European Commission - Statement

Statement by Commissioner Vestager on Commission decision that the non-

taxation of certain McDonald's profits in Luxembourg is not illegal State aid

Brussels, 19 September 2018

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The Commission has today decided that the non-taxation of certain McDonald's profits in Luxembourg
is not illegal State aid.
Our case concerned two tax rulings granted by Luxembourg to McDonald's in 2009. These exempt from
taxation in Luxembourg all franchise profits that McDonald's receives from third parties operating
McDonald's outlets in Europe, the Ukraine and Russia. In the first ruling, Luxembourg falsely assumed
that these profits were taxable in the US. They were not. In the second ruling, Luxembourg then
removed any obligation on McDonald's to prove that the revenues were taxable in the US. This means
that these profits were neither taxed in Luxembourg nor the US.
The Commission investigated under EU State aid rules whether this double non-taxation was the result
of Luxembourg misapplying its national laws and the Luxembourg-US Double Taxation Treaty, in
favour of McDonald's. EU State aid rules prevent Member States from giving unfair advantages only to
selected companies, including through illegal tax benefits.
However, our in-depth investigation has shown 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, we concluded that Luxembourg did not break EU State aid rules.
Details of the McDonald's structure
First, let me tell you a bit more about the facts of the case.
Our case concerns McDonald's Europe Franchising, a Luxembourg-based subsidiary of the McDonald's
Corporation. This company also has a branch in the US.
McDonald's Europe Franchising owns the rights to the McDonald's brand and other related rights. It
licenses these rights to third parties, who operate the McDonald's fast food outlets and pay franchise
fees to McDonald's Europe Franchising.
In February 2009, McDonald's Europe Franchising contacted the Luxembourg tax authorities to ask for
a tax ruling confirming that profits from its franchise rights would not be taxable in Luxembourg.
McDonald's claimed that this was because these rights are attributed to its US branch. It further
argued that the Luxembourg – US Double Taxation Treaty exempts from taxation in Luxembourg any
income that may be taxed in the US, if the company has a taxable presence there, for example
through a branch.
In March 2009, the Luxembourg authorities issued a first tax ruling agreeing to McDonald's
interpretation of the Double Taxation Treaty. At the same time, they requested that the company
provide proof that the income of the US branch had been declared and could indeed be taxed in the
US.
However, six months later, the Luxembourg tax authorities issued a second tax ruling that removed
this requirement to submit proof. In other words, Luxembourg confirmed that the income is exempt
from taxation in Luxembourg as well, even though it is not taxable at the US branch.
The State aid investigation
You may wonder how Luxembourg can rely on a Treaty meant to avoid double taxation to endorse
double non-taxation. We asked ourselves the same question, which is why we opened a State aid
investigation in December 2015.
The purpose of such investigations is to give the Member State and company concerned, as well as
other third parties, the opportunity to submit their views on the Commission's preliminary concerns.
We then carefully assess them.
The short summary of our conclusion in this case is that the Double Taxation Treaty between
Luxembourg and the US explains Luxembourg's tax treatment of McDonald's. Luxembourg did not
misapply the Treaty in a selective manner and, on that basis, did not break EU State aid rules.
The more complicated answer starts with a taxation concept called "permanent establishment". If a
company has a "permanent establishment" in a specific country, this means that it carries out business
and has a taxable presence there.
The Luxembourg – US Double Taxation Treaty says that Luxembourg cannot tax the profits of
companies, if they may be taxed in the US because they have a permanent establishment there.
Luxembourg can assume that the income of this permanent establishment is taxed in the US.
However, whether a permanent establishment exists in the US is assessed differently by the US and by
the Luxembourg tax authorities, under their respective tax codes.
The US did not consider the US branch of McDonald's Europe Franchising to be a permanent
establishment under its tax law, and so did not tax the profits of this US branch. However, the
Luxembourg authorities considered that the same US branch fulfilled all the conditions necessary to be
a permanent establishment under Luxembourg tax law. It therefore exempted this income from
Luxembourg taxation in line with the Double Taxation Treaty.
The result was double non-taxation of the income by Luxembourg and the US. However, this was not
due to any special treatment awarded by Luxembourg to McDonald's, which was the issue that our
investigation under EU State aid rules focused on. In other words, Luxembourg's tax treatment of
McDonald's is not illegal under EU State aid rules.
As usual, we will publish the non-confidential version of our decision as soon as we have agreed with
Luxembourg on any business secrets that need to be removed from it.
New Luxembourg tax rules
Of course, the fact remains that McDonald's did not pay any taxes in Luxembourg 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.
Among other things, Luxembourg will strengthen the criteria under its tax code to define a permanent
establishment. This proposal is currently with the Luxembourg parliament. Once adopted, the new
provision will require the taxpayer, in certain circumstances, to provide a certificate of residence in the
other country, if it wants to benefit from a tax exemption in Luxembourg. This would be proof that the
other country recognises the existence of a taxable permanent establishment of that company. This
new provision is presented to the Luxembourg parliament together with other measures to transpose
the EU's Anti-Tax-Avoidance Directive.
Over the past few years, we have seen an international determination to deal with the issue of tax
avoidance. Through closing loopholes in tax laws and working on the OECD's Base Erosion and Profit
Shifting Project.
Also within the EU, under the responsibility of my colleagues Valdis Dombrovskis and Pierre Moscovici,
the Commission has pursued a coherent strategy towards fair taxation and greater transparency. And
Member States have been using the momentum to reform their corporate taxation framework, to make
it both fairer and more efficient.
Progress on recovery cases
Finally, I would like to update you on significant progress made on the implementation of Commission
decisions requiring Member States to recover unpaid taxes. This is important because otherwise
companies continue to benefit from an illegal advantage.
In May, Luxembourg completed the recovery of more than 280 million euros from Amazon, of which 21
million euros is interest.
I am also happy to confirm that Ireland has now recovered the full illegal aid from Apple. The final
amount recovered is 14.3 billion euros, of which about 1.2 billion euros is interest. This money will be
held in an escrow account, pending the outcome of the ongoing appeal of the Commission's decision
before the EU courts. This means that we can proceed to closing the infringement procedure against
Ireland for failure to implement the decision.
These are important steps forward to tackling multinationals' tax avoidance and to meeting our
ultimate goal of ensuring that all companies, big or small, pay their fair share of tax in the future.
STATEMENT/18/5833