On September 19, 2018 the European Commission issued a press release announcing that following an in-depth investigation which was launched in December 2015, based on doubts that Luxembourg might have misapplied its Double Taxation Treaty with the United States, the Commission has concluded that Luxembourg's tax treatment of McDonald's Europe Franchising does not violate the Double Taxation Treaty with the United States. On that basis the tax rulings granted to McDonald's do not infringe EU State aid rules.
In this respect the European Commission states a.o. the following in its press release:
“McDonald's Europe Franchising corporate structure
McDonald's Europe Franchising is a subsidiary of McDonald's Corporation, based in the United States. The company is tax resident in Luxembourg and has two branches, one in the United States and the other in Switzerland. In 2009, McDonald's Europe Franchising acquired a number of McDonald's franchise rights from McDonald's Corporation in the United States, which it subsequently allocated internally to the US branch of the company.
As a result, McDonald's Europe Franchising receives royalties from franchisees operating McDonald's fast food outlets in Europe, Ukraine and Russia for the right to use the McDonald's brand.
McDonald's Europe Franchising also set up a Swiss branch responsible for the licensing of the franchise rights to franchisors and through which royalty payments flowed from Luxembourg to the US branch of the company.
McDonald's tax rulings in Luxembourg
In March 2009, the Luxembourg authorities 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 United States. This was justified by reference to the Luxembourg – US Double Taxation Treaty, 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 subject to taxation in the United States and in Switzerland.
Following this first tax ruling, the Luxembourg authorities and McDonald's engaged in discussions concerning the taxable presence of McDonald's Europe Franchising in the United States (a so-called "permanent establishment"). McDonald's claimed that although the US branch was not a "permanent establishment" according to US tax law, it was a "permanent establishment" according to Luxembourg tax law. As a result, the royalty income should be exempt from taxation under Luxembourg corporate tax law.
The Luxembourg authorities ultimately agreed with this interpretation and, in September 2009, issued a second tax ruling according to which McDonald's Europe Franchising was no longer required to prove that the royalty income was subject to taxation in the United States.
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 Luxembourg – US Double Taxation Treaty and gave McDonald's an advantage not available to other companies subject to the same tax rules.
The Commission concluded that this was not the case.
In particular, it could not be established that the interpretation given by the second tax ruling to the Luxembourg – US Double Taxation Treaty was incorrect, although it resulted in the double non-taxation of the royalties attributed to the US branch. Therefore, the Commission found that the Luxembourg authorities did not misapply the Luxembourg –US Double Taxation Treaty and that the tax advantage conferred to McDonald's Europe Franchising cannot be considered State aid.
McDonald's Europe Franchising's US branch did not fulfil the relevant provisions under the US tax code to be considered a permanent establishment.
At the same time, the Commission found that the Luxembourg authorities could exempt the US branch of McDonald's Europe Franchising from corporate taxation without violating the Double Taxation Treaty because the US branch could be considered a permanent establishment according to Luxembourg tax law. Under the relevant provision in the Luxembourg tax code, the business carried on by the US branch of McDonald's Europe Franchising fulfilled all the conditions of a permanent establishment under Luxembourg tax law.
Therefore, the Commission concluded that the Luxembourg authorities did not misapply the Luxembourg – US Double Taxation Treaty by exempting the income of the US branch from Luxembourg corporate taxation.”
In the McDonald’s case the interpretation of the Luxembourg – US Double Taxation Treaty led to double non-taxation of the franchise income of McDonald's Europe Franchising.
On June 19, 2018 the Luxembourg government has submitted to Parliament a draft bill transposing the first ATAD directive into Luxembourg law and amending provisions of the tax legislation, with the aim of henceforth preventing double non-taxation situations such as raised by the Commission.
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