In a ruling on Wednesday, the Commission said the reason the US fast food chain did not pay some taxes was due to the mismatch between US and Luxembourg laws and was in line with national tax laws.
The long-awaited announcement follows an in-depth investigation launched in December 2015 based on doubts that Luxembourg might have misapplied its double taxation treaty with the United States.
The investigation had focused on McDonald’s Luxembourg-based subsidiary Europe Franchising which receives royalties from franchisees in Europe, Ukraine and Russia.
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McDonald’s Europe Franchising is a subsidiary of McDonald's Corporation, based in the United States. The company is tax resident in Luxembourg and has two branches, one in the US and the other in Switzerland.
The Commission concluded that Luxembourg’s tax treatment of McDonald’s Europe does not violate the tax treaty or infringe EU state aid rules.
On 19 June, the Luxembourg government presented draft legislation which, it said, seeks to avoid similar cases of double non-taxation in the future.
The Commission says it welcomes the steps taken by Luxembourg to prevent future double non-taxation.
Speaking to reporters in Brussels on Wednesday, European competition Commissioner Margrethe Vestager said, “The Commission investigated under EU state aid rules whether the double non-taxation of certain McDonald’s profits was the result of Luxembourg misapplying its national laws and the Luxembourg-US double taxation treaty, in favour of McDonald’s.
“EU state aid rules prevent member states from giving unfair advantages only to selected companies, including through illegal tax benefits.”
She added, “However, our in-depth investigation has shown that the reason for double non-taxation in this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, Luxembourg did not break EU State aid rules.”
The official added, “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.
“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."
Luxembourg said in a statement that it welcomed the Commission’s recognition of the steps it had taken to avoid similar cases in future.