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28th May 2023

Commission opens McDonald's tax probe

  • The fast-food giant dodged taxes in the EU and the US after a deal with Luxembourg. (Photo: Steve Baker)

The European Commission opened a formal probe against McDonalds Thursday (3 December) over tax deals with Luxembourg that resulted in the US fast-food giant not paying taxes in Europe or in the US.

Under two tax-rulings issued by Luxembourg authorities in March and September 2009, McDonald's Europe Franchising was exempted from paying taxes in the Grand Duchy, where the McDonalds subsidiary was registered.

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In addition to its Luxembourg main office, McDonald's Europe Franchising has a Swiss branch, which the commission says "has a limited activity related to the franchising rights" and a US branch, "which does not have any real activities".

The tax deal was about profits made from "royalties paid by franchisees operating restaurants in Europe and Russia for the right to use the McDonald's brand," the commission explains in a statement.

In 2013, for example, these profits reached €250 million.

A first tax ruling was granted on the ground that profits would be subject to taxation in the US, in conformity to the Luxembourg-US double taxation Treaty.

"Under the ruling, McDonald's was required to submit proof every year that the royalties transferred to the US via Switzerland were declared and subject to taxation in the US and Switzerland," the Commission says.

However McDonalds told Luxembourg tax authorities that it did not pay taxes in the US because McDonald's Europe Franchising did not have any taxable presence in the US under US law.

Despite this admission, McDonald's Europe Franchising was granted a second tax ruling.

"With the second ruling, Luxembourg authorities accepted to exempt almost all of McDonald's Europe Franchising's income from taxation in Luxembourg," the Commission says.

Double non-taxation

The commission thinks that the deal, which was done when Jean-Claude Juncker, the current commission president, was Luxembourg's prime minister, could constitute a breach of EU state aid rules.

"The purpose of double taxation treaties between countries is to avoid double taxation – not to justify double non-taxation," competition commissioner Margrethe Vestager said in the commission statement.

The commission will now "assess whether Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg-US double treaty and whether thereby the Luxembourg authorities gave McDonalds an advantage not available to other companies in a comparable factual and legal situation."

The McDonalds sweetheart deal with Luxembourg was among the cases revealed in the so-called LuxLeaks file published by media outlets in 2014, along with other multinational companies such as Ikea, FedEx, Disney and Microsoft.

The commission has already launched investigations into tax deals between online retailer Amazon and Luxembourg and between IT firm Apple and Ireland, as well as on the Belgium system of "excess profit"'.

In October, coffee company Starbucks and automaker Fiat were sentenced to pay back between 20 and 30 million euros in taxes to Luxembourg and the Netherlands after the Commission ruled that their tax deals amounted to unfair state aid.

The McDonalds probe comes a day after a European Parliament special committee on tax rulings was extended for six months Wednesday.

The committee, which was created after the LuxLeaks revelations and is chaired by French centre-right MEP Alain Lamassoure, is looking at how companies and EU states comply with tax legislation.

It has so far investigated tax rulings in Luxembourg and the role of former PM Jean-Claude Juncker. It also grilled multinational executives about their tax avoidance strategies.

The committee's mandate will now end in June 2016.

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