6th December 2015

EC targets Luxembourg-McDonald´s tax deal

The European Commission, specifically the Competition Commissioner Margrethe Vestager, continues its drive against the so-called sweetheart deals between large multinationals and national tax authorities. The EC regards individual tax rulings as a possible state aid measure, which means the EU executive has important powers in that area. The EU already opened investigation into Amazon´s and Apple´s tax regimes and also ordered re-calculation and recovery of taxes from Starbucks and Fiat. On 3 December, Ms. Vestager´s department opened an investigation into McDonald´s and its tax regime in Luxembourg.

McDonald´s functions as a franchising business, with its activities in Europe and Russia administered by a company registered in Luxembourg. This company receives royalties from franchise partners across Europe and Russia for the rights to use the McDonald´s name and specific services. The annual amount of royalties received is about €250 million (2013). The Luxembourg-based company has a sister company in Switzerland and another in the US. Despite relatively high profits, McDonald´s Europe Franchising has paid virtually no taxes on its profits since 2009. That has been made possible, and completely legal, by the Luxembourgish tax authority. In March 2009, it issued a tax ruling stating that McDonald´s Europe Franchising´s profits from royalties should be taxed, but under a Luxembourg-US double taxation treaty, they are taxable in the US. The tax authority allowed the company to transfer its profits to the US, without paying taxes in the EU, and tax them there – of which McDonald´s needed to provide proof. Internally, McDonald´s Europe Franchising transferred the profits via Switzerland (where some taxes were paid), to the US. But here, the profits from royalties were not subject to taxation based on US laws. McDonalds Europe Franchising asked for a second ruling legalizing the non-taxation in the US from a Luxembourgish point of view. And later in September 2009, it received it. This second tax ruling is the main problematic point.

The main Luxembourgish argument was the bilateral double taxation treaty. According to the treaty, to avoid double taxation, royalties should be taxed in the US – therefore Luxembourgish tax authority authorized zero taxation in Europe. However, the US sister company of McDonald´s Europe Franchising did not undertake significant business in the US (it only received royalties from Europe and Russia), therefore from the US point of view, it was not taxable there. The second Luxembourgish tax ruling confirmed this. Thus, the double taxation treaty provided an argument to avoid taxation altogether. Ms. Vestager stated that this was fundamentally wrong. Double taxation treaties are here to avoid double taxation, not to authorize double non-taxation, she added.

Of course, the process is only at its beginning and all the parties involved will have an opportunity to respond to the allegations. Nevertheless, if the tax ruling is confirmed as illegal state aid (unfair advantage provided by the state to an individual company to the detriment of others), Luxembourg can be tasked to re-calculate and recover the due tax. This process is also an embarrassment for Commission President Juncker. At the time of the ruling, he served as Luxembourg´s Prime Minister and Finance Minister.

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Members of the American Chamber of Commerce in the Czech Republic