There are limits to claims of illegal state aid in tax cases.
On 19 September 2018, the European Commission announced that, in its view, Luxembourg did not grant any unlawful state aid to McDonald’s. This conclusion is in line with our earlier views.
In December 2015, the European Commission had initiated a state aid investigation into tax rulings granted by the Luxembourg tax authorities to McDonald’s in 2009.
Under the terms of the first ruling, royalties received by the US branch of McD Europe Franshising S.à.r.l., a Luxembourg tax resident company (McDonald’s), were exempt from Luxembourg taxation, under both domestic tax rules and the double tax treaty between Luxembourg and the US (‘the tax treaty’), in particular, based on article 7 (business profits) and article 25 (elimination of double taxation) of such treaty, and provided that such profits were subject to tax in the US.
The second tax ruling (amending the first one), confirmed that even though there was no permanent establishment (PE) from a US perspective and consequently, in practice, the US did not tax such royalties, such royalties should nevertheless be exempt in Luxembourg.
In relation to tax measures, the CJEU has defined a three-step analysis to determine if state aid exists (seePaint Graphos (joined Cases C-78/08 to C-80/08)):
identify a ‘reference system’, as the common or ‘normal’ tax regime applied in the member state;
assess if the measure is ‘selective’, in the sense that it operates as a derogation from the ‘reference system’ inasmuch as it differentiates between taxpayers (economic operators) who or which, considering the objective of the tax system, are in a comparable factual and legal situation; and
evaluate if there is any ‘justification’ for such ‘selective’ treatment by reference to the nature or the general scheme of the reference system.
Applying this test, the Commission initially considered that:
the Luxembourg corporate income tax regime (including double tax treaties, specifically the tax treaty) was the ‘reference system’; and
the rulings granted by the Luxembourg tax authorities had a ‘selective’ character.
In effect, the Commission’s initial view was that such rulings were contrary to the ‘reference system’. Indeed, according to the Commission, the fundamental condition in article 25 of the tax treaty that the profits of the PE ‘may be taxed’ by the US, was clearly not met and the Luxembourg tax authorities were aware of this fact. In relation to the third step of the CJEU’s analysis, the Commission considered there was no justification for such tax treatment.
However, in its 2018 decision, the Commission has finally concluded that the existence of a double exemption was simply a consequence of a ‘mismatch’ between both applicable tax regimes in Luxembourg and the US, without any misapplication of the tax treaty or domestic tax rules in Luxembourg. Hence, Luxembourg did not infringe EU state aid rules. Indeed, the business activities carried out by the US branch of McDonald’s met all the conditions to qualify as a PE under Luxembourg law.
For the Commission, it is still regrettable that this tax treatment contravenes the concept of ‘tax fairness’, but it acknowledges that Luxembourg is taking the appropriate legislative steps to ensure this type of practice does not continue.
In particular, the Commission referred to recent Luxembourg legislative changes to address this type of situation, including a BEPS-related change to the Luxembourg domestic PE definition under which, in order to recognise the existence of a PE from a Luxembourg perspective, taxpayers may need to provide evidence of the recognition of the existence of the PE in the other state (included in the draft law 7318 of 18 June 2018), making the existence of such a mismatch virtually impossible in the future.
This decision is the first of the recent collection of state aid cases on tax rulings (including the Starbucks, Apple and Amazon cases) in which an EU member state has been found not to have granted state aid to a worldwide multinational.
The decision is, therefore, potentially significant in showing the limits of state aid case law in the tax arena.
The mere fact that a large multinational has benefited from a favourable tax ruling in a member state does not automatically lead to a conclusion there has been state aid. Where the operation of the tax rules in that member state have not been overstepped, and those rules themselves do not infringe EU law, then the favourable treatment will not be illegal state aid.
Accordingly, it will be of particular importance to review the full non-confidential version of the decision once it has been made available.
Pierre-Regis Dukmedjian, partner (pierre-regis.dukmedjian@simmons-simmons.com) & Alejandro Dominguez, supervising associate (alejandro.dominguez@ simmons-simmons.com), Simmons & Simmons Luxembourg, with acknowledgment to Gary Barnett, senior PSL at Simmons & Simmons.
Home >Articles > Luxembourg did not provide state aid to McDonald’s
Luxembourg did not provide state aid to McDonald’s
There are limits to claims of illegal state aid in tax cases.
On 19 September 2018, the European Commission announced that, in its view, Luxembourg did not grant any unlawful state aid to McDonald’s. This conclusion is in line with our earlier views.
In December 2015, the European Commission had initiated a state aid investigation into tax rulings granted by the Luxembourg tax authorities to McDonald’s in 2009.
Under the terms of the first ruling, royalties received by the US branch of McD Europe Franshising S.à.r.l., a Luxembourg tax resident company (McDonald’s), were exempt from Luxembourg taxation, under both domestic tax rules and the double tax treaty between Luxembourg and the US (‘the tax treaty’), in particular, based on article 7 (business profits) and article 25 (elimination of double taxation) of such treaty, and provided that such profits were subject to tax in the US.
The second tax ruling (amending the first one), confirmed that even though there was no permanent establishment (PE) from a US perspective and consequently, in practice, the US did not tax such royalties, such royalties should nevertheless be exempt in Luxembourg.
In relation to tax measures, the CJEU has defined a three-step analysis to determine if state aid exists (seePaint Graphos (joined Cases C-78/08 to C-80/08)):
identify a ‘reference system’, as the common or ‘normal’ tax regime applied in the member state;
assess if the measure is ‘selective’, in the sense that it operates as a derogation from the ‘reference system’ inasmuch as it differentiates between taxpayers (economic operators) who or which, considering the objective of the tax system, are in a comparable factual and legal situation; and
evaluate if there is any ‘justification’ for such ‘selective’ treatment by reference to the nature or the general scheme of the reference system.
Applying this test, the Commission initially considered that:
the Luxembourg corporate income tax regime (including double tax treaties, specifically the tax treaty) was the ‘reference system’; and
the rulings granted by the Luxembourg tax authorities had a ‘selective’ character.
In effect, the Commission’s initial view was that such rulings were contrary to the ‘reference system’. Indeed, according to the Commission, the fundamental condition in article 25 of the tax treaty that the profits of the PE ‘may be taxed’ by the US, was clearly not met and the Luxembourg tax authorities were aware of this fact. In relation to the third step of the CJEU’s analysis, the Commission considered there was no justification for such tax treatment.
However, in its 2018 decision, the Commission has finally concluded that the existence of a double exemption was simply a consequence of a ‘mismatch’ between both applicable tax regimes in Luxembourg and the US, without any misapplication of the tax treaty or domestic tax rules in Luxembourg. Hence, Luxembourg did not infringe EU state aid rules. Indeed, the business activities carried out by the US branch of McDonald’s met all the conditions to qualify as a PE under Luxembourg law.
For the Commission, it is still regrettable that this tax treatment contravenes the concept of ‘tax fairness’, but it acknowledges that Luxembourg is taking the appropriate legislative steps to ensure this type of practice does not continue.
In particular, the Commission referred to recent Luxembourg legislative changes to address this type of situation, including a BEPS-related change to the Luxembourg domestic PE definition under which, in order to recognise the existence of a PE from a Luxembourg perspective, taxpayers may need to provide evidence of the recognition of the existence of the PE in the other state (included in the draft law 7318 of 18 June 2018), making the existence of such a mismatch virtually impossible in the future.
This decision is the first of the recent collection of state aid cases on tax rulings (including the Starbucks, Apple and Amazon cases) in which an EU member state has been found not to have granted state aid to a worldwide multinational.
The decision is, therefore, potentially significant in showing the limits of state aid case law in the tax arena.
The mere fact that a large multinational has benefited from a favourable tax ruling in a member state does not automatically lead to a conclusion there has been state aid. Where the operation of the tax rules in that member state have not been overstepped, and those rules themselves do not infringe EU law, then the favourable treatment will not be illegal state aid.
Accordingly, it will be of particular importance to review the full non-confidential version of the decision once it has been made available.
Pierre-Regis Dukmedjian, partner (pierre-regis.dukmedjian@simmons-simmons.com) & Alejandro Dominguez, supervising associate (alejandro.dominguez@ simmons-simmons.com), Simmons & Simmons Luxembourg, with acknowledgment to Gary Barnett, senior PSL at Simmons & Simmons.
