The European Commission has found that the non-taxation of certain McDonald's profits in Luxembourg did not lead to illegal state aid, as it is in line with national tax laws and the Luxembourg/United States double taxation treaty.
The decision follows an in-depth investigation launched in December 2015, based on doubts that Luxembourg might have misapplied its double taxation treaty with the US. The Commission has now concluded that it could not be established that the interpretation given by the second tax ruling to the Luxembourg/US double taxation treaty was incorrect, even though it resulted in the double non-taxation of the royalties attributed to the US branch. Therefore, the Luxembourg authorities did not misapply the double taxation treaty and 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 welcomes steps taken by Luxembourg to prevent future double non-taxation. On 19 June 2018, the Luxembourg government presented 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. This is currently being discussed by the Luxembourg Parliament. Under the proposed new provision, the conditions to determine the existence of a permanent establishment under Luxembourg law would be strengthened. In addition, Luxembourg would be able to, under certain conditions, require companies that claim to have a taxable presence abroad to submit confirmation that they are indeed subject to taxation in the other country.
Competition commissioner Margrethe Vestager said: ‘The fact remains that McDonald's did not pay any taxes on these profits – and this is not how it should be from a tax fairness point of view. That's why I very much welcome that the Luxembourg government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future.’
The European Commission has found that the non-taxation of certain McDonald's profits in Luxembourg did not lead to illegal state aid, as it is in line with national tax laws and the Luxembourg/United States double taxation treaty.
The decision follows an in-depth investigation launched in December 2015, based on doubts that Luxembourg might have misapplied its double taxation treaty with the US. The Commission has now concluded that it could not be established that the interpretation given by the second tax ruling to the Luxembourg/US double taxation treaty was incorrect, even though it resulted in the double non-taxation of the royalties attributed to the US branch. Therefore, the Luxembourg authorities did not misapply the double taxation treaty and 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 welcomes steps taken by Luxembourg to prevent future double non-taxation. On 19 June 2018, the Luxembourg government presented 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. This is currently being discussed by the Luxembourg Parliament. Under the proposed new provision, the conditions to determine the existence of a permanent establishment under Luxembourg law would be strengthened. In addition, Luxembourg would be able to, under certain conditions, require companies that claim to have a taxable presence abroad to submit confirmation that they are indeed subject to taxation in the other country.
Competition commissioner Margrethe Vestager said: ‘The fact remains that McDonald's did not pay any taxes on these profits – and this is not how it should be from a tax fairness point of view. That's why I very much welcome that the Luxembourg government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future.’
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