The Commission is investigating special tax arrangements between Luxembourg and the fast food company which may have resulted in McDonald's paying no tax on some royalty payments. This week it published the public version of its decision to launch the investigation.
The investigation is looking into whether two 'tax rulings' given by Luxembourg to McDonald's Europe Franchising in March and September 2009 went against national tax law and the Luxembourg-US double taxation treaty.
The Commission argues that by doing so Luxembourg gave McDonald's an advantage not available to other companies in comparable factual and legal situations in breach of EU state aid rules.
McDonald's Europe Franchising is headquartered in Luxembourg but also has two branches, in Switzerland and the US. The head office is designated as responsible for corporate "strategic decision-making"; while the Swiss branch has limited activity relating to franchising rights and the US branch has no 'real' activities, according to the Commission. All royalties received by McDonald's Europe Franchising are transferred internally to the US branch.
According to the Commission, the March 2009 tax ruling confirmed that the company was not due to pay corporate tax in Luxembourg on the grounds that the profits were subject to US tax under the Luxembourg-US double taxation treaty. However, as the company had no taxable presence in the US under US law, the profits were not in fact subject to US tax.
McDonald's requested a second tax ruling to confirm that it did not have to prove that the income was subject to US tax in order to benefit from the Luxembourg exemption, which was granted by Luxembourg in September 2009.
"There is…no requirement that the other contracting state (US) effectively taxes this income," McDonald's tax advisor, said, according to the Commission document. This was accepted by Luxembourg, the Commission said.
Luxembourg argues that the measures put in place are in line with its law and do not constitute state aid, the Commission said.
The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition that occurs when national governments grant advantages or incentives to particular companies. If the Commission rules that member states have given unlawful state aid, the member state may be required to make the company pay back any illegal reliefs granted over a period usually covering up to 10 years.
When announcing the investigation in December 2015, EU competition commissioner Margrethe Vestager said: "A tax ruling that agrees to McDonald's paying no tax on their European royalties either in Luxembourg or in the US has to be looked at very carefully under EU state aid rules."
"The purpose of 'double taxation' treaties between countries is to avoid double taxation – not to justify double non-taxation," Vestager said.
In October 2015 the Commission decided that rulings issued by the Netherlands to Starbucks and Luxembourg to Fiat Finance and Trade constituted selective tax advantages that contravened EU state aid rules. The Commission said that the countries concerned would be required to recover €20 to €30 million from each company to claw back the benefits of the state aid received.
The commission is also investigating rulings given to Amazon by Luxembourg and to Apple by Ireland.
From 1 January 2017 EU member states will be required to exchange information automatically on advance cross-border tax rulings, as well as advance pricing arrangements. The Commission is developing a secure central directory where the information exchanged will be stored. The directory will be accessible to all member states and, where it is required for monitoring implementation of the directive, to the Commission.