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7 June 2016
EU Direct Tax Newsalert
Non-confidential version of the EC’s State aid
opening decision in McDonald’s
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For more detailed information, please
do not hesitate to contact:
Sjoerd Douma - PwC State Aid Working
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[email protected]
Alina Macovei - PwC Luxembourg
+352 49 48 48 3122
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Calum Dewar – PwC US
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On 6 June 2016, the European Commission (“EC”) published its opening decision in the formal investigation into two
tax rulings obtained by McDonald’s entities in Luxembourg. The opening decision explains the reasons for the initiation of the formal investigation. It also
specifies the additional information,
which the EC has requested from Luxembourg in order to reach a final conclusion
in this respect. This decision represents
therefore the opening, not the outcome,
of the EC's formal investigation into this
matter.
Background
The formal investigation pertains to the
granting of two tax rulings concluded in
March and September 2009 relating to
the tax treatment of royalty income derived by McD Europe Franchising Sarl
(Luxembourg) (“McD Sarl”) from a US
branch.
According to the description of the facts
in the opening decision, McD Sarl acquired the beneficial ownership of certain franchising rights of the group,
which were then allocated to and managed at the level of its US branch. An initial ruling of March 2009 confirmed the
exemption of the US branch profits at the
level of McD Sarl, as being profits derived
from the
permanent establishment
(“PE”) located in the US on the basis of
Article 25 of the Luxembourg-US double
tax treaty (“DTT”). The initial ruling included the requirement that annual proof
is produced that the profits were declared
and subject to tax in the US. A revised ruling was introduced and eventually obtained in September 2009, which explained that the US branch does not constitute a US trade or business under US
domestic law and which confirmed that
proof of effective taxation of the profits in
the US is not needed, as it is not required
by Article 25 of the Luxembourg-US DTT.
According to the opening decision, the
argument which was brought forward in
this respect was that the US branch represents a PE of the Luxembourg company
in the US under Luxembourg law and Article 25 of the Luxembourg-US DTT does
not require the profits of the PE to be effectively subject to tax in the other state.
In its response to the EC’s inquiry, Luxembourg supported the treatment confirmed in the revised ruling on the basis of
the following arguments:
 The treatment is fully in line with
Luxembourg law and does not constitute State aid;
 To the extent to which the ruling includes only an interpretation of the
Luxembourg law without deviating
from the generally applicable tax
provisions, it cannot constitute State
aid;
 The US branch constitutes a PE in
the US and an exemption applies on
the basis of the DTT.
Key reasons:
The EC believes at this stage that the combination of the two rulings can lead to a
situation of State aid based on the following preliminary grounds:



The framework of reference in relation to which a selective advantage is
to be established is the Luxembourg
income tax system, including the
DTT;
The interpretation in the revised ruling contradicts the Luxembourg-US
DTT and the Luxembourg law that
transposes the DTT into national law.
The exemption provision in Article
25 of the DTT, which refers to profits
which “may be taxed” in the other
State does not require as such effective taxation of the profits in the US;
however, the absence of a PE under
the laws of the US implies that the
profits may not be taxed in the US, as
a result of which the exemption of
those profits in Luxembourg is not
justified.
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