The European commission has opened a formal state aid investigation into what it believes to be two unlawful sweetheart tax deals that Luxembourg granted to McDonald’s six years ago.

It is examining the tax rulings the grand duchy gave the fast food group in 2009, the year the business shifted its European headquarters out of London.

The fast food group’s Luxembourg company, McDonald’s Europe Franchising Sarl, has paid no corporate tax in the grand duchy since 2009, the commission said. This was despite receiving hundreds of millions of euros in royalty payments from across Europe and Russia for the right to use the brand and associated service. For 2013 alone its profits were more than €250m (£176m).

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Under the terms of its Luxembourg tax ruling, McDonald’s Europe Franchising has not been required to pay tax locally because the grand duchy regards almost all of its profits to have been generated through the Luxembourg company’s US branch.

However, US tax rules offer a different view. Under American rules, the Luxembourg company’s profits should be taxed in Luxembourg, where the company is registered, not at its US branch office. As a result, the profits of McDonald’s Europe Franchising go untaxed by both Luxembourg and the US.

Margrethe Vestager, Europe’s competition commissioner, 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.”

Untaxed, or “stateless”, profits are considered the holy grail for international tax planners who specialise in creating complex cross-border corporate structures for multinationals. The structures are designed to exploit differences between different countries’ tax codes such that earnings can escape without being taxed.

Facebook Twitter Pinterest The McDonald’s tax trail. Photograph: EU

Responding to the commission’s investigation, McDonald’s said: “We are subject to the same tax laws as other companies and are confident that the inquiry will be resolved favourably.”

It added: “McDonald’s complies with all tax laws and rules in Europe and pays a significant amount of corporate income tax. In fact, from 2010-2014, the McDonald’s Companies paid more than $2.1bn just in corporate taxes in the European Union, with an average tax rate of almost 27%.”

The Luxembourg tax affairs of Europe’s largest fast food chain have already been subject to considerable scrutiny, attracting a French tax office investigation in 2013 and a critical report this year from a coalition of union groups.

Officials in Brussels had been reviewing the report and gathering further preliminary evidence since March.

This is the third Luxembourg tax ruling over which the commission has raised state aid concerns. Officials are continuing to investigate a tax deal granted to Amazon in 2003, and determined in October that a tax ruling provided by the grand duchy to Chrysler Fiat was so generous as to amount to unlawful state aid.

The tax deals under scrutiny – sometimes known as “comfort letters” – provide businesses that have complex or controversial tax affairs with certainty as to how they will be taxed in a country. These private assurances have attracted criticism from politicians and campaigners who argue that some countries are secretly offering multinationals bespoke generous tax deals in exchange for inward investment and jobs.

The Luxembourg finance ministry said: “[We] consider that no special tax treatment nor selective advantage have been granted to McDonald’s. Luxembourg will fully cooperate with the commission in the investigation.” It is already appealing the state aid decision in the Chrysler Fiat case and denies allegations of state aid in relation to Amazon and McDonald’s.

Should the commission’s investigation into Luxembourg’s tax deal with McDonald’s lead to a finding of unlawful state aid, the restaurant group could be forced to pay huge sums to the grand duchy after its historic tax bills are recalculated.



Some critics have questioned whether such a remedy would reflect a fairer tax treatment. Campaigners want to see taxes being paid where economic activity occurs: in the case of McDonald’s, there is little evidence that Luxembourg represents a hub of economic activity for the restaurant group.