EU Commission Concludes McDonalds’ Luxembourg Tax Rulings Are In Line With State Aid Rules

The European Commission has concluded that tax rulings issued by Luxembourg tax authorities to McDonald’s Europe Franchising did not infringe EU State aid rules in September 2018. The non-taxation of certain McDonald’s profits in Luxembourg is not a selective tax treatment and it is in line with national tax laws and the Luxembourg-United States Double Taxation Treaty.

Corporate Structure and Luxembourg Tax Rulings

McDonald's Europe Franchising is a subsidiary of McDonald's US. The company is a tax resident in Luxembourg and has two branches, one in the United States (US branch) and the other in Switzerland (Swiss branch). In 2009, McDonald's Europe Franchising acquired a number of McDonald's franchise rights from McDonald's US, which are subsequently allocated internally to the US branch. The Swiss branch is responsible for the licensing of the franchise rights to franchisors and through which royalty payments flowed from Luxembourg to the McDonald's Europe Franchising US branch. As a result, royalties from franchisees operating McDonald's fast food outlets in Europe, Ukraine and Russia received by McDonald's Europe Franchising are allocated to the US branch.

In March 2009, the Luxembourg tax authority 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 US. This was justified by reference to the Double Taxation Treaty between Luxembourg and the US, 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 are subject to taxation in the United States and in Switzerland.

In September 2009, Luxembourg issued a second tax ruling according to which McDonald's Europe Franchising was no longer required to submit such proof; after discussing, McDonald's claimed that although the US branch was not a PE according to US tax law, it was a PE according to Luxembourg tax law. As a result, the royalty income should be exempt from taxation under Luxembourg corporate tax law.

State Aid Investigation and Conclusion

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 Commission's in-depth investigation assessed whether the Luxembourg authorities selectively derogated from the provisions of their national tax law and the tax treaty and grant a selective advantage. In conclusion, 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.

The Luxembourg Government has taken legislative steps to address the issue. A 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 is currently being discussed by the Luxembourg Parliament.

Source: European Commission

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