Worldwide: EU Commission Finds No Illegal State Aid In The McDonald's Case

Last Updated: 4 December 2018
Article by Oliver R. Hoor

On 19 September 2018, the EU Commission announced its decision in the McDonald's State Aid investigations. According to a press release1, the Commission has found that the non-taxation of certain McDonald's profits in Luxembourg did not constitute illegal State aid as it is in line with national tax laws and the Luxembourg-United States tax treaty.

The in-depth analysis of the Commission has shown that the reason for double non-taxation in this case is a mismatch between Luxembourg and US tax laws and not special treatment by Luxembourg. Therefore, Luxembourg did not break EU State Aid rules.

The decision of the EU Commission is consistent with the analysis of ATOZ that was detailed in a comprehensive publication at the time the State Aid investigations were launched.2

Overview of the McDonald's case

The McDonald's group is a large US multinational which is headed by McDonald's corporation, acompany listed on the New York Stock Exchange (NYSE).

Outside of the United States, McDonald's Corporation and its US affiliate, McDonald's International Property Company, licenses the right to develop and operate McDonald's restaurants on a market-by-market basis to entities which, in most major markets, are either direct and indirect subsidiaries of McDonald's Corporation

McD Europe Franchising S.a r.l. ("McD Europe"), a Luxembourg Company, has two branches, one in the US ("US Branch") and a second branch in Switzerland ("Swiss Branch"). In order to centralise the oversight and management of the European franchise rights within McD Europe, the latter entered into a "buy-in agreement" and a "qualified cost sharing arrangement" with McDonald's Corporation and McDonald's International Property Company

According to the buy-in agreement, McD Europe buys-in to certain pre-existing and to be developed franchise rights owned by McDonald's Corporation and McDonald's International Property Company. As a result, McD Europe acquired the beneficial ownership of a number of franchise rights intangibles. Subsequently, McD Europe allocated these franchise rights as well as the related obligations to its US Branch

The US Branch maintains operations within the US and is controlled by a branch manager located in the US who oversees certain activities associated with the franchise rights. The branch manager is provided by McDonald's Corporation on a part-time basis under a service agreement in return for a cost-plus charge as determined in the agreement.

The Swiss Branch has its registered office in Geneva (Switzerland) and licenses the franchise rights to franchisors in various European countries. It also provides management, support, development and other similar or related services associated with the franchise rights. The US Branch remunerates the Swiss Branch for these services on a cost-plus basis.

The Swiss Branch receives royalty income from the franchisors which is then on-paid to the US Branch to which the franchise rights intangibles have been allocated. The remuneration of the services rendered by the Swiss Branch is reflected in a decrease of the amount of royalties paid by the Swiss Branch to the US Branch of McD Europe.

The following chart illustrates the relevant entities of the McDonald's group and the major fund flows:

Tax treatment in Luxembourg and the US

McD Europe is a Luxembourg resident company that is subject to Luxembourg corporate income tax on its worldwide income. The income which is attributable to the US Branch is, in principle, part of the taxable income of McD Europe

However, the tax treaty concluded between the US and Luxembourg allocates an unlimited primary taxing right over profits attributable to the US Branch to the US, as the US is considered as the host state of the permanent establishment ("PE"). In this regard, under the US-Luxembourg double tax treaty, Luxembourg has to exempt income attributable to a US PE

The tax treatment of McD Europe has been detailed in two tax rulings which were signed by the Luxembourg tax authorities in March and September 2009.

Under US tax law, income derived by a Luxembourg company through a US branch is not automatically taxable in the US. Instead, for the income to be taxable, it needs to be "effectively connected with a US trade or business

Therefore, to the extent the activities performed by a Luxembourg company through a US branch do not fall within the scope of "US trade or business", the US branch should not be subject to tax in the US. Accordingly, there may be cases, such as the McDonald's case, where a PE is considered to exist from a Luxembourg tax perspective (and under tax treaty law), but no taxable presence is considered from a US tax perspective. Hence, in these circumstances, the taxing rights allocated to the US by the applicable tax treaty are not exercised under US internal law

Consequently, the income realised by McD Europe through its US branch was neither taxable in the US nor in Luxembourg, where the exemption method in regard to business profits attributable to the PE in the US was applied.

Conclusion

In the McDonalds case, the interaction between Luxembourg and US tax law as well as the applicable tax treaty have resulted in the non-taxation of the income attributable to the US branch.

The decision of the EU Commission confirms that the tax rulings granted by the Luxembourg tax authorities did not entail a selective tax benefit and merely provided certainty on the general tax treatment in these circumstances. The double nontaxation was not the result of an unfair advantage granted by the Luxembourg tax authorities. Instead, it was the outcome of the correct application of the tax rules in force.

This is quite remarkable as in all previous decisions on State Aid in tax matters, the EU Commission has concluded that illegal State Aid was present. In all these other cases, the countries concerned have reached out to the Court of Justice of the European Union ("CJEU") to file a claim to challenge the Commission's decision. Ultimately, in these cases it will be up to the CJEU to provide legal certainty with regard to State Aid investigations going back as far as 10 years.

Footnote

1. The text of the decision has not yet been published.

2. See the report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions