McDonald’s cited information obtained through LuxLeaks to show that tax rulings it obtained from Luxembourg didn’t convey a selective advantage or constitute illegal state aid.
A nonconfidential version of the European Commission’s decision that Luxembourg’s tax treatment of McDonald’s subsidiary McD Europe Franchising S.a.r.l. didn’t violate the Luxembourg-United States tax treaty revealed the commission’s conclusion that the contested rulings weren’t so different from those granted to many other taxpayers.(French text; 2009 protocol; French text.) “The assessment of 25 other tax rulings demonstrates that the Luxembourg tax authorities have followed a coherent interpretation of the double taxation treaty,” according to the decision, published December 17.
The commission announced its conclusion that Luxembourg’s rulings did not violate EU state aid rules in September, after an investigation into the double nontaxation of royalties from fast food outlets for the use of the McDonald’s brand that were attributed to a U.S. branch of McD Europe. The rulings at issue supported the company’s positions that the profits of the U.S. branch were subject to tax in the United States and therefore, no corporate tax was due in Luxembourg under the tax treaty, and that its U.S. branch was not a permanent establishment for U.S. purposes, but was a PE for Luxembourg purposes, with its royalty income exempt in Luxembourg.
The commission argued that Luxembourg’s tax authorities knew that the profits attributed to the U.S. branch wouldn’t be taxed in either Luxembourg or the United States and they shouldn’t have exempted the income from corporate tax in Luxembourg. But ultimately, the commission couldn’t show that the Luxembourg authorities erroneously applied the tax treaty or that the rulings gave McD Europe a selective advantage, according to the decision.
“It appears that many undertakings have benefited from the same treatment as McD Europe,” the decision says. “None of these other tax rulings impose a condition of taxation of the business profits at the level of the PE.”
Luxembourg had argued that if McD Europe wasn’t subject to tax under Luxembourg law, the question of whether it’s taxable under U.S. law is irrelevant, “since Luxembourg does not recover its right to tax,” the ruling says.
The nontaxation of the branch’s income “derives mainly from the fact that the U.S. does not make use of its right to tax,” according to the decision. The commission considered whether the nontaxation of the branch’s income resulted from a “conflict of qualification,” permitting Luxembourg to recover its right to tax, but found no evidence of such a situation.
In a conflict of qualification, parties to a treaty apply different articles of the treaty based on the interaction of domestic law and the treaty articles, the decision explains. If this were such a case and the United States considered itself to have no right to tax income under the treaty, Luxembourg would not be required to exempt the income, it said.
But in McDonald’s case, Luxembourg and the United States aren’t applying different provisions of the tax treaty; they are interpreting the same article — article 5 concerning PEs — differently, the decision says. In cases of differing interpretations, double nontaxation can arise, the decision acknowledges. That can be addressed with an amendment to the tax treaty or through the mutual agreement procedure, it adds.