The European Commission (EC) has decided that McDonald's' Luxembourg operating company was not given illegal State Aid by the Luxembourg tax authorities when they agreed in 2009 that the Luxembourg company was not subject to tax in Luxembourg because its profits were attributable to the company's US permanent establishment and so only subject to US tax under the Luxembourg-US double tax treaty, notwithstanding that the profits were also not taxable in the US under the US's domestic treatment of the arrangements.

State Aid arises where, among other things, a person is given a 'selective' advantage not available to others in similar circumstances. The EC concluded that this was not the case and that, rather, the tax ruling given to McDonald's would be available to any Luxembourg taxpayer in similar circumstances and the tax advantage arose because of the different general application of tax law in Luxembourg and the US.

As a result of this case, the Luxembourg government has now put forward proposed changes to its determination of when a non-Luxembourg permanent establishment will be recognised to avoid this sort of non taxation in the future. Among other things, the Luxembourg authorities will require proof that the permanent establishment is subject to tax on its profits outside Luxembourg.

This is the first of a number of high profile State Aid infringement cases brought by the EC to be decided, and it will be interesting to see what approach is taken in those other cases.