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Is McDonald's tax deal in Europe legal?

The European Union is investigating allegations that fast food giant McDonald's received a sweet tax deal from Luxembourg, at a time when the EU is trying to crack down on preferential treatment for multinationals.

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A sign for McDonald's outside of a restaurant in Sint-Pieters-Leeuw, near Brussels, Belgium December 3, 2015. EU antitrust regulators will investigate McDonald's tax deals with Luxembourg, which enabled the US fast food chain to escape paying taxes on European franchise royalties from 2009, in a move which could lead to hefty back taxes for the company. REUTERS/Yves Herman

Yves Herman/Reuters/File

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The European Union is investigating allegations that fast food giant McDonald's received a sweet tax deal from Luxembourg, at a time when the bloc is trying to crack down on preferential treatment for multinationals.

EU antitrust Commissioner Margrethe Vestager said Thursday that the Luxembourg deal may have breached state aid rules, which seek to keep a level playing field for businesses across the 28 member states.

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The EU says that since 2009, McDonald's Europe Franchising paid no corporate tax in Luxembourg despite large profits. It said the profits were more than 250 million euros ($265 million) in 2013.

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Vestager said that "a tax ruling that agrees to McDonald's paying no tax on their European royalties either in Luxembourg or in the U.S. has to be looked at very carefully."

The EU said Luxembourg gave McDonald's "an advantage not available to other companies in a comparable factual and legal situation."

Multinationals in Europe pay taxes in the country where they have their regional headquarters, and countries have long competed to lure the big companies.

A portion of the ECB's Thursday release on the McDonald's probe is below: 

"The Commission has opened a formal probe into Luxembourg's tax treatment of McDonald's.Its preliminary view is that a tax ruling granted by Luxembourg may have granted McDonald's an advantageous tax treatment in breach of EU State aid rules

In particular, the Commission will assess whether Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg-US Double Taxation Treaty and thereby gave McDonald's an advantage not available to other companies in a comparable factual and legal situation.

Commissioner Margrethe Vestager, in charge of competition policy, stated: "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. The purpose of Double Taxation treaties between countries is to avoid double taxation – not to justify double non-taxation."

On the basis of two tax rulings given by the Luxembourg authorities in 2009, McDonald's Europe Franchising has paid no corporate tax in Luxembourg since then despite recording large profits (more than €250 million in 2013). These profits are derived from royalties paid by franchisees operating restaurants in Europe and Russia for the right to use the McDonald's brand and associated services. The company's head office in Luxembourg is designated as responsible for the company's strategic decision-making, but the company also has two branches, a Swiss branch, which has a limited activity related to the franchising rights, and a US branch, which does not have any real activities. The royalties received by the company are transferred internally to the US branch of the company.

The Commission requested information on the tax rulings in summer 2014 following press allegations of advantageous tax treatment of McDonald's in Luxembourg. Subsequently, trade unions presented additional information to the Commission. The Commission's assessment thus far has shown that in particular due to the second tax ruling granted to the company McDonald's Europe Franchising has virtually not paid any corporate tax in Luxembourg nor in the US on its profits since 2009. 

That has resulted in some offering advantages that allow companies to pay very low tax overall. It has become a big political issue as citizens in many European nations are forced to tighten their belt because of the weak economy while some multinationals get away with huge tax breaks.

In October, the EU already demanded that Starbucks and Fiat repay up to 30 million euros ($34 million) each in back taxes, in what was the start of a broad crackdown on favorable tax deals for multinationals.