Commission Decision (EU) 2019/1252 of 19 September 2018 on tax rulings SA.38945 (2015/C) (ex 2015/NN) (ex 2014/CP) granted by Luxembourg in favour of McDonald's Europe (notified under document C(2018) 6076)Text with EEA relevance.

and entered into force in both contracting States on 20 December 2000, taking effect on 1 January 2001.

(54) Double taxation treaties are international agreements between two sovereign states

They are often also called double tax agreements or double tax conventions.

. Most double taxation treaties are bilateral but multilateral tax treaties also exist, such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters

OECD Council of Europe, Convention on Mutual Administrative Assistance in Tax Matters, 2011.

.

(55) Double taxation treaties exist to enhance cross-border trade and international investment by eliminating or reducing tax barriers for companies and physical persons trading or investing in two contracting States. If the same income resulting from cross-border operations was taxed by two countries, this would potentially threaten the development of trade or discourage investments between two sovereign states. The most important objective of a double taxation treaty is therefore to avoid or eliminate double taxation where it arises

There are two main model tax conventions for contracting States in order to negotiate the exact terms and provisions of a double taxation treaty: the United Nations Model Tax Convention and the OECD Model Tax Convention. The first OECD MTC was published in 1958 and has been regularly revised and updated since then. The OECD MTC is complemented by the OECD Model Tax Convention Commentaries which explain and interpret the provisions of the OECD MTC and are regularly updated and revised. The OECD Commentaries also provide observations by some countries on specific aspects of the double taxation treaties and on the way these countries interpret some articles of the double taxation treaties under their own internal law.

.

(56) The general scope of application of the Luxembourg – US double taxation treaty is defined in Article 1(1) which provides: This Convention shall apply only to persons who are resident of one or both of the Contracting States, except as otherwise provided in the Convention.

(57) Article 3(2) of the Luxembourg – US double taxation treaty on General Definitions provides: As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a common meaning pursuant to the provisions of Article 27 (Mutual Agreement Procedure), have the meaning that it has under the law of that State concerning the taxes to which the Convention applies.

(58) Article 5(1) of the Luxembourg – US double taxation treaty defines the concept of PE: For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

(59) Article 7(1) of the Luxembourg – US double taxation treaty concerning the taxation of business profits provides: The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as are attributable to that permanent establishment.

(60) Article 25 of the Luxembourg – US double taxation treaty is entitled Relief from Double Taxation, Article 25(2) of the Luxembourg – US double taxation treaty provides: In Luxembourg double taxation shall be eliminated as follows: (a) where a resident of Luxembourg derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the United States, Luxembourg shall, subject to the provisions of subparagraph (b) and (c), exempt such income or capital from tax, but may, in order to calculate the amount of tax on the remaining income or capital of the resident, apply the same rates of tax as if the income or capital had not been exempted.

1. GROUNDS FOR INITIATING THE FORMAL INVESTIGATION PROCEDURE

(61) The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the contested tax rulings granted State aid to McD Europe within the meaning of Article 107(1) of the Treaty and expressed its doubts as to the compatibility of the contested tax measures with the internal market.

(62) In particular, the Commission expressed doubts that the revised tax ruling misapplied Article 25(2) of the Luxembourg – US double taxation treaty and thereby granted a selective advantage to McD Europe.

(63) The Commission applied the three-step analysis to determine whether the revised tax ruling is prima facie selective. First, it considered the reference system to be the general Luxembourg corporate income tax system, which has as its objective the taxation of profits of all companies subject to tax in Luxembourg. It also considered that the Luxembourg corporate tax system includes the double taxation treaties to which Luxembourg is a party.

(64) Second, the Commission established whether the revised tax ruling gives rise to a derogation from the reference system leading to a favourable treatment of McD Europe as compared to economic operators that are factually and legally in a similar situation. It considered that in principle, McD Europe is liable to Luxembourg corporate tax on its worldwide profits unless a double taxation treaty applies which allows Luxembourg to exempt the income attributable to its foreign branches from Luxembourg corporate income tax. The Commission expressed doubts that the revised tax ruling complied with Articles 7 and 25 of the Luxembourg – US double taxation treaty as well as Luxembourg law which transposes the double taxation treaty into national law and which, as its guiding principle, requires worldwide taxation of profits.

(65) Article 25 of the Luxembourg – US double taxation treaty prescribes that where a tax resident of Luxembourg derives foreign income which, in accordance with the provisions of this Convention, may be taxed in the US, Luxembourg shall exempt such income from tax. To determine whether the income may be taxed in US […] in accordance with provisions of this Convention, reference should be made to Article 7 of the Luxembourg – US double taxation treaty.

(66) Under Article 7 of the Luxembourg – US double taxation treaty, the Commission noted that the United States (source State) may only tax the relevant income (i.e. profits generated by McD Europe's US Franchise Branch from franchise right exploitation) to the extent that a permanent establishment exists to whom the business profits can be attributed, otherwise those profits are taxable only in Luxembourg. It then noted that the profits attributed to the US Franchise Branch cannot be taxed in the United States since the US Franchise Branch does not constitute a permanent establishment for US tax purposes. In other words, there is no possibility that those profits may be taxed by the United States within the meaning of Article 25(2) of the Luxembourg – US double taxation treaty. As the Luxembourg tax authorities were fully aware of the non-possibility of taxation, the Commission argues that they should not have agreed to the exemption of the income attributed to the US Franchise Branch from corporate income tax in Luxembourg.

(67) Thus, to avoid conferring a selective advantage, the Commission considered that the Luxembourg tax administration should have only agreed to exempt income from corporate taxation to the extent that the income may be taxed in the United States in accordance with the provisions of the Luxembourg – US double taxation treaty. According to the views expressed by the Commission in the Opening Decision, the fact that the Luxembourg tax administration was fully aware when it issued the revised tax ruling that the US Franchise Branch does not constitute a permanent establishment for US tax purposes means that it was also fully aware that its business income may not be taxed in the United States in accordance with the Luxembourg – US double taxation treaty and that consequently, the confirmation by the Luxembourg tax authorities to exempt the income for corporate tax by virtue of Article 25(2)(a) of the Luxembourg-US double taxation treaty rests on a misapplication of that provision.

(68) Given the absence of a justification for the selective treatment of McD Europe resulting from the revised tax ruling and given that all other conditions for the existence of State aid pursuant to Article 107(1) of the Treaty were fulfilled, the Commission came to the preliminary conclusion that the revised tax ruling issued by the Luxembourg tax administration in favour of McD Europe constituted State aid within the meaning of Article 107(1) of the Treaty. Furthermore, because of its qualification as operating aid, the Commission had doubts as to the compatibility of the contested measures pursuant to Articles 107(2) or (3) of the Treaty.

1. COMMENTS FROM THE LUXEMBOURG AUTHORITIES ON THE OPENING DECISION

(69) The Luxembourg authorities submitted their comments on the Opening Decision on 4 February 2016. The Luxembourg authorities argue, first, that the Commission has incorrectly identified the legal framework; second, that the Commission's reasoning in the Opening Decision is fundamentally flawed; and third, that the Commission has not proven the existence of a selective advantage.

5.1.

Comments from the Luxembourg authorities on the legal framework

(70) The Luxembourg authorities first set out the objective and content of the double taxation treaty, which is the allocation of the right to tax in order to prevent (actual or potential) double taxation, but not to ensure the actual taxation of the taxpayer by one or other of the contracting States or by a third state. A double taxation treaty does not give rise to taxation if no taxation is provided for in national law. The exercise of the power of taxation is an exclusive competence of the contracting State to which that power has been allocated by the double taxation treaty. In the absence of a switch-over-clause

The so-called switch-over allows one contracting State to unilaterally change the method for avoidance of double taxation if the other contracting State applies the treaty or domestic tax law to exempt certain income or capital from taxation or applies the reduced withholding tax rates to dividends, interest or royalties.

or the credit method

The essential feature of the credit method, whether granted unilaterally or by bilateral tax treaty, is that the residence State treats a foreign income tax paid to the source State by its residents, within certain statutory limitations, as if it were an income tax paid to itself. When the foreign tax rate is lower than the domestic rate, only the excess of the domestic tax over the foreign tax is payable to the residence State. When the foreign tax is the higher one, the residence State does not collect any tax. The effective overall tax burden is the higher of the domestic tax or the foreign tax.

, the other contracting State cannot unilaterally resolve a problem of non-taxation if the other State does not exercise its power of taxation. According to the Luxembourg authorities, the only possible way of resolving situations of non-taxation is to amend the double taxation treaty.

(71) The Luxembourg authorities also explain that a double taxation treaty is interpreted independently by each contracting State. Luxembourg can therefore not be expected to interpret the Luxembourg – US double taxation treaty by reference to US law.

(72) As regards Luxembourg's domestic law and case-law, the Luxembourg authorities explain that neither the Luxembourg – US double taxation treaty, nor the legal text transposing the double taxation treaty into Luxembourg law, nor any other piece of legislation of Luxembourg national law establishes a principle of actual taxation. It then makes reference to the La Coasta judgment

See recital 43. First, in a decision of the French Conseil d'Etat of 18 March 1994, France was denied the right to tax capital gains realised by a Luxembourg company on the sale of a property located in France on the grounds that the mere holding of real estate did not constitute a permanent establishment located in France and that commercial income was only taxable in France if it were attributable to a French PE. Following this decision, Luxembourg tried to tax in Luxembourg income and capital gains derived by Luxembourg companies and stemming from real estate located in France. In its La Coasta judgment, the Luxembourg administrative court, however, took the opposite view by deciding that the double taxation treaty between France and Luxembourg gave the right to tax real estate income to the State in which real estate was actually located, in the case at hand, France.

which acknowledged that double non-taxation could happen despite a correct application of a double taxation treaty, each contracting State being independent from the other in the interpretation of the double taxation treaty.

(73) In this case, the Luxembourg authorities explain that the non-taxation of the US Franchise Branch in the United States is due to the application of US national law and the concept of effectively connected income. The non-taxation in the United States derives from the fact that the United States does not make use of the right to tax assigned to it by the Luxembourg-US double taxation treaty and Luxembourg cannot challenge that. Furthermore, according to Luxembourg, the Commission is not competent to (re-)interpret an international treaty and breaches Articles 4 and 5 of the Treaty on European Union if it decides on the correct interpretation of a bilateral international treaty between a Member State and a third country.

5.2.

Comments from the Luxembourg authorities on the Commission's reasoning

(74) The Luxembourg authorities consider that the Commission's reasoning is based on two incorrect assumptions: first, that the Luxembourg tax authorities knew or should have known that the US Franchise Branch was not taxable under US law on the date of issuance of the tax ruling; second, that if the Luxembourg tax authorities had known that the US Franchise Branch was not taxable in the United States under US tax law, it had an obligation to tax McD Europe.

(75) As regards the first assumption of the Commission, the Luxembourg authorities assert that they do not have the competence to assess and interpret foreign tax law. In addition, the Luxembourg tax authorities could not know whether the US Franchise Branch would actually be taxed by the US tax authorities as, first, they did not receive any document or information from the US tax authorities with the request for a tax ruling and, second, the subjective opinion of a private tax advisor cannot be equated with a position taken by the US tax authorities.

(76) As regards the second assumption of the Commission, the Luxembourg authorities submit that if McD Europe is not taxable from the perspective of Luxembourg law, it is irrelevant to know whether or not it is taxable under US law since Luxembourg does not recover its right to tax. The allocation of taxing power is unconditional and final.

5.3.

Comments from the Luxembourg authorities on the Commission's analysis pursuant to Article 107 of the Treaty

(77) The Luxembourg authorities do not agree with the Commission's legal analysis for establishing the existence of a selective advantage. As regards the definition of the reference system, it only comprises the Luxembourg – US double taxation treaty and the Luxembourg rules and practice relating to double taxation treaties, as interpreted by the Luxembourg courts.

(78) In addition, the Luxembourg authorities observe that the Commission in its Opening Decision only makes reference to Article 159 L.I.R, whereas the correct reference relating to the worldwide taxation of companies subject to corporate income tax also requires the application of Article 160 L.I.R. Furthermore, the incorporation of double taxation treaties takes place on the basis of Article 134 L.I.R in conjunction with Article 162 L.I.R together with the Grand-Ducal Decree of 3 December 1969, none of which were mentioned by the Commission in its Opening Decision. According to the Luxembourg authorities, such lack of clarity is contrary to the requirements of Article 107(1) of the Treaty.

(79) According to the Luxembourg authorities, the Commission also fails to demonstrate any derogation from the double taxation treaty and/or the law as interpreted by Luxembourg courts and Luxembourg practice.

(80) Last but not least, the Luxembourg authorities do not agree with the Commission's determination of an advantage. First, the question of the advantage must be independent of the decision by the US authorities to tax the company. Second, assuming that Luxembourg has an obligation to tax in order to prevent a situation of double non-taxation, an advantage would only exist if the Luxembourg tax authorities had known for certain on the date of issuance of the revised tax ruling that the US Franchise Branch was not actually being taxed by the US authorities. However, the US tax authorities did not take a position on whether the US Franchise Branch was taxable in the United States until five years after the revised tax ruling was issued, i.e. in 2014 in the context of an IRS audit. The Luxembourg tax authorities could not have known this when issuing the contested tax rulings. Third, according to the Luxembourg authorities, the Commission would never have disputed the contested tax rulings if the IRS had concluded at the end of its tax audit, that the US Franchise Branch was taxable in the United States. Given that the United States apply a system of worldwide taxation, the income of McD Europe would be taxed once repatriated to the United States. The result is therefore merely a tax deferral. It is therefore the non-taxation of the US Franchise Branch's income by the US tax authorities after the contested tax rulings have been issued which led to the finding of an advantage to McD Europe according to the Commission.

1. COMMENTS FROM INTERESTED PARTIES ON THE OPENING DECISION

6.1.

Comments from McD Europe

(81) McD Europe submitted its comments on 9 August 2016. McD Europe, first, disputes the Commission's competence to interpret international and national tax rules; second, it points to a number of flaws in the Commission's interpretation of the Luxembourg – US double taxation treaty; and, third, it argues that the Commission has failed to demonstrate the existence of State aid in favour of McD Europe.

6.1.1.

Comments from McD Europe on the Commission's competence to interpret international and national tax rules

(82) McD Europe argues that, based on Articles 113, 114, and 115 of the Treaty, Member States have sole jurisdiction to determine their corporate tax regime and to enter into international treaties. Consequently, the Commission's attempt to impose its own interpretation of an international treaty such as the Luxembourg – US double taxation treaty violates Luxembourg's tax sovereignty. In particular, according to McD Europe, the Commission disregards the (correct) interpretation of the double taxation treaty made by the Luxembourg tax authorities by considering that (i) the permanent establishment condition provided for by the double taxation treaty should have been analysed in the light of United States law; and (ii) the taxability in the United States of the US Franchise Branch revenues should have been considered by the Luxembourg tax authorities before deciding that they should not be taxed in Luxembourg.

6.1.2.

Comments from McD Europe on the Commission's interpretation of the Luxembourg – US double taxation treaty

(83) McD Europe argues that the Commission's interpretation of the Luxembourg – US double taxation treaty is flawed as (i) the Commission's interpretation of the notion of permanent establishment disregards the way double taxation treaties are usually interpreted/applied and runs against Treaty provisions; (ii) the Commission introduces the requirement in the double taxation treaty that the US Franchise Branch's revenues should be taxable in the United States; (iii) the Commission makes reference to provisions of the OECD Model Tax Convention

The OECD Model Tax Convention is a model for countries concluding bilateral tax conventions and plays a crucial role in removing tax-related barriers to cross-border trade and investment. It is the basis for negotiation and application of bilateral tax treaties between countries, designed to assist business while helping to prevent tax evasion and avoidance. The OECD Model Tax Convention also provides a means for settling on a uniform basis the most common problems that arise in the field of international double taxation.

that are not applicable to the Luxembourg – US double taxation treaty and/or irrelevant.

(84) As regards the first point, McD Europe argues that a double taxation treaty does not create itself a right to tax if no taxation rights exist under domestic law. Also, each contracting State is independent from the other in the interpretation of the double taxation treaty. Thus, the interpretation that may be given of a particular concept under US law is irrelevant for Luxembourg even though conflicting interpretations between contracting States may lead to double non-taxation. According to McD Europe, the only way of solving this situation of double non-taxation is to negotiate an amendment of the double taxation treaty.

(85) As regards the interpretation of the concept of a PE, McD Europe argues that the wording of the Luxembourg – US double taxation treaty and notably its Article 3 confirms that it belongs to the contracting State that applies the double taxation treaty to interpret it by reference to its own legal system. Hence, in this case, it was for the Luxembourg tax administration to interpret the Luxembourg – US double taxation treaty by reference to its own legal system and to consider that the US Franchise Branch constituted a permanent establishment for the purposes of the double taxation treaty. The conclusion of the IRS audit conducted in 2014 is irrelevant as the Luxembourg tax authorities could not have been aware of the IRS position at the time of the contested tax rulings in 2009 nor could it have retroactively affected the tax rulings.

(86) Second, Articles 7(2) and 25(2)(a) of the Luxembourg – US double taxation treaty do not require that the revenue of the permanent establishment is taxable in the United States. According to McD Europe, following a correct reading of the double taxation treaty provisions, whether the contracting State which, under the double taxation treaty may tax (in this case, the United States), later considers, under its domestic rules, that the revenues are not taxable, is irrelevant for the other contracting State (Luxembourg), which has lost its right to tax the revenues by virtue of the double taxation treaty.

(87) Third, the Commission's reference to an OECD Commentary introduced in 2000 to support its conclusion that, in light of the fact that the US Franchise Branch revenues were not taxable in the United States, the Luxembourg tax authorities should have taxed such income, is irrelevant as the provision in question did not exist when the double taxation treaty was concluded in 1996. A new reading of OECD Commentaries that changes the meaning of Article 23A of the OECD MTC can only be applicable in respect of treaties ratified after the relevant revision of the OECD MTC in 2000. McD Europe further underlines that the OECD MTC is not binding by law but rather considered as a recommendation.

6.1.3.

Comments from McD Europe on the Commission's analysis pursuant to Article 107 of the Treaty

(88) According to McD Europe, the Commission's reasoning is based on the erroneous premise that the tax ruling commits State resources. Second, McD Europe did not benefit from any advantage as the Luxembourg tax authorities could not have taxed the revenues attributable to the US Franchise Branch. Third, the Commission did not demonstrate that McD Europe was the only undertaking that benefited from the application of the double taxation treaty and even less that it was part of a selective group of undertakings.

(89) On the first point, McD Europe asserts that tax rulings do not constitute State aid if they are mere interpretations and practical applications of general tax rules in specific cases. They can only constitute State aid if they depart from the general rules through administrative discretion. In the case at hand, the purpose of the tax rulings was to confirm the absence of Luxembourg taxation of business income attributed to the US Franchise Branch under the Luxembourg – US double taxation treaty. The tax ruling did not reduce the tax burden of McD Europe as in the absence of the tax ruling, McD Europe would have had the same tax burden in Luxembourg. The tax ruling does not change or improve the tax situation of McD Europe.

(90) Second, according to McD Europe, the Commission incorrectly concluded that the Luxembourg tax authorities had misapplied the Luxembourg – US double taxation treaty and on that basis, found an advantage in favour of McD Europe. Also, the fact that the United States eventually decided not to tax the royalty income under US domestic tax rules cannot qualify as State aid under EU law. Luxembourg did not recover its taxing right over the US Franchise Branch income because the same income was not taxable under US law. Like the Luxembourg authorities, McD Europe quotes the La Coasta judgment to support the principle according to which the Luxembourg tax authorities cannot take into account interpretations done by the other contracting State. However, even if one followed the Commission's reasoning, the advantage that McD Europe would have potentially received from the Luxembourg tax authorities would in fact have resulted from a decision made by the IRS in 2014 not to tax the US Franchise Branch's revenues. Yet, the possible existence of an advantage cannot depend on the attitude of a third country.

(91) Regarding selectivity and in particular the question of derogation, McD Europe states that according to public information available through LuxLeaks

In the fall of 2014, more than 500 rulings obtained by, in particular, PwC were leaked and published on the internet (Luxleaks Affair).

, it appears that many undertakings have benefited from the same treatment as McD Europe. This would not be surprising as the interpretation of the Luxembourg – US double taxation treaty in the tax ruling is perfectly in line with the application of Luxembourg law. The other LuxLeaks rulings demonstrate that the Luxembourg authorities have followed a coherent interpretation of the double taxation treaty, applicable to all taxpayers in a comparable situation within the same system of reference. None of these other tax rulings impose a condition of taxation of the business profits at the level of the PE.

(92) Finally, McD Europe argues that the selective advantage may be considered as justified in order to avoid double taxation and that therefore the measure does not constitute State aid.

6.2.

Comments from other interested parties

(93) The Coalition submitted its comments on 5 August 2016 in which it expresses its support for the investigation.

(94) It states that given the dominant position of McDonald's in Europe, any aid in favour of McD Europe could distort competition and affect intra-EU trade. According to the Coalition, McDonald's changes in its corporate structure in late 2008 and early 2009, followed by the tax ruling requests, were tax-related and aimed at achieving double non-taxation both in Luxembourg and the United States, thereby gaining a competitive advantage over its competitors.

(95) According to the Coalition, interpretations of double taxation treaties resulting in double non-taxation should not be considered as complying with the letter and spirit of double taxation treaties.

(96) Finally, the Coalition calls for Member States that have anti-abuse rules to investigate McDonald's for optimising its corporate tax structure in order to avoid paying taxes. According to the Coalition, the McDonald's case exemplifies the necessity for tax administrations to exchange information about the tax treatments of multinationals and to introduce public country-by-country reporting.

1. COMMENTS FROM THE LUXEMBOURG AUTHORITIES ON THIRD PARTIES' COMMENTS

(97) The Luxembourg authorities commented on McD Europe's and the Coalition's observations on the Opening Decision by letter of 30 September 2016.

(98) The Luxembourg authorities stated that the analysis of McD Europe largely coincided with its own analysis.

(99) It considered that the comments sent by the Coalition do not concern the question whether State aid has been granted in favour of McD Europe but are essentially targeting McDonald's worldwide practices, criticising the latter's fiscal, social, and wage policies.

(100) The Luxembourg authorities note that, contrary to the allegations of the Coalition, the purpose of a double taxation treaty is to eliminate double taxation, not to ensure effective taxation. The allocation of taxing rights between two contracting States resulting from a double taxation treaty is definitive and not conditional. Therefore, if the Luxembourg tax authorities contractually waive their taxing rights, they do not recover such taxing rights based on the fact that the other contracting State does not effectively tax such income.

(101) With regard to the call of the Coalition to strengthen anti-tax avoidance tools, the Luxembourg authorities state that it is fully committed to this purpose and that any measures pertaining to transparency and exchange of information between Member States should be discussed and adopted in the appropriate form and following the relevant procedures.

1. ASSESSMENT

(102) Following an in-depth investigation and after having thoroughly considered the comments received in response to the Opening Decision, the Commission considers that the concerns raised in the Opening Decision do not lead to the conclusion that State aid has been granted through the contested tax rulings.

8.1.

Existence of aid

(103) According to Article 107(1) of the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the provision of certain goods is incompatible with the internal market, in so far as it affects trade between Member States. It is thus well-established that, for a measure to be categorised as State aid, there must, first, be an intervention by the State or through State resources; second, the intervention must be liable to affect trade between Member States; third, it must confer a selective advantage on an undertaking; and, fourth, it must distort or threaten to distort competition

See Case C-399/08 P Commission v Deutsche Post ECLI:EU:C:2010:481, paragraph 39 and the case-law cited therein.

.

(104) For a measure to be categorised as aid within the meaning of Article 107(1) of the Treaty, all the conditions set out in that provision must be fulfilled

See Case C-399/08 P Commission v Deutsche Post ECLI:EU:C:2010:481, paragraph 38 and the case-law cited therein.

. In the following, the Commission will concentrate its assessment on whether the contested tax rulings granted a selective advantage to McD Europe. In the absence of the existence of a selective advantage, the Commission does not need to assess whether the other conditions are fulfilled, as there would be no State aid within the meaning of Article 107 of the Treaty.

8.2.

Presence of a selective advantage for McD Europe

(105) Whenever a measure adopted by the State improves the net financial position of an undertaking, an advantage is present for the purposes of Article 107(1) of the Treaty

See Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union (Notion of aid Notice), OJ C 262, 19.7.2016, p. 1, paragraph 67 and the case-law cited.

. In establishing the existence of an advantage, reference is to be made to the effect of the measure itself

Case 173/73 Italy v Commission ECLI:EU:C:1974:71, paragraph 13.

. As regards fiscal measures, an advantage may be granted through different types of reduction of an undertaking's tax burden and, in particular, through a reduction in the taxable base or in the amount of tax due

See Case C-66/02 Italy v Commission ECLI:EU:C:2005:768, paragraph 78; Case C-222/04 Cassa di Risparmio di Firenze and Others ECLI:EU:C:2006:8, paragraph 132; Case C-522/13 Ministerio de Defensa and Navantia ECLI:EU:C:2014:2262, paragraphs 21 to 31.

.

(106) For the purposes of the selectivity analysis, the Court of Justice has devised a three-step analysis in order to determine whether a particular tax measure is selective

See Joined Cases C-78/08 to C-80/08 Paint Graphos and Others ECLI:EU:C:2011:550.

. Under the three-step test, the first step is to identify the common or normal tax regime applicable in the Member State: the reference system. Second, it needs to be determined whether the tax measure in question constitutes a derogation from that system, in so far as it differentiates between economic operators who, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation. If the measure constitutes a derogation from the reference system, it then needs to be established, in the third step of the analysis, whether that measure is justified by the nature or the general scheme of the reference system. A tax measure which constitutes a derogation from the application of the reference system may be justified if the Member State concerned can show that that measure results directly from the basic or guiding principles of that tax system

See Joined Cases C-78/08 to C-80/08 Paint Graphos and Others ECLI:EU:C:2011:550, paragraph 65.

. If that is the case, the tax measure is not selective. The burden of proof in that third step lies with the Member State.

(107) It should be underlined that the doubts expressed in the Opening Decision relied on a preliminary definition of the reference system as being the general Luxembourg corporate income tax system, including the double taxation treaties to which Luxembourg is a party. The Commission thought that there could be a selective advantage for McD Europe resulting from a misapplication of the Luxembourg-US double taxation treaty. More precisely, the confirmation by the Luxembourg tax authorities of the exemption of the business income of the US Franchise Branch of McD Europe from corporate tax in Luxembourg by virtue of Articles 5, 7 and 25(2)(a) of the Luxembourg – US double taxation treaty was considered as possibly resting on a misapplication of these provisions. No other type of discrimination or misapplication was considered in the Opening Decision.

(108) The following analysis will be focused on the doubts expressed in the Opening Decision, taking into account that the comments of Luxembourg and other interested parties and the information collected during the investigation have not led the Commission to extend the formal procedure in this specific case, which is only devoted to the rulings granted to McD Europe and to the possible misapplication of Articles 5, 7(1) and 25(2) of the Luxembourg-US double taxation treaty. It should also be kept in mind that the burden of proof of the existence of a selective advantage lies with the Commission (with the exception of the justification of the measure by the basic or guiding principles of that tax system).

(109) It is not established that the contested tax rulings constitute a derogation from the rules set by the double taxation treaty. Such a derogation would exist if the contested tax rulings misapplied (i.e. deviated from) a rule of the double taxation treaty reducing McD Europe's tax liability and thereby giving rise to a discrimination between McD Europe vis-à-vis other undertakings that are legally and factually comparable.

(110) McD Europe is tax resident in Luxembourg. In accordance with Articles 159 and 160 L.I.R., McD Europe is in principle liable to Luxembourg corporate tax on its worldwide profits. However, as regards the profits attributed to its US Franchise Branch, the Luxembourg – US double taxation treaty applies which has been transposed into Luxembourg law by virtue of Article 134 L.I.R, Article 162 L.I.R together with the Grand-Ducal Decree of 3 December 1969. The double taxation treaty limits the taxation rights of Luxembourg in that certain income attributable to a permanent establishment in the US under the double taxation treaty is taxable in the US and not in Luxembourg.

(111) Article 25(2)(a) of the Luxembourg US double taxation treaty exempts from taxation income […] which in accordance with the provisions of this Convention, may be taxed in the United States. In order to determine what may be taxed in the United States, Article 7(1) of the Luxembourg – US double taxation treaty stipulates that business profits generated by a company of one of the contracting States are taxable in that State, except if they are realised by or attributable to a permanent establishment located in the other contracting State. In that case, the first contracting State may assume that the profits attributable to that permanent establishment may be taxed in the other contracting State and accordingly exempt from taxation these profits in order to avoid possible double taxation.

(112) It is therefore decisive under the double taxation treaty whether McD Europe's US Franchise branch constitutes a permanent establishment in the US that generates business profits that are exempt from taxation in Luxembourg. Article 5(1) of the Luxembourg – US double taxation treaty defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. While a permanent establishment is therefore defined in the Luxembourg – US double taxation treaty, the term business is not. Also Article 7 of the Luxembourg – US double taxation treaty includes the notion of business profits which is not defined.

(113) In this situation, Article 3(2) of the Luxembourg – US double taxation treaty considers that any undefined term in the Convention shall have the meaning that it has under the law of the State applying the Convention, i.e. Luxembourg in this case. As explained further in recitals 119 to 121 and contrary to what the Commission asserted in its Opening Decision, in the case of differences in interpretation or factual assessment between the contracting States, it is not decisive for the purposes of applying the double taxation treaty by Luxembourg whether the US Franchise Branch constitutes a permanent establishment under US domestic tax law

Recital 84 of the Opening Decision.

and it is equally not decisive whether the Luxembourg tax authorities knew about the non-taxation of the business income in the US

Recital 91 of the Opening Decision.

. If the US Franchise Branch constitutes a permanent establishment that carries out a business in the US according to Luxembourg domestic tax law and therefore has business profits attributable to it, those profits shall be exempt from taxation under Luxembourg tax law pursuant to Article 25(2)(a) of the Luxembourg – US double taxation treaty.

(114) As regards Luxembourg tax law, Article 16 StAnpG defines the concept of permanent establishment and refers in this respect to every fixed piece of equipment or place which serves for the operation of an established enterprise or business. The tax advisor in his ruling request applies the criteria of Article 16 StAnpG to the characteristics of the business carried out by the US Franchise Branch

See recital 44.

and concludes that those criteria are fulfilled. Accordingly, from a Luxembourg tax perspective, one should come to the conclusion that the [US Franchise Branch] carries on intellectual property activities through a US PE by virtue of Article 5 of the US–Luxembourg Treaty

P. 8 of the request for a revised ruling.

.

(115) In line with the comments received from the Luxembourg authorities and McD Europe in response to the Opening Decision

See recitals 70, 71, 76 and 92.

, the Commission sees no reason to disagree with the assessment of the tax advisor that the US Franchise Branch constitutes a permanent establishment pursuant to Article 16 StAnpG. From the perspective of Luxembourg law, a permanent establishment exists in the US, and it is not established that the Luxembourg tax authorities misapplied the double taxation treaty by considering that the income of the US Franchise Branch may be taxed in the US according to Articles 7(1) and 25(2)(a) of the Luxembourg – US double taxation treaty.

(116) As regards Luxembourg national jurisprudence, the tax advisor as well as Luxembourg and McDonald's in their comments to the Opening Decision

See recital 92.

refer to the La Coasta judgment dealing with differing interpretations of the Luxembourg – France double taxation treaty. In that judgment, the Luxembourg administrative court acknowledged that double non-taxation can arise despite a correct application of a double taxation treaty, each contracting State being independent from the other in the interpretation of the double taxation treaty. The main objective of a double taxation treaty is the elimination of both actual and potential double taxation. It does not always ensure actual taxation

See recital 72.

.

(117) The non-taxation in this case derives mainly from the fact that the US does not make use of its right to tax assigned to it under the double taxation treaty due to the interpretation in US tax law of the term business. The Commission, in its Opening Decision, raised doubts as to whether the double non-taxation of McD Europe's franchise income was due to a difference in interpretation between Luxembourg and the US or a conflict of qualification when applying the Luxembourg – US double taxation treaty. In particular, the wording of Article 25(2)(a) of the Luxembourg – US double taxation treaty ([i]n Luxembourg double taxation shall be eliminated as follows) seemed to indicate an obligation on Luxembourg to only exempt income in order to eliminate double taxation

See OECD, The Application of the OECD Model Tax Convention to Partnerships, Issues in International Taxation No 6 (1999) (hereinafter the 1999 Report), paragraph 116.

.

(118) Thus, the question arose in the context of the preliminary examination whether, in the absence of a case of virtual double taxation

Virtual double taxation arises in situations where the source State has a clear right to tax an item of income in accordance with the double taxation treaty, but chooses not to exercise this right under its domestic tax law.

, the double non-taxation in this case was due to a conflict of qualification and Luxembourg could recover its right to tax because of such a conflict. The reference in the Opening Decision to the OECD Commentaries on the Model Tax Convention with respect to conflicts of qualification, in particular, paragraph 32.6

Paragraph 32.6 OECD Commentaries on the Model Tax Convention (2000) provides [t]he phrase in accordance with the provisions of this Convention, may be taxed must also be interpreted in relation to possible cases of double non-taxation that can arise under Article 23A. Where the Source State considers that the provisions of the Convention preclude it from taxing an item of income or capital which it would otherwise have had the right to tax, the State of residence should, for purposes of applying paragraph 1 of Article 23 A, consider that the item of income may not be taxed by the State of source in accordance with the provisions of the Convention, even though the State of residence would have applied the Convention differently so as to have the right to tax that income if it had been in the position of the State of source. Thus the State of Residence is not required by paragraph 1 to exempt the item of income, a result which is consistent with the basic function of Article 23 which is to eliminate double taxation.

thereof should be understood in this context.

(119) A conflict of qualification refers to situations where the contracting States apply different articles of the double tax convention based on the interaction of domestic law with the convention

1999 Report, paragraph 94.

. According to the OECD Commentaries, in cases of conflict of qualification, the residence State (Luxembourg) has to take the source State's (US) qualification into account

1999 Report, paragraph 105.

. In other words, where from the source State's perspective, that State has no right to tax an item of income in accordance with the double tax treaty, the State of residence is not required to exempt the income

1999 Report, paragraph 109 which reads: [w]here the State of source considers that the provisions of the convention preclude it from taxing an item of income which it would otherwise have taxed, the State of residence […] is not required by paragraph 1 [of Article 23A] to exempt the item of income […].

.

(120) In contrast, differences of interpretation or factual assessment refer to how the contracting States interpret the treaty or apply it to a given set of facts, unrelated to domestic law. Situations of differences of interpretation led to the inclusion of Article 23A(4) in the OECD Model Tax Convention to tackle such cases of double non-taxation

demonstrates that the Luxembourg tax authorities have followed a coherent interpretation of the double taxation treaty, applicable to all taxpayers in a comparable situation. No condition of effective taxation is provided for under the double taxation treaty and the tax rulings do not impose such a condition to the extent it is not specifically included in the relevant double taxation treaty.

8.2.1.

Conclusion

(124) Based on this analysis, the Commission concludes that in this specific case, it is not established that the Luxembourg tax authorities misapplied the Luxembourg – US double taxation treaty. Therefore, on the basis of the doubts raised in the Opening Decision and taking into account its definition of the reference system, the Commission cannot establish that the contested rulings granted a selective advantage to McD Europe by misapplying the Luxembourg – US double taxation treaty.

(125) As the criteria for finding the existence of State aid pursuant to Article 107(1) of the Treaty are cumulative, there is no need to assess the other criteria.

1. CONCLUSION ON THE EXISTENCE OF AID

(126) In light of the foregoing, the Commission concludes that the contested tax rulings issued by the Luxembourg tax authorities in favour of McD Europe Franchising, S.à.r.l. do not constitute State aid within the meaning of Article 107(1) of the Treaty,

HAS ADOPTED THIS DECISION:

Article 1

With the contested tax rulings issued by the Luxembourg tax authorities on 30 March 2009 and 17 September 2009 in favour of McD Europe Franchising, S.à.r.l., Luxembourg did not misapply the Luxembourg – US double taxation treaty and these tax rulings therefore do not constitute aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union on this basis.

Article 2

This Decision is addressed to the Grand Duchy of Luxembourg.

Done at Brussels, 19 September 2018.

For the Commission

Margrethe Vestager

Member of the Commission