminary view is that a tax ruling granted to the company may have afforded it advantageous tax treatment in breach of European Union (EU) state aid rules.

The Commission said that on the basis of two tax rulings given by the Luxembourg authorities in 2009, McDonald's Europe Franchising has paid no corporate tax in Luxembourg in the years since. It has however derived profits 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 is designated as responsible for the company's strategic decision making, and McDonald's also has branches in Switzerland and the US. The royalties received by the company are transferred internally to the US branch, the Commission said.

In 2014, the Commission requested information on these rulings. It said that its assessment has so far shown that it has been possible for McDonald's to reduce its corporate tax liabilities in Luxembourg and the US because the first tax ruling (provided by Luxembourg 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 double taxation agreement. The ruling required McDonald's to submit proof every year that the royalties were declared and subject to tax in the US and Switzerland.

A second ruling was issued by Luxembourg in September 2009 after McDonald's clarified that McDonald's Europe Franchising did not have a taxable presence in the US under US law and could not therefore provide proof that the profits were subject to tax in the US. Under the second ruling, McDonald's was not required to prove that the income was subject to taxation in the US.

According to the Commission, "with the second ruling, Luxembourg authorities accepted to exempt almost all of McDonald's Europe Franchising's income from taxation in Luxembourg." It said: "As a result, the Luxembourg authorities recognized 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 recognize 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 Commission will now investigate further to see if its concerns are justified, in particular the concern that the second ruling provided McDonald's with a favorable tax treatment in breach of EU state aid rules. It will assess whether Luxembourg authorities selectively deviated from the provisions of their national tax law and the Luxembourg-US double taxation treaty, and whether the Luxembourg authorities gave McDonald's an advantage not available to other companies in a comparable factual and legal situation.

Tax Commissioner Margrethe Vestager said: "A tax ruling that agrees to McDonald's paying no tax on their European royalties either in Luxembourg or in the US has to be looked at very carefully under EU state aid rules. The purpose of double taxation treaties between countries is to avoid double taxation – not to justify double non-taxation."

According to Article 107(1) of the Treaty on the Functioning of the European Union, state aid that affects trade between EU member states and threatens to distort competition by favoring certain undertakings is in principle incompatible with the EU single market.

In a statement, the Luxembourg Finance Ministry said: "The adoption of the opening decision is a procedural step that does not pre-judge the outcome of the investigation. This procedure is not related to any other case that is currently open. Luxembourg considers that no special tax treatment nor selective advantage have been granted to McDonald's. Luxembourg will fully cooperate with the Commission in the investigation."

In a statement provided to the BBC, McDonald's stated: "We are subject to the same tax laws as other companies and are confident that the inquiry will be resolved favorably. McDonald's complies with all tax laws and rules in Europe and pays a significant amount of corporate income tax. In fact, from 2010-2014, the McDonald's companies paid more than USD2.1bn just in corporate taxes in the European Union, with an average tax rate of almost 27 percent."

TAGS: Russia | compliance | tax | European Commission | double tax agreement (DTA) | tax compliance | royalties | law | corporation tax | Luxembourg | ministry of finance | tax authority | agreements | tax planning | transfer pricing | tax rates | Switzerland | trade | European Union (EU) | services | Europe

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