On 19 September 2018, the European Commission ("Commission") found, following an in-depth investigation, that the non-taxation of McDonald's profits in Luxembourg was in line with national tax laws and the Luxembourg-US double taxation Treaty, and therefore did not constitute illegal State aid. Ashurst acted for the Luxembourg authorities on this case.
| What you need to know - key takeaways |
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- The McDonald's decision is the first amongst recent State aid decisions where the Commission reached a finding of no aid.
- The decision confirms that where tax rulings granted by a national authority do not deviate from national law, and the national law itself is not selective, there is no State aid.
- In this case, the Commission assessed the extent of any deviation in relation to the Luxembourg-US double taxation Treaty – rather than deviation from general national tax rules (as in the Fiat, Starbucks or Amazon cases) or the alleged "objective" of these rules (Engie).
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In 2009, McDonald's Luxembourg-based entity, McD Europe, set up a branch in the US assuming various economic risks and costs associated with the development of McDonald's franchise rights. Revenues of this branch were included in the consolidated financial statements of McD Europe in Luxembourg.
It follows from the tax ruling concerned that:
- McD Europe was a tax resident in Luxembourg pursuant to national legislation, and was accordingly fully liable for corporate income tax in Luxembourg but also benefitted from all provisions of the Luxembourg-US double taxation Treaty.
- Under this Treaty, activities of the US branch were to be considered as being performed in the US. Consequently, the profits generated by the US branch could only be subject to possible taxation in the US and exempted from corporate income tax in Luxembourg.
Under US domestic law, the US branch did not constitute a permanent establishment for tax purposes. As a result, under US law, the US branch was also exempted from corporate taxation.
The Commission's formal investigation, which was opened on 3 December 2015, concluded on 19 September 2018, that the Luxembourg authorities did not misapply the Luxembourg-US double taxation Treaty and that therefore McD Europe's tax treatment in Luxembourg could not be considered State aid. The business carried on by the US branch fulfilled all of the conditions of a permanent establishment under the Luxembourg tax code. Therefore, the Luxembourg authorities correctly applied this Treaty by considering that profits generated by the US branch could only be subject to possible taxation in the US and that they were exempt from corporate income tax in Luxembourg. This is so, regardless of the fact that, under the US tax code, the US branch did not fulfil the relevant provisions to be considered a permanent establishment there and that it was consequently effectively exempt from corporate taxation in the US.
The McDonald's decision is the first amongst the recent fiscal State aid cases in which the Commission had reached a finding of no aid. Commissioner Vestager explained that "the reason for double non-taxation in this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, Luxembourg did not break EU State aid rules".
Denis Waelbroeck and Scheherazade Oozeerally of Ashurst acted for the Luxembourg authorities on this case.
With thanks to Scheherazade Oozeerally of Ashurst for her contribution.
