EU Commission: Non-Taxation of McDonald’s Profits in Luxembourg Is Not State Aid

27 September 2018
Author: Sabina Manea

The European Commission has concluded that Luxembourg did not breach EU state aid rules by not taxing certain profits of McDonald’s in that jurisdiction.

The Commission’s investigation, launched in December 2015, focused on whether the non-taxation resulted from a misapplication of national laws as well as the Luxembourg-US Double Taxation Treaty. The Commission sought to establish whether such non-taxation amounted to state aid through illegal tax benefits, whereby McDonald’s was granted an advantage not available to other entities in a comparable situation.

McDonald’s Europe Franchising had not paid any corporate tax in Luxembourg since 2009, whilst recording substantial profits in that period, for instance in excess of €250 million in 2013. The profits originated from franchise royalties in Europe and Russia for the use of the McDonald’s brand and related services. These royalties were directed internally to McDonald’s US branch. The Luxembourg authorities held in 2009 that McDonald’s Europe Franchising did not owe any corporate tax in that jurisdiction, since the profits were due to be taxed in the US according to the Luxembourg-US Double Taxation Treaty. However, the profits were in fact not subject to taxation in the US as McDonald’s Europe Franchising was not a ‘permanent establishment’ and thus did not have a taxable presence in the US under US law. At the same time, the Luxembourg authorities viewed the US branch as a ‘permanent establishment’ and thus the place where most of the profits should be taxed under Luxembourg law. This conclusion led to the double non-taxation of the relevant profits in Luxembourg and the US.

 

The Commission concluded that the Luxembourg authorities had been correct in exempting McDonald’s US branch, since that branch was indeed a ‘permanent establishment’ under the Luxembourg tax code. That the Luxembourg authorities knew the US branch was simultaneously exempt from tax under US law when they decided not to tax that branch under Luxembourg law did not constitute illegal state aid. However, to prevent such double non-taxation in the future, Luxembourg has now drafted amendments to its tax code which are being discussed in the national parliament. The legislative proposals aim to tighten the rules on determining the existence of a permanent establishment, as well as requiring companies claiming to have a taxable presence abroad to submit confirmation that they are indeed subject to taxation in the other country.

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Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)

Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).

In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1

HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.

This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.

It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.

This article was first published with ThoughtLeaders4 Private Client Magazine

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