EU to investigate McDonald's tax deal

by Erica Shaffer
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The EU's investigation into Luxembourg's tax treatment of McDonald's is part of a general crackdown on preferential treatment of multinational companies.

BRUSSELS – The European Union is investigating alleged preferential tax treatment of McDonald’s Europe by the Luxembourg government. McDonald’s has denied any wrongdoing.

The EU’s Antitrust Commission said that McDonald’s Europe Franchising has paid no corporate tax in Luxembourg or the United States since 2009. In 2013, the commission said, McDonald’s Europe reported profits of more than €250 million ($265 million) in 2013. Additionally, trade unions in the US and Europe released a report claiming McDonald’s failed to pay more than €1 billion in taxes between 2009 and 2013 while underpaying taxes in Luxembourg.

Companies generally pay corporate taxes on profits earned in a country if they have a permanent establishment in the country. This requires the company to have a certain level of business activity, according to the EU. But McDonald’s Europe Franchising has paid no taxes because of a difference in how Luxembourg and the US view the company’s permanent establishment status.

In 2009, McDonald’s argued that its US branch of McDonald’s Europe Franchising constituted a permanent establishment under Luxembourg law; and that its US-based branch was not a permanent establishment under US law, the Commission explained. As a result Luxembourg recognized the US branch of McDonald’s Europe Franchising as the establishment where most of their profits should be taxed, while US tax authorities did not recognize it, the commission explained. Therefore, the Luxembourg authorities exempted the profits from taxation in Luxembourg despite knowing those profits were not subject to tax in the US. 

Margrethe Vestager, European Commission
Margrethe Vestager, EU Competition Commissioner

“A tax ruling that agrees to McDonald’s paying no tax on their European royalties either in Luxembourg or in the US has to be looked at very carefully under EU state aid rules,” Commissioner Margrethe Vestager said in a statement. “The purpose of Double Taxation treaties between countries is to avoid double taxation — not to justify double non-taxation.”

The investigation is part of a general crackdown on sweetheart tax deals for multinational companies. In October, the Commission ordered the Netherlands to charge Starbucks €20 million to €30 million ($23 million to $34 million) for unpaid taxes. Ireland’s tax treatment of Apple and Luxembourg’s tax arrangement with Amazon also are under investigation.

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