Antitrust

1 2 6 The EC also had a success in the General Court, which ruled in a series of cases that the EC was right to find that a particular measure for the amortization of financial goodwill under the Spanish tax regime was selective in nature and amounted to incompatible State aid. 1 THE DEFINITION OF STATE AID State aid is defined as an advantage in any form (including tax measures) conferred on a selective basis to businesses by public authorities. General measures open to all businesses do not constitute State aid. Since tax rulings are available to any tax payer who needs them they are not a problem per se; however, where they — or any other taxation measure — result in favorable treatment vis-à-vis the general taxation regime, they will fall foul of the State aid rules. Navigating this distinction in practice is difficult especially for tax rulings which are by definition individual. THE LUXEMBOURG/MCDONALD'S CASE The Luxembourg-U.S. double taxation treaty provided that Luxembourg cannot tax the profits of a company that can be taxed in the U.S. by virtue of them having a 'permanent establishment.' McDonald's Europe Franchising — a Luxembourg based corporation with two branches, one in the U.S. and one in Switzerland — received royalties from franchisees using the McDonald's brand in Europe, Russia and Ukraine. The Swiss branch licensed the franchise rights and the royalty profits were sent from Luxembourg to the U.S. branch. Under Luxembourg tax law, the U.S. branch was considered a 'permanent establishment,' so its revenues could not be taxed by Luxembourg. However, under U.S. tax law the same branch was not considered a 'permanent establishment,' meaning the profits from the royalties were not subject to taxation in the U.S. either. Luxembourg granted tax rulings in favor of McDonald's Europe Franchising, which confirmed the profits were not taxable in Luxembourg, while removing any obligation to prove that they were taxable in the U.S., with the effect that McDonald's paid no tax on certain royalty payments. The EC opened an in-depth State aid investigation to assess whether the tax rulings gave McDonald's a selective advantage by derogating from the provisions of national tax law and the Luxembourg-U.S. double taxation treaty. However, the EC's investigation found 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." This decision is significant because it is the first time that an EC investigation into alleged aid by virtue of tax rulings by a Member State has resulted in a finding of no aid. However, the outcome that McDonald's will not pay tax anywhere on these revenues is unpalatable for the EC since opposing aggressive tax avoidance was a big part of the motivation for and communication strategy around the EC's case against Apple's Irish tax treatment for example. The EC's approach does show some belated deference to the STATE AID 24 M C D O N A L D ' S I S T H E F I R S T T I M E T H A T A N E C I N V E S T I G A T I O N I N T O A L L E G E D A I D B Y V I R T U E O F T A X R U L I N G S B Y A M E M B E R S T A T E H A S R E S U LT E D I N A F I N D I N G O F N O A I D The Increasing Link Drawn by Regulators Between State Aid & Taxation Systems

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