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.
