by Julie Martin, Editor MNE Tax
The EU Commission today announced that it has determined that tax rulings granted by Luxembourg to McDonald’s in 2009 did not provide illegal state aid to the fast food giant. As a result, Luxembourg is not required to collect back taxes from McDonald’s, the Commission said.
The Commission has been investigating the Luxembourg tax rulings since 2015, following the publication of a report claiming that McDonald’s avoided over €1 billion (USD 1.1 billion) in European corporate taxes from 2009-2013 on account of its arrangement with Luxembourg. The report was written by European and American trade unions and anti-poverty campaign group War on Want.
According to the Commission, though, while two Luxembourg tax rulings confirmed an interpretation of the law that allowed McDonald’s to escape taxation on franchise income in Luxembourg, this treatment did not amount to a selective advantage to McDonald’s and was thus not illegal under EU law.
McDonald’s nontaxation in Luxembourg was due to a mismatch between the laws of the United States and Luxembourg, not because Luxembourg misapplied its national laws or gave McDonald’s any special treatment, said Commissioner Margrethe Vestager, in charge of competition policy, announcing the Commission decsion.
Double nontaxation
A 2009 Luxembourg tax ruling confirmed that subsidiary, McDonald’s Europe Franchising (McDonald’s Luxembourg), which owned McDonald’s European intellectual property and franchising rights, did not have a permanent establishment (PE) in Luxembourg and was thus not subject to taxes there on profits it received from royalties paid by franchisees operating restaurants across Europe and Russia.
Luxembourg based its tax ruling on the claim that the royalties — routinely transferred from McDonald’s 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 US-Luxembourg tax treaty.
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 as it had no PE in the United States. Luxembourg nonetheless granted the company a second private tax ruling in 2009 confirming again that McDonald’s had no PE in Luxembourg and was not subject to tax there.
As a result, since 2009 McDonald’s paid virtually no tax in either country on the royalty payments, which were likely deductible in other jurisdictions by other McDonald’s group members.
In its announcement, the Commission noted that Luxembourg is now debating a change to its tax laws to prevent other MNEs from using this same loophole.
Tax ruling challenges
The EU Commission has conducted several investigations into member states that are alleged to have given unfair advantages to selected companies through private tax rulings.
The McDonald’s/Luxembourg case is first state aid probe involving tax rulings where the Commission has concluded after an in-depth investigation that no state aid violation occurred.
The Commission has previously ordered recovery of taxes in state aid challenges involving tax rulings granted to Apple by Ireland, Starbucks by the Netherlands, and Amazon and Fiat by Luxembourg. These decisions are all being challenged in European courts.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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Hi Julie, can you share the copy of the ruling. Thanks
Hi Rohan – The decision was announced by press release – the public version of the actual decision has not yet been released – JM