The European Commission on June 7 published the non-confidential version of its decision to open a State aid investigation into whether a tax ruling granted by Luxembourg to McDonald’s may have granted State aid to the fast food giant.
The Commission’s decision, first announced December 3, 2015, questions whether Luxembourg granted a selective advantage to McDonald’s by misapplying the US-Luxembourg tax treaty so as to lower tax paid by McDonald’s Luxembourg subsidiary.
In 2009, Luxembourg confirmed in a tax ruling that McDonald’s Europe Franchising, owner of McDonald’s European intellectual property and franchising rights, was not subject to tax in Luxembourg on profits it received from royalties paid by franchisees operating restaurants in Europe and Russia.
Luxembourg based its ruling on McDonald’s claim that McDonald’s Europe Franchising was a resident and could thus take advantage of the US-Luxembourg tax treaty. The royalties — routinely transferred from Luxembourg to a US branch via a Swiss branch — were exempt from taxation in Luxembourg because they were attributable to a United States PE under the treaty, the ruling concluded.
Later that same year, McDonald’s told the Luxembourg tax authorities that the profit was not in fact subject to tax in the United States because the US branch was not a PE under US law.
McDonald’s argued that notwithstanding the fact that there was no US PE under US law, under Luxembourg law and the Luxembourg/US tax treaty, McDonald’s US entity would be a US PE, so the income should be exempt from Luxembourg tax under the treaty.
Luxembourg accepted the company’s position in a second private tax ruling in September 2009, confirming again that McDonald’s had no PE in Luxembourg and exempting all profits from taxation in Luxembourg.
As a result, since 2009 McDonald’s paid no tax on the royalty payments in either country. These untaxed profits amounted to more than €250 million (USD 273 million) in 2013 alone.
According to Luxembourg, its position is in line with Luxembourg law, and since the rulings are a mere interpretation of relevant provisions of Luxembourg law, they cannot lead to a finding of discriminatory treatment between taxpayers.
The Commission’s preliminary decision, though, was that the Luxembourg tax administration should have only agreed to exempt income from corporate taxation to the extent that the income may be taxed in the United States pursuant to the Luxembourg–US tax treaty. By instead reaching an erroneous interpretation of the treaty and law, Luxembourg conferred a selective advantage on McDonald’s, the Commission said.
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