The investigation that had started in December 2015 concerning the fiscal treatment of the profits of a Luxembourg subsidiary of McDonald’s concluded that the Grand Duchy did not provide illegal state aid to McDonald’s.
The core of the issue is connected to the US Branch of the Luxembourg entity, where the royalties received by the Luxembourg entity are allocated to its US Branch. This eventually leads to double non-taxation of the profits, both in Luxembourg and the US. This fiscal treatment was secured by a Luxembourg tax ruling dated 2009.
The main focus of the European Commission’s investigation was whether or not the treatment described above was in line with the EU and Luxembourg law, the double tax treaty between the two countries and if there was a preferential advantage provided to McDonald’s.
The in-depth investigation undertaken by the European Commission concluded that the Luxembourg authorities did not misapply the Luxembourg – US Double Taxation Treaty further to the exemption of income of the US branch from Luxembourg corporate taxation.
It is worth mentioning that the two countries are re-negotiating certain provisions of the existing double tax treaty with a view to prevent double non-taxation of profits. Furthermore, provisions of the bill of Law 7318 transposing the EU Anti-Tax Avoidance Directive (ATAD), and its sequel the ATAD II, will strengthen Luxembourg’s tax law, which will allow tax authorities to avoid similar situations of double non-taxation.
Charles Russell Speechlys Comment
Luxembourg entities of multinational groups are under growing pressure as to their profit allocation structures. OECD’s base erosion and profit shifting (BEPS) project and EU’s forceful efforts to recover taxes from some well-known multinational groups are the primary examples of the trend. Luxembourg however, keeps its attractive fiscal provisions. At the same time, demonstration of its willingness to express commitment to emerging international norms such as BEPS and initiatives of the European Union should be welcomed. The European Commission’s decision, paired with Luxembourg’s efforts to enforce stricter rules to prevent tax avoidance (see our July 2018 newsletter) strengthens the position of the Grand Duchy on the international level, thus keeping its position as the prime location for holding and financing operations for multinational groups.