On 19 September 2018, the European Commission (“Commission”) issued a press release declaring that Luxembourg did not provide illegal State aid to McDonald’s with regards to two tax rulings that resulted in double non-taxation of franchise profits in Luxembourg. The Commission’s three-year-long in-depth investigation established that Luxembourg had merely acted in compliance with its national tax laws and that the double non-taxation was the result of a mismatch between Luxembourg and US tax law, as opposed to a more favourable treatment given to McDonald’s compared to other companies in Luxembourg.

The Commission’s initial concerns

In December 2015, the Commission launched an investigation into McDonald’s Europe Franchising (“MEF”), a EU subsidiary of the US-based McDonald’s Corporation. At issue were two tax rulings regarding MEF, a tax resident of Luxembourg with one Swiss branch and one US branch, that received franchisee royalties from outlets in Europe, Ukraine and Russia.

Under the first tax ruling, the authorities in Luxembourg exempted MEF from having to pay corporate tax by reference to the Luxembourg-US Double Taxation Treaty (the “Treaty”). The Treaty states that company profits cannot be taxed by Luxembourg if the company may be taxed in the US by virtue of it having a “permanent establishment” there, from which permanent establishment business is carried out, as well as a taxable presence. Using the Luxembourg definition of “permanent establishment”, the US branch of MEF may have been subject to taxation in the US and therefore exempted from corporate tax in Luxembourg. Despite this, MEF was still required to provide the Luxembourg authorities with annual proof that royalties transferred to the US via Switzerland were declared and subject to taxation.

Under the second tax ruling, McDonald’s subsequently highlighted a discrepancy between the US and Luxembourg jurisdictions. It claimed that, although MEF’s US branch could be considered a “permanent establishment” under Luxembourg tax law, it could not be classified as such under US tax law. On this basis, it argued that (i) the royalty income should be exempt from corporate tax in Luxembourg, under the interpretation given of “permanent establishment” by Luxembourg national tax law, and that (ii) MEF did not have to prove that the royalty income was subject to tax in the US. The authorities in Luxembourg agreed with these points and issued a second tax ruling.

As a consequence, both Luxembourg tax rulings resulted in a double non-taxation as MEF’s royalty income would be taxable neither under Luxembourg nor US tax law.

The Commission’s findings

In its examination, the Commission concluded that the Luxembourg authorities had not misapplied the Treaty in exempting the income of the US branch of MEF from Luxembourg corporate taxation. In particular, the Commission could not establish that the interpretation given by the second tax ruling to the Treaty was incorrect, even if it resulted in a double non-taxation of the royalties awarded to MEF’s US branch. Therefore, no special, more favourable treatment had been provided to McDonald’s that would have constituted illegal State aid.

However, Commissioner Vestager expressed concerns from a tax fairness point of view and emphasized that “the fact remains that McDonald’s did not pay any taxes on these profits – and this is not how it should be from a tax fairness point of view”. Consequently, the Commission welcomed actions taken by the Luxembourg government to combat situations of double non-taxation including the presentation of draft legislation that aims to:

  • strengthen the conditions required to determine the existence of a permanent establishment under Luxembourg law; and
  • require companies, under certain conditions, to provide confirmation that they are subject to the taxation in another country, where such a claim is made.


The Commission has investigated individual tax rulings of Member States under EU State aid rules since June 2013, with this being the first investigation which has not resulted in a finding by the Commission of illegal State aid. To companies under investigation the decision offers hope, by illustrating that there are situations where the specificities of the national tax laws are recognised, even if they may result in special treatment. However, the decision also demonstrates the influence the Commission has and that it can successfully urge Member States to make legislative amendments to change the current situation even if this situation is legally accepted. This can also prevent future situations of non-taxation, even if the Commission did not find the current situation to result in illegal State aid.

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Photo of Johan Ysewyn Johan Ysewyn

Johan Ysewyn is widely respected as a highly skilled European competition lawyer, advising on complex competition issues, including on merger control, anti-cartel enforcement, monopolisation cases and other conduct investigations. He acts as Co-Head of the firm’s Global Competition group and as Managing Partner…

Johan Ysewyn is widely respected as a highly skilled European competition lawyer, advising on complex competition issues, including on merger control, anti-cartel enforcement, monopolisation cases and other conduct investigations. He acts as Co-Head of the firm’s Global Competition group and as Managing Partner of the Brussels office.

Clients turn to Johan when they need cutting-edge competition and regulatory advice. He has been advising some of the world’s leading companies for over 30 years on their most complex competition issues. Johan is “an exceptional lawyer who is solution-oriented, has a remarkable ability to rapidly understand our business and has excellent reactivity.” (Chambers Global) Johan “attracts considerable praise for his reliable practice, as well as his great energy and insight into cartel proceedings.” (Who’s Who Legal)

Johan represents clients from around the world in dealings with competition authorities as well as in court litigation. He has in-depth knowledge of regulatory procedures and best practices as well as longstanding relationships with key regulators, in particular at the European Commission. He has also an active advisory practice covering a range of areas of interest to corporates, including the interplay between ESG goals and competition law, the impact of competition law enforcement on digital markets and broad strategic compliance issues.

Johan’s experience spans many industry sectors, with recent experience in telecoms and information technology, media, healthcare, consumer goods, retail, energy and transport. He has advised on several of the most major merger investigations in recent years. In addition, he has represented clients in many conduct investigations.

Johan’s practice also has a strong focus on global and European cartel investigations. He has acted for the immunity applicants in the bitumen and marine hose cartels, and acted for defendants in alleged cartels in financial services, consumer goods, pharmaceuticals, chemicals, consumer electronics and price benchmarking in the oil sector. He has acted for the European Payments Council in the first European Commission investigation into standardisation agreements in the e-payments sector. Johan has written and lectured extensively on international cartel and leniency-related issues. He co-authors the loose-leaf European Cartel Digest and lectures on cartel law and economics at the Brussels School of Competition.

Johan is also one of the leading experts on EU State aid issues, working both for beneficiaries and governments. He has advised a number of leading banks and governments, as well as represented major European airlines. From the cases that can be publicly disclosed, he has been involved in the Fortis, KBC, Dexia, Arco, Citadele, airBaltic and Riga Airport State aid cases.