(CN) - The European Commission said Thursday it has opened a formal investigation into whether Luxembourg offers McDonald's an illegal tax advantage that other restaurant chains don't get.
Specifically, the commission said it is looking into whether Luxembourgish tax officials ignored the tiny nation's own tax rules and the Luxembourg-U.S. Double Taxation Treaty by allowing McDonald's to pay no tax in the EU when it also hasn't paid taxes in the United States since 2009.
"A tax ruling that agrees to McDonald's paying no tax on their European royalties either in Luxembourg or in the U.S. has to be looked at very carefully under EU state aid rules," competition commissioner Margrethe Vestager said. "The purpose of double-taxation treaties between countries is to avoid double taxation - not to justify double non-taxation."
Based on two tax rulings by Luxembourgish tax officials in 2009, McDonald's Europe Franchising has paid no corporate tax in Luxembourg despite recording large profits - over $273 million in 2013 alone, the commission said.
The commission said it began poking into Luxembourg's tax treatment of McDonald's in 2014, after press reports of the cushy deal surfaced. An initial probe revealed that a first tax ruling in 2009 held that McDonald's didn't need to pay corporate taxes in the EU because it would pay taxes on EU profits in the United States.
However, the commission also found that McDonald's Europe has no taxable presence in the United States under U.S. law - and hasn't paid taxes in either place, the commission believes.
Tax authorities in Luxembourg compounded the problem with a second tax ruling in 2009 - requested by McDonald's - that said McDonald's no longer had to prove it pays taxes in the United States on EU profits.
"With the second ruling, Luxembourg authorities accepted to exempt almost all of McDonald's Europe Franchising's income from taxation in Luxembourg," the commission said.
The commission's opening of a formal investigation gives Luxembourg, McDonald's, interested third parties and EU member states an opportunity to weigh in on the allegations.
McDonald's operates over 7,800 restaurants in Europe. It is also the latest in a line of U.S.-based companies that have been taken to task by the commission for cozy tax arrangements in the EU.
In October, the commission ordered the Netherlands and Luxembourg to claw back up to $67 million in unpaid taxes from Starbucks and Fiat, respectively, finding that tax advantages offered to the companies broke EU law.
The commission has similar pending investigations into Apple in Ireland , Amazon in Luxembourg and a big business-friendly tax scheme in Belgium .
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