In a decision returned on Wednesday 19 September, the European Commission found that the failure to tax certain profits made by McDonald's in Luxembourg, by virtue of tax rulings, did not constitute unlawful State aid within the meaning of EU law, as this situation complies with Luxembourg's tax law and the agreement on dual taxation between Luxembourg and the United States.
“Our in-depth investigation has shown that the reason for the double non-taxation in this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg”, Margrethe Vestager, the Commissioner for Competition, told a press conference, having reiterated that the rules of EU State aid law aim to avoid giving any company an undue advantage. Luxembourg's “tax treatment is not illegal under EU rules”, she added.
Today's decision follows the opening of an in-depth investigation in December 2015 (see EUROPE 11445) into the Grand Duchy, over its tax treatment of the US fast-food giant, the result of a fairly complex legal arrangement.
McDonald's Europe Franchising is a European subsidiary of the McDonald's Corporation (based in the United States), which is resident for tax purposes in Luxembourg. McDonald's Europe Franchising itself has two branches, one in the United States and the other in Switzerland.
In 2009, McDonald's Europe Franchising acquired franchising rights for the operation of fast-food establishments from its parent company in the United States, for which it received fees from franchisees operating in Europe, which it subsequently allocated to its US branch. Additionally, the company based in Luxembourg used its Swiss branch to transfer licenses on franchising rights and to transfer the related fees from Luxembourg to the US branch.
Two tax rulings. In March 2019, the Grand Duchy granted McDonald's Europe Franchising a tax ruling, exonerating it from corporate tax on its territory. This was on the grounds of the existence of a Luxembourg-US agreement exonerating income from corporate tax in Luxembourg if this income is taxable in the US. Here, Luxembourg argued that the profits in question were taxable on US soil, but this decision required McDonald's Europe Franchising to provide the Luxembourg taxation authorities with evidence every year that the fees transferred via Switzerland to the US had been subjected to tax in the US.
Subsequently, the company and the Grand Duchy exchanged their observations concerning the tax presence of McDonald's Europe Franchising in the United States. The US giant took the view that the American branch was indeed a permanent establishment within the meaning of Luxembourg law, although this was not the case under US law, which automatically led to a situation of double non-taxation.
The Grand Duchy took position in favour of this interpretation, in line with its law, and issued a second tax ruling in September 2019 whereby McDonald's Europe Franchising was no longer required to prove that the fees in question had been taxed in the US.
No differentiated treatment. In its decision, the Commission reiterates that the purpose of the EU State aid rules is to prevent member states from giving certain companies more favourable treatment than others.
In this situation, although the interpretation of the Luxembourg-United States agreement gave rise to a double non-taxation of profits, it was the correct one, as the US branch could be considered a permanent establishment within the meaning of Luxembourg law.
Consequently, the Commission was unable to conclude that McDonald's had benefited from State aid.
Future Luxembourg legislation. Nonetheless, the Commission regrets that there is a non-compliance with the principle of fiscal equity in the matter, as McDonald's benefited from the double non-taxation of certain profits.
With regard to this, it welcomes the fact that the Luxembourg government has proposed draft legislation to the national parliament to tighten up the rules on determining a permanent establishment (within the meaning of Luxembourg law). Similar cases may thus be avoided in the future.
Reactions. Unsurprisingly, the Luxembourg authorities have welcomed this decision. “This decision strengthens Luxembourg's position that while the application of the rules in force at the time might have resulted in a situation that no longer reflects the current spirit of the national and international tax framework, such an application does not constitute State aid”, said finance minister Pierre Gramegna.
“This decision is a demonstration of the urgent need to reform the taxation of multinationals as a whole in order to restore fairness and avoid similar unacceptable situations”, said MEP Eva Joly (Greens/EFA, France). (Original version in French by Lucas Tripoteau)