Commission Decision (EU) 2019/1252
of 19 September 2018
on tax rulings SA.38945 (2015/C) (ex 2015/NN) (ex 2014/CP) granted by Luxembourg in favour of McDonald's Europe
(notified under document C(2018) 6076)
(Only the French text is authentic)
(Text with EEA relevance)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,
Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,
Whereas:
By letter of 24 June 2014, the Commission sent an additional request for information to Luxembourg regarding the McDonald's group. Among others, it requested Luxembourg to provide all the tax rulings issued by its tax administration in favour of the McDonald's group.
In their reply of 4 August 2014, the Luxembourg authorities also described the tax ruling practice in Luxembourg and explained why they consider that the rulings granted to the McDonald's group do not grant State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (hereinafter: ‘the Treaty’).
On 23 April 2015, the Luxembourg authorities transmitted their reply to the Commission's request for information of 23 March 2015.
By letter of 18 May 2015, the Commission asked the Luxembourg authorities, among others, to provide the documents submitted by McD Europe since the date of the initial tax ruling based on the requirement in that ruling to prove that the profits of McD Europe's US Franchise Branch and Swiss Services Branch have been declared and subject to tax in the United States and Switzerland respectively.
By letter of 9 June 2015, the Luxembourg authorities responded to those requests and indicated (providing the relevant documents) that McD Europe's US Franchise Branch had been subject in 2014 to a tax audit in the United States by the Internal Revenue Service (hereinafter: the ‘IRS’) for tax years 2009 and 2010 and that the IRS confirmed that no changes had to be made to the tax returns filed by McD Europe's US Franchise Branch in the United States.
On 3 December 2015, the Commission adopted the decision to initiate the formal investigation procedure under Article 108(2) of the Treaty on the contested tax rulings on the ground that those rulings could constitute State aid within the meaning of Article 107(1) of the Treaty, which could be incompatible with the internal market (hereinafter: the ‘Opening Decision’).
By letter of 4 February 2016, the Luxembourg authorities submitted their comments on the Opening Decision.
By letter of 30 September 2016, the Luxembourg authorities submitted their comments on the third party observations received by the Commission in response to the Opening Decision.
By letter of 23 November 2016, the Commission sent a further information request to the Luxembourg authorities.
The Luxembourg authorities replied to that request on 14 December 2016 and 12 January 2017.
Outside of the United States, McDonald's Corporation and its US affiliate, McDonald's International Property Company (hereinafter ‘MIPCO’) license the right to develop and operate McDonald's restaurants on a market-by-market basis to entities which in most major markets are direct or indirect subsidiaries of McDonald's Corporation.
According to the information provided by the Luxembourg authorities, as of December 2013 the McDonald's group controlled five companies in Luxembourg: (i) McD Europe; (ii) McD Europe Holdings S.à.r.l.; (iii) Luxembourg McD Investments S.à.r.l.; (iv) Lux MC Holdings S.à.r.l.; and (v) McD Luxembourg Holdings S.à.r.l.
McD Europe Holding S.à.r.l., Luxembourg McD Investments S.à.r.l. and Lux MC Holdings S.à.r.l. held shares in other McDonald's subsidiaries in Europe and in the United States, while McD Luxembourg Holdings S.à.r.l. acted as a vehicle for the execution of a centralised cash management agreement with a bank. Luxembourg McD Investments S.à.r.l. also held shares in the US company Golden Arches UK LLC, a Delaware limited liability company.
In 2015, McDonald's announced a significant reorganisation of its business by grouping together countries around the world based on common market characteristics rather than on the basis of geographical proximity. In December 2016, McDonald's announced a decision to create a new integrated international holding company structure to align with and to support the new business structure.
The present decision concerns two tax rulings issued by the Luxembourg tax administration in 2009 in favour of McD Europe: the initial tax ruling and the revised tax ruling, both of which concern McD Europe's taxable status in Luxembourg.
The initial tax ruling was issued by the Luxembourg tax administration on 30 March 2009 following a ruling request by McDonald's dated 11 February 2009, supplemented by further documents submitted on 10 March 2009. In response to the initial tax ruling, McD Europe's tax advisor (hereinafter: the ‘tax advisor’) made a request for a revised tax ruling to the Luxembourg tax administration dated 27 July 2009. That request resulted in the revised tax ruling, which was issued by the Luxembourg tax administration on 17 September 2009.
According to the initial ruling request, McD Europe's US Franchise Branch has its office in Oak Brook, Illinois, United States of America. That branch assumes various economic risks associated with the development of the franchise rights and bears associated costs. In bearing those costs, the US Franchise Branch is, according to the ruling request, effectively participating in the QCS Agreement with McDonald's Corporation and MIPCO. The related activities at McDonald's Corporation (or its affiliates) that are reimbursed by the US Franchise Branch are directed and performed by employees within McDonald's Corporation.
The primary individuals employed, seconded or contracted for by the Swiss Service Branch are the ‘Key European Management’. Although the Swiss Service Branch pays the costs related to those individuals, including salaries/bonuses expenses, according to the initial ruling request those costs are ultimately borne by the US Franchise Branch through a reduction in the royalties paid by the Swiss Service Branch to the US Franchise Branch.
Furthermore, according to the tax advisor, by virtue of Article 5 of the Luxembourg – US double taxation treaty, the activities of the US Franchise Branch will be considered to be performed in the United States. Consequently, the profits generated by the US Franchise Branch will only be subject to possible taxation in the United States and exempt from corporate income tax in Luxembourg by virtue of Articles 7 and 25 of the Luxembourg – US double taxation treaty.
The initial ruling request concludes with a request to the Luxembourg tax administration to confirm its agreement on the tax advisor's understanding of the Luxembourg tax implications of the transactions described therein.
In response to the initial tax ruling, the tax advisor provided a detailed analysis to the Luxembourg tax administration on whether the income of the US Franchise Branch is taxable in the United States and whether the US Franchise Branch constitutes a permanent establishment from a US perspective.
As regards the question whether the US Franchise Branch constitutes a permanent establishment in the sense of Article 5 of the Luxembourg – US double taxation treaty from a US perspective, the tax advisor explains that ‘it is US domestic law that should be consulted to ascertain whether an entity effectively has a permanent establishment under [the US – Luxembourg double taxation treaty]’. Although the US Franchise Branch has a fixed place of business through which the branch manager conducts certain activities, the tax advisor explains that in order to constitute a PE, the ‘business activities in the taxing country [should be] substantial enough to constitute a permanent establishment or fixed bases’. US domestic law thus requires that the operations of the US Franchise Branch ‘exceed a certain substance threshold’, which, the tax advisor concludes, is not reached.
By letter of 17 September 2009, the Luxembourg tax administration confirmed its agreement with the tax advisor's interpretation of the Luxembourg – US double taxation treaty in the request for a revised tax ruling as regards the tax treatment under Luxembourg law of the profits generated by McD Europe's US Franchise Branch in the United States.
The ordinary rules of corporate taxation in Luxembourg can be found in the Luxembourg Income Tax Code (loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenu, ‘L.I.R’). Article 159(1) of the L.I.R provides: ‘L'impôt sur le revenu des collectivités porte sur l'ensemble des revenus du contribuable.’ Article 160 of the L.I.R provides: ‘Sont passibles de l'impôt sur le revenu des collectivités pour leur revenu indigène au sens de l'article 156, les organismes à caractère collectif de l'article 159 qui n'ont ni leur siège statutaire, ni leur administration centrale sur le territoire du Grand-Duché.’
The incorporation of double taxation treaties takes place on the basis of Article 134 L.I.R in conjunction with Article 162 L.I.R together with the Grand-Ducal Decree of 3 December 1969.
Article 134 L.I.R provides for individuals that: ‘Lorsqu'un contribuable résident a des revenus exonérés, sous réserve d'une clause de progressivité prévue par une convention internationale contre les doubles impositions ou une autre convention interétatique, ces revenus sont néanmoins incorporés dans une base imposable fictive pour déterminer le taux d'impôt global qui est applicable au revenu imposable ajusté au sens de l'article 126’.
The general scope of application of the Luxembourg – US double taxation treaty is defined in Article 1(1) which provides: ‘This Convention shall apply only to persons who are resident of one or both of the Contracting States, except as otherwise provided in the Convention.’
Article 3(2) of the Luxembourg – US double taxation treaty on ‘General Definitions’ provides: ‘As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a common meaning pursuant to the provisions of Article 27 (Mutual Agreement Procedure), have the meaning that it has under the law of that State concerning the taxes to which the Convention applies.’
Article 5(1) of the Luxembourg – US double taxation treaty defines the concept of PE: ‘For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.’
Article 7(1) of the Luxembourg – US double taxation treaty concerning the taxation of business profits provides: ‘The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as are attributable to that permanent establishment.’
Article 25 of the Luxembourg – US double taxation treaty is entitled ‘Relief from Double Taxation’, Article 25(2) of the Luxembourg – US double taxation treaty provides: ‘In Luxembourg double taxation shall be eliminated as follows: (a) where a resident of Luxembourg derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the United States, Luxembourg shall, subject to the provisions of subparagraph (b) and (c), exempt such income or capital from tax, but may, in order to calculate the amount of tax on the remaining income or capital of the resident, apply the same rates of tax as if the income or capital had not been exempted.’
The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the contested tax rulings granted State aid to McD Europe within the meaning of Article 107(1) of the Treaty and expressed its doubts as to the compatibility of the contested tax measures with the internal market.
In particular, the Commission expressed doubts that the revised tax ruling misapplied Article 25(2) of the Luxembourg – US double taxation treaty and thereby granted a selective advantage to McD Europe.
The Commission applied the three-step analysis to determine whether the revised tax ruling is prima facie selective. First, it considered the reference system to be the general Luxembourg corporate income tax system, which has as its objective the taxation of profits of all companies subject to tax in Luxembourg. It also considered that the Luxembourg corporate tax system includes the double taxation treaties to which Luxembourg is a party.
Second, the Commission established whether the revised tax ruling gives rise to a derogation from the reference system leading to a favourable treatment of McD Europe as compared to economic operators that are factually and legally in a similar situation. It considered that in principle, McD Europe is liable to Luxembourg corporate tax on its worldwide profits unless a double taxation treaty applies which allows Luxembourg to exempt the income attributable to its foreign branches from Luxembourg corporate income tax. The Commission expressed doubts that the revised tax ruling complied with Articles 7 and 25 of the Luxembourg – US double taxation treaty as well as Luxembourg law which transposes the double taxation treaty into national law and which, as its guiding principle, requires worldwide taxation of profits.
Article 25 of the Luxembourg – US double taxation treaty prescribes that where a tax resident of Luxembourg derives foreign income which, ‘in accordance with the provisions of this Convention, may be taxed in the US’, Luxembourg shall exempt such income from tax. To determine whether the income ‘may be taxed in US […] in accordance with provisions of this Convention’, reference should be made to Article 7 of the Luxembourg – US double taxation treaty.
Under Article 7 of the Luxembourg – US double taxation treaty, the Commission noted that the United States (source State) ‘may’ only tax the relevant income (i.e. profits generated by McD Europe's US Franchise Branch from franchise right exploitation) to the extent that a permanent establishment exists to whom the business profits can be attributed, otherwise those profits are taxable only in Luxembourg. It then noted that the profits attributed to the US Franchise Branch cannot be taxed in the United States since the US Franchise Branch does not constitute a permanent establishment for US tax purposes. In other words, there is no possibility that those profits ‘may be taxed’ by the United States within the meaning of Article 25(2) of the Luxembourg – US double taxation treaty. As the Luxembourg tax authorities were fully aware of the non-possibility of taxation, the Commission argues that they should not have agreed to the exemption of the income attributed to the US Franchise Branch from corporate income tax in Luxembourg.
Thus, to avoid conferring a selective advantage, the Commission considered that the Luxembourg tax administration should have only agreed to exempt income from corporate taxation to the extent that the income may be taxed in the United States in accordance with the provisions of the Luxembourg – US double taxation treaty. According to the views expressed by the Commission in the Opening Decision, the fact that the Luxembourg tax administration was fully aware when it issued the revised tax ruling that the US Franchise Branch does not constitute a permanent establishment for US tax purposes means that it was also fully aware that its business income may not be taxed in the United States in accordance with the Luxembourg – US double taxation treaty and that consequently, the confirmation by the Luxembourg tax authorities to exempt the income for corporate tax by virtue of Article 25(2)(a) of the Luxembourg-US double taxation treaty rests on a misapplication of that provision.
Given the absence of a justification for the selective treatment of McD Europe resulting from the revised tax ruling and given that all other conditions for the existence of State aid pursuant to Article 107(1) of the Treaty were fulfilled, the Commission came to the preliminary conclusion that the revised tax ruling issued by the Luxembourg tax administration in favour of McD Europe constituted State aid within the meaning of Article 107(1) of the Treaty. Furthermore, because of its qualification as operating aid, the Commission had doubts as to the compatibility of the contested measures pursuant to Articles 107(2) or (3) of the Treaty.
The Luxembourg authorities submitted their comments on the Opening Decision on 4 February 2016. The Luxembourg authorities argue, first, that the Commission has incorrectly identified the legal framework; second, that the Commission's reasoning in the Opening Decision is fundamentally flawed; and third, that the Commission has not proven the existence of a selective advantage.
The Luxembourg authorities also explain that a double taxation treaty is interpreted independently by each contracting State. Luxembourg can therefore not be expected to interpret the Luxembourg – US double taxation treaty by reference to US law.
In this case, the Luxembourg authorities explain that the non-taxation of the US Franchise Branch in the United States is due to the application of US national law and the concept of ‘effectively connected income’. The non-taxation in the United States derives from the fact that the United States does not make use of the right to tax assigned to it by the Luxembourg-US double taxation treaty and Luxembourg cannot challenge that. Furthermore, according to Luxembourg, the Commission is not competent to (re-)interpret an international treaty and breaches Articles 4 and 5 of the Treaty on European Union if it decides on the ‘correct’ interpretation of a bilateral international treaty between a Member State and a third country.
The Luxembourg authorities consider that the Commission's reasoning is based on two incorrect assumptions: first, that the Luxembourg tax authorities knew or should have known that the US Franchise Branch was not taxable under US law on the date of issuance of the tax ruling; second, that if the Luxembourg tax authorities had known that the US Franchise Branch was not taxable in the United States under US tax law, it had an obligation to tax McD Europe.
As regards the first assumption of the Commission, the Luxembourg authorities assert that they do not have the competence to assess and interpret foreign tax law. In addition, the Luxembourg tax authorities could not know whether the US Franchise Branch would actually be taxed by the US tax authorities as, first, they did not receive any document or information from the US tax authorities with the request for a tax ruling and, second, the subjective opinion of a private tax advisor cannot be equated with a position taken by the US tax authorities.
As regards the second assumption of the Commission, the Luxembourg authorities submit that if McD Europe is not taxable from the perspective of Luxembourg law, it is irrelevant to know whether or not it is taxable under US law since Luxembourg does not recover its right to tax. The allocation of taxing power is unconditional and final.
The Luxembourg authorities do not agree with the Commission's legal analysis for establishing the existence of a selective advantage. As regards the definition of the reference system, it only comprises the Luxembourg – US double taxation treaty and the Luxembourg rules and practice relating to double taxation treaties, as interpreted by the Luxembourg courts.
In addition, the Luxembourg authorities observe that the Commission in its Opening Decision only makes reference to Article 159 L.I.R, whereas the correct reference relating to the worldwide taxation of companies subject to corporate income tax also requires the application of Article 160 L.I.R. Furthermore, the incorporation of double taxation treaties takes place on the basis of Article 134 L.I.R in conjunction with Article 162 L.I.R together with the Grand-Ducal Decree of 3 December 1969, none of which were mentioned by the Commission in its Opening Decision. According to the Luxembourg authorities, such lack of clarity is contrary to the requirements of Article 107(1) of the Treaty.
According to the Luxembourg authorities, the Commission also fails to demonstrate any derogation from the double taxation treaty and/or the law as interpreted by Luxembourg courts and Luxembourg practice.
Last but not least, the Luxembourg authorities do not agree with the Commission's determination of an advantage. First, the question of the advantage must be independent of the decision by the US authorities to tax the company. Second, assuming that Luxembourg has an obligation to tax in order to prevent a situation of double non-taxation, an advantage would only exist if the Luxembourg tax authorities had known for certain on the date of issuance of the revised tax ruling that the US Franchise Branch was not actually being taxed by the US authorities. However, the US tax authorities did not take a position on whether the US Franchise Branch was taxable in the United States until five years after the revised tax ruling was issued, i.e. in 2014 in the context of an IRS audit. The Luxembourg tax authorities could not have known this when issuing the contested tax rulings. Third, according to the Luxembourg authorities, the Commission would never have disputed the contested tax rulings if the IRS had concluded at the end of its tax audit, that the US Franchise Branch was taxable in the United States. Given that the United States apply a system of worldwide taxation, the income of McD Europe would be taxed once repatriated to the United States. The result is therefore merely a tax deferral. It is therefore the non-taxation of the US Franchise Branch's income by the US tax authorities after the contested tax rulings have been issued which led to the finding of an advantage to McD Europe according to the Commission.
McD Europe submitted its comments on 9 August 2016. McD Europe, first, disputes the Commission's competence to interpret international and national tax rules; second, it points to a number of flaws in the Commission's interpretation of the Luxembourg – US double taxation treaty; and, third, it argues that the Commission has failed to demonstrate the existence of State aid in favour of McD Europe.
McD Europe argues that, based on Articles 113, 114, and 115 of the Treaty, Member States have sole jurisdiction to determine their corporate tax regime and to enter into international treaties. Consequently, the Commission's attempt to impose its own interpretation of an international treaty such as the Luxembourg – US double taxation treaty violates Luxembourg's tax sovereignty. In particular, according to McD Europe, the Commission disregards the (correct) interpretation of the double taxation treaty made by the Luxembourg tax authorities by considering that (i) the permanent establishment condition provided for by the double taxation treaty should have been analysed in the light of United States law; and (ii) the taxability in the United States of the US Franchise Branch revenues should have been considered by the Luxembourg tax authorities before deciding that they should not be taxed in Luxembourg.
As regards the first point, McD Europe argues that a double taxation treaty does not create itself a right to tax if no taxation rights exist under domestic law. Also, each contracting State is independent from the other in the interpretation of the double taxation treaty. Thus, the interpretation that may be given of a particular concept under US law is irrelevant for Luxembourg even though conflicting interpretations between contracting States may lead to double non-taxation. According to McD Europe, the only way of solving this situation of double non-taxation is to negotiate an amendment of the double taxation treaty.
As regards the interpretation of the concept of a PE, McD Europe argues that the wording of the Luxembourg – US double taxation treaty and notably its Article 3 confirms that it belongs to the contracting State that applies the double taxation treaty to interpret it by reference to its own legal system. Hence, in this case, it was for the Luxembourg tax administration to interpret the Luxembourg – US double taxation treaty by reference to its own legal system and to consider that the US Franchise Branch constituted a permanent establishment for the purposes of the double taxation treaty. The conclusion of the IRS audit conducted in 2014 is irrelevant as the Luxembourg tax authorities could not have been aware of the IRS position at the time of the contested tax rulings in 2009 nor could it have retroactively affected the tax rulings.
Second, Articles 7(2) and 25(2)(a) of the Luxembourg – US double taxation treaty do not require that the revenue of the permanent establishment is taxable in the United States. According to McD Europe, following a correct reading of the double taxation treaty provisions, whether the contracting State which, under the double taxation treaty may tax (in this case, the United States), later considers, under its domestic rules, that the revenues are not taxable, is irrelevant for the other contracting State (Luxembourg), which has lost its right to tax the revenues by virtue of the double taxation treaty.
Third, the Commission's reference to an OECD Commentary introduced in 2000 to support its conclusion that, in light of the fact that the US Franchise Branch revenues were not taxable in the United States, the Luxembourg tax authorities should have taxed such income, is irrelevant as the provision in question did not exist when the double taxation treaty was concluded in 1996. A new reading of OECD Commentaries that changes the meaning of Article 23A of the OECD MTC can only be applicable in respect of treaties ratified after the relevant revision of the OECD MTC in 2000. McD Europe further underlines that the OECD MTC is not binding by law but rather considered as a recommendation.
According to McD Europe, the Commission's reasoning is based on the erroneous premise that the tax ruling commits State resources. Second, McD Europe did not benefit from any advantage as the Luxembourg tax authorities could not have taxed the revenues attributable to the US Franchise Branch. Third, the Commission did not demonstrate that McD Europe was the only undertaking that benefited from the application of the double taxation treaty and even less that it was part of a selective group of undertakings.
On the first point, McD Europe asserts that tax rulings do not constitute State aid if they are mere interpretations and practical applications of general tax rules in specific cases. They can only constitute State aid if they depart from the general rules through administrative discretion. In the case at hand, the purpose of the tax rulings was to confirm the absence of Luxembourg taxation of business income attributed to the US Franchise Branch under the Luxembourg – US double taxation treaty. The tax ruling did not reduce the tax burden of McD Europe as in the absence of the tax ruling, McD Europe would have had the same tax burden in Luxembourg. The tax ruling does not change or improve the tax situation of McD Europe.
Second, according to McD Europe, the Commission incorrectly concluded that the Luxembourg tax authorities had misapplied the Luxembourg – US double taxation treaty and on that basis, found an advantage in favour of McD Europe. Also, the fact that the United States eventually decided not to tax the royalty income under US domestic tax rules cannot qualify as State aid under EU law. Luxembourg did not recover its taxing right over the US Franchise Branch income because the same income was not taxable under US law. Like the Luxembourg authorities, McD Europe quotes the La Coasta judgment to support the principle according to which the Luxembourg tax authorities cannot take into account interpretations done by the other contracting State. However, even if one followed the Commission's reasoning, the advantage that McD Europe would have potentially received from the Luxembourg tax authorities would in fact have resulted from a decision made by the IRS in 2014 not to tax the US Franchise Branch's revenues. Yet, the possible existence of an advantage cannot depend on the attitude of a third country.
Finally, McD Europe argues that the selective advantage may be considered as justified in order to avoid double taxation and that therefore the measure does not constitute State aid.
The Coalition submitted its comments on 5 August 2016 in which it expresses its support for the investigation.
It states that given the dominant position of McDonald's in Europe, any aid in favour of McD Europe could distort competition and affect intra-EU trade. According to the Coalition, McDonald's changes in its corporate structure in late 2008 and early 2009, followed by the tax ruling requests, were tax-related and aimed at achieving double non-taxation both in Luxembourg and the United States, thereby gaining a competitive advantage over its competitors.
According to the Coalition, interpretations of double taxation treaties resulting in double non-taxation should not be considered as complying with the letter and spirit of double taxation treaties.
Finally, the Coalition calls for Member States that have anti-abuse rules to investigate McDonald's for optimising its corporate tax structure in order to avoid paying taxes. According to the Coalition, the McDonald's case exemplifies the necessity for tax administrations to exchange information about the tax treatments of multinationals and to introduce public country-by-country reporting.
The Luxembourg authorities commented on McD Europe's and the Coalition's observations on the Opening Decision by letter of 30 September 2016.
The Luxembourg authorities stated that the analysis of McD Europe largely coincided with its own analysis.
It considered that the comments sent by the Coalition do not concern the question whether State aid has been granted in favour of McD Europe but are essentially targeting McDonald's worldwide practices, criticising the latter's fiscal, social, and wage policies.
The Luxembourg authorities note that, contrary to the allegations of the Coalition, the purpose of a double taxation treaty is to eliminate double taxation, not to ensure effective taxation. The allocation of taxing rights between two contracting States resulting from a double taxation treaty is definitive and not conditional. Therefore, if the Luxembourg tax authorities contractually waive their taxing rights, they do not recover such taxing rights based on the fact that the other contracting State does not effectively tax such income.
With regard to the call of the Coalition to strengthen anti-tax avoidance tools, the Luxembourg authorities state that it is fully committed to this purpose and that any measures pertaining to transparency and exchange of information between Member States should be discussed and adopted in the appropriate form and following the relevant procedures.
Following an in-depth investigation and after having thoroughly considered the comments received in response to the Opening Decision, the Commission considers that the concerns raised in the Opening Decision do not lead to the conclusion that State aid has been granted through the contested tax rulings.
It should be underlined that the doubts expressed in the Opening Decision relied on a preliminary definition of the reference system as being the general Luxembourg corporate income tax system, including the double taxation treaties to which Luxembourg is a party. The Commission thought that there could be a selective advantage for McD Europe resulting from a misapplication of the Luxembourg-US double taxation treaty. More precisely, the confirmation by the Luxembourg tax authorities of the exemption of the business income of the US Franchise Branch of McD Europe from corporate tax in Luxembourg by virtue of Articles 5, 7 and 25(2)(a) of the Luxembourg – US double taxation treaty was considered as possibly resting on a misapplication of these provisions. No other type of discrimination or misapplication was considered in the Opening Decision.
The following analysis will be focused on the doubts expressed in the Opening Decision, taking into account that the comments of Luxembourg and other interested parties and the information collected during the investigation have not led the Commission to extend the formal procedure in this specific case, which is only devoted to the rulings granted to McD Europe and to the possible misapplication of Articles 5, 7(1) and 25(2) of the Luxembourg-US double taxation treaty. It should also be kept in mind that the burden of proof of the existence of a selective advantage lies with the Commission (with the exception of the justification of the measure by the basic or guiding principles of that tax system).
It is not established that the contested tax rulings constitute a derogation from the rules set by the double taxation treaty. Such a derogation would exist if the contested tax rulings misapplied (i.e. deviated from) a rule of the double taxation treaty reducing McD Europe's tax liability and thereby giving rise to a discrimination between McD Europe vis-à-vis other undertakings that are legally and factually comparable.
McD Europe is tax resident in Luxembourg. In accordance with Articles 159 and 160 L.I.R., McD Europe is in principle liable to Luxembourg corporate tax on its worldwide profits. However, as regards the profits attributed to its US Franchise Branch, the Luxembourg – US double taxation treaty applies which has been transposed into Luxembourg law by virtue of Article 134 L.I.R, Article 162 L.I.R together with the Grand-Ducal Decree of 3 December 1969. The double taxation treaty limits the taxation rights of Luxembourg in that certain income attributable to a permanent establishment in the US under the double taxation treaty is taxable in the US and not in Luxembourg.
Article 25(2)(a) of the Luxembourg US double taxation treaty exempts from taxation ‘income […] which in accordance with the provisions of this Convention, may be taxed in the United States.’ In order to determine what ‘may be taxed in the United States’, Article 7(1) of the Luxembourg – US double taxation treaty stipulates that business profits generated by a company of one of the contracting States are taxable in that State, except if they are realised by or attributable to a permanent establishment located in the other contracting State. In that case, the first contracting State may assume that the profits attributable to that permanent establishment may be taxed in the other contracting State and accordingly exempt from taxation these profits in order to avoid possible double taxation.
It is therefore decisive under the double taxation treaty whether McD Europe's US Franchise branch constitutes a permanent establishment in the US that generates business profits that are exempt from taxation in Luxembourg. Article 5(1) of the Luxembourg – US double taxation treaty defines a permanent establishment as ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’. While a permanent establishment is therefore defined in the Luxembourg – US double taxation treaty, the term ‘business’ is not. Also Article 7 of the Luxembourg – US double taxation treaty includes the notion of ‘business profits’ which is not defined.
In addition, the Commission notes that the non-taxation of the US Franchise Branch's income could also be resolved through a modification of Article 16 StAnpG which currently does not cater for situations where business activities are considered to give rise to a permanent establishment under Luxembourg law but are not sufficient to reach the substance threshold to be considered a permanent establishment under US tax law (see recital 41).
Based on this analysis, the Commission concludes that in this specific case, it is not established that the Luxembourg tax authorities misapplied the Luxembourg – US double taxation treaty. Therefore, on the basis of the doubts raised in the Opening Decision and taking into account its definition of the reference system, the Commission cannot establish that the contested rulings granted a selective advantage to McD Europe by misapplying the Luxembourg – US double taxation treaty.
As the criteria for finding the existence of State aid pursuant to Article 107(1) of the Treaty are cumulative, there is no need to assess the other criteria.
In light of the foregoing, the Commission concludes that the contested tax rulings issued by the Luxembourg tax authorities in favour of McD Europe Franchising, S.à.r.l. do not constitute State aid within the meaning of Article 107(1) of the Treaty,
HAS ADOPTED THIS DECISION: