No illegal State aid in favour of Mc Donald's in Luxembourg
22/10/2018

On 19 September 2018, the European Commission concluded its investigation into two tax rulings granted by Luxembourg to McDonald’s in 2009: the rulings under investigation did not constitute State aid in favour of McDonald’s.

Competition Commissioner Vestager has set out her State aid policy priorities on tax rulings following a global inquiry into tax rulings in all Member States for the period 2010 to 2012 and part of 2013. DG Competition investigated more than a thousand tax rulings, focusing on tax rulings that endorsed transfer-pricing arrangements proposed by the taxpayer for determining the tax basis of an integrated group company. 

Following this inquiry, the Commission opened several formal State aid investigations into tax rulings granted by Ireland (Apple case), Luxembourg (Fiat, Amazon and McDonald’s cases), the Netherlands (Starbucks case) and Belgium (the Excess Profits Scheme case). These investigations resulted in negative decisions in the Starbucks, Fiat, Excess Profits Scheme, Apple and Amazon cases. 

The McDonald’s case concerned two tax rulings granted by the Luxembourg State in 2009. Those tax rulings exempted from taxation in Luxembourg all franchise profits received by McDonald’s from third parties operating in Europe, Ukraine and Russia 

In February 2009, McDonald’s Europe Franchising asked the Luxembourg tax authorities for a tax ruling confirming that profits from its franchise rights would not be taxable in Luxembourg as these rights related to its US branch. The company argued that the Luxembourg–US double taxation treaty exempts from taxation in Luxembourg any income taxed in the US if the company has a taxable presence there. The first tax ruling issued by the Luxembourg authorities in March 2009 confirmed the McDonald’s interpretation of the double taxation treaty. The authorities also requested evidence from the company that the US branch income had been declared and indeed taxed in the US. However, six months later a second tax ruling removed this requirement for evidence. In fact, McDonald’s declared that it could not provide any evidence that the profits were subject to tax in the US, but insisted that Luxembourg should nevertheless, as agreed, exempt a profit not taxed in the US from taxation in Luxembourg.

Following press allegations of advantageous tax treatment of McDonald’s in Luxembourg, the European Commission initiated an informal investigation into the tax rulings in 2014.

In December 2015, the Commission opened a formal investigation to assess whether Luxembourg authorities had selectively derogated from national tax law and the Luxembourg–US double taxation treaty, thereby giving McDonald’s an economic advantage over its competitors.

Following the investigation, the Commission concluded that the tax ruling issued by the Luxembourg authorities did not breach Treaty State aid rules. Indeed, from the information provided by Member States, McDonald's and other companies, the Commission concluded that the Luxembourg–US double taxation treaty justifies Luxembourg’s tax treatment of McDonald’s. Under this treaty, Luxembourg cannot tax a company’s profits if taxed in the US when the company has a permanent establishment in the US. Therefore, Luxembourg must assume that the income from this permanent establishment is taxed in the US.

However, the respective tax laws of the US and Luxembourg treat the notion of permanent establishment differently, which resulted in non-taxation of large profits of around 250 million euros in 2013. This arose from applying Luxembourg and US rules, not from selective tax treatment by a Member State (which may be qualified as State aid). 

Even if this case did not fall under State aid rules, Commissioner Vestager raised the question of tax fairness and welcomed the fact that the Luxembourg government was adapting its legal framework in that respect.

This decision is therefore an exception following numerous negative Commission decisions on tax rulings (as mentioned above). The General Court of the EU is now examining many of these decisions which were appealed against by undertakings concerned and there is much anticipation surrounding its judgments owing to the legal uncertainty and the amounts at stake (13 billion euros and 250 million euros in the Apple and Amazon cases respectively).

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