European Union Ends Inquiry Into Luxembourg’s Tax Deal With McDonald’s

Posted September 19, 2018 4:06 p.m. EDT

The European Union has sparred with multinationals like Apple and Amazon as well as countries such as Ireland in its efforts to curb tax avoidance. In the case of McDonald’s, it is standing down.

The European Commission, the bloc’s executive arm, had been examining whether a deal that Luxembourg granted to McDonald’s may have led to the fast food chain paying less tax than it owed. The commission said Wednesday that these deals did not constitute illegal state aid.

The profits under scrutiny had not been taxed in Luxembourg or the United States, according to the commission, but it said that this was a result of a mismatch between the countries’ tax laws rather than special treatment from Luxembourg, and that no rules had been broken. Still, Margrethe Vestager, the European Union’s competition commissioner, said that it was important that Luxembourg change its laws to ensure profits do not go untaxed regularly.

“Of course, 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,” Vestager said in a statement. “That’s why I very much welcome that the Luxembourg government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future.”

McDonald’s and the government of Luxembourg welcomed the decision from the European Commission. “We pay the taxes that are owed and, from 2013-2017, McDonald’s companies paid more than $3 billion just in corporate income taxes in the European Union with an average tax rate approaching 29 percent,” McDonald’s said in a statement.

The European Union has taken aim at companies that have kept their tax bills down by keeping their profits in lower-tax jurisdictions overseas. The targets have often been American tech companies, like Apple and Amazon, as well as the countries where the profits are stashed.

Vestager has previously ordered Luxembourg to collect about $293 million in unpaid taxes from Amazon in 2017. The commission also ordered Ireland to collect about $14.5 billion in back taxes from Apple in 2016. And in May, it proposed taxing digital media companies based on where they generate revenue, rather than where they have their regional headquarters, in an effort to ensure they pay more tax. The commission has clawed back money from Starbucks and Fiat Chrysler, too.

In McDonald’s case, the commission started an investigation in 2015 to look at whether authorities in Luxembourg had selectively given McDonald’s an unfair advantage through its tax arrangements.

The country had granted McDonald’s Europe Franchising, a subsidiary, a ruling that said it did not need to pay corporate tax in Luxembourg since the profits would be taxed in the United States. Luxembourg then said in a second tax ruling that it did not need to prove that the income had actually been taxed in the United States.

The Luxembourg government has since drafted legislation aimed at preventing such situations in future.