Skechers US Inc. had formed a related party entity, SKII, in 1999 and transferred IP and $18 million in cash to the entity in exchange for 100 percent of the stock. Skechers then licensed the IP back from SKII and claimed a franchise tax deduction for the royalties and also deductions for management fees and interest expenses on the unpaid balance of royalty fees. The Wisconsin tax authorities held that these were sham transaction lacking business purpose and disallowed the deductions. Judgement of the Tax Appeals Commission The Tax Appeals Commission ruled in favor of the tax authorities. Excerpt “(…) The burden of proof is on Petitioner to prove that the Department’s assessment is incorrect by clear and satisfactory evidence. In this case, Petitioner must prove that it had a valid nontax business purpose for entering into the licensing transaction that generated the royalty deductions claimed on its Wisconsin tax returns and that the licensing transaction had economic substance. Both are required. Petitioner did not present persuasive evidence or testimony of either requirement being met. Therefore, the Department’s assessments are upheld. CONCLUSIONS OF LAW Petitioner did not have a valid nontax business purpose for the creation of SKII. Petitioner did not have a valid nontax business purpose for entering into the licensing transactions between Skechers and SKII that generated the royalty deductions claimed on its Wisconsin tax returns. Petitioner’s licensing transactions between Skechers and SKII did not have economic substance. (…)” ...

Ikea France (SNC MIF) had concluded a franchise agreement with Inter Ikea Systems BV (IIS BV) in the Netherlands by virtue of which it benefited, in particular, as a franchisee, from the right to operate the ‘Ikea Retail System’ (the Ikea concept), the ‘Ikea Food System’ (food sales) and the ‘Ikea Proprietary Rights’ (the Ikea trade mark) in its shops. In return, Ikea France paid Inter Ikea Systems BV a franchise fee equal to 3% of the amount of net sales made in France, which amounted to EUR 68,276,633 and EUR 72,415,329 for FY 2010 and 2011. These royalties were subject to the withholding tax provided for in the provisions of Article 182 B of the French General Tax Code, but under the terms of Article 12 of the Convention between France and the Netherlands: “1. Royalties arising in one of the States and paid to a resident of the other State shall be taxable only in that other State”, the term “royalties” meaning, according to point 2. of this Article 12, “remuneration of any kind paid for the use of, or the right to use, (…) a trade mark (…)”. As the franchise fees paid by Ikea France to Inter Ikea Systems BV were taxable in the Netherlands, Ikea France was not obligated to pay withholding taxes provided for by the provisions of Article 182 B of the General Tax Code. However, the tax authorities held that the arrangement set up by the IKEA group constituted abuse of law and furthermore that Inter Ikea Systems BV was not the actual beneficiary of the franchise fees paid by Ikea France. On that basis, an assessment for the fiscal years 2010 and 2011 was issued according to which Ikea France was to pay additional withholding taxes and late payment interest in an amount of EUR 95 mill. The court of first instance decided in favor of Ikea and the tax authorities then filed an appeal with the CAA of Versailles. Judgement of the CAA of Versailles The Court of appeal upheld the decision of the court of first instance and decided in favor of IKEA. Excerpt “It follows from the foregoing that the Minister, who does not establish that the franchise agreement concluded between SNC MIF and the company IIS BV corresponds to an artificial arrangement with the sole aim of evading the withholding tax, by seeking the benefit of the literal application of the provisions of the Franco-Dutch tax convention, is not entitled to maintain that the administration could implement the procedure for abuse of tax law provided for in Article L. 64 of the tax procedure book and subject to the withholding tax provided for in Article 182 B of the general tax code the royalties paid by SNC MIF by considering them as having directly benefited the Interogo foundation. On the inapplicability alleged by the Minister of the stipulations of Article 12 of the tax convention without any reference to an abusive arrangement: If the Minister maintains that, independently of the abuse of rights procedure, the provisions of Article 12 of the tax treaty are not applicable, it does not follow from the investigation, for the reasons set out above, that IIS BV is not the actual beneficiary of the 70% franchise fees paid by SAS MIF. It follows from all of the above that the Minister is not entitled to argue that it was wrongly that, by the contested judgment, the Versailles Administrative Court granted SAS MIF the restitution of an amount of EUR 95,912,185 corresponding to the withholding taxes payable by it, in duties, increases and late payment interest, in respect of the financial years ended in 2010 and 2011. Consequently, without there being any need to examine its subsidiary conclusions regarding increases, its request must be rejected.” Click here for English translation Click here for other translation ...

Z-Group had been subject to a joint transfer pricing audit by the tax administrations of Belgium, France, Italy, Spain, Austria and Germany in order to examine the appropriateness of the franchise fee charged between the group companies. Z Group filed a complaint where it disputed the German tax administration’s entitlement to cooperate in a coordinated cross-border external tax audit and, in this context, to exchange information with the other tax administrations. Judgement of the Tax Court The Court dismissed the complaint filed by Z Group. Excerpt “118 The defendant does not violate the principle of subsidiarity by agreeing on or conducting a coordinated examination as planned in the present case with Belgium, France, Italy, Spain and Austria. With reference to the findings of the domestic tax audit, the defendant understandably points out that the audit serves to further clarify the facts, which is not possible in this way in Germany, in order to examine the appropriateness of the franchise fee charged between the group companies. Against this background, a coordinated tax audit between Germany and the other states appears to be a suitable and necessary possibility to clarify the facts by way of administrative assistance with regard to the franchise model and the prices applied within the group of companies of the applicants and to assess the possibility of an arm’s length comparison of the remunerations paid. 119 Furthermore, the requirement to exhaust domestic investigation possibilities may be limited in the event of a simultaneous tax audit, in particular since it is also part of the tasks of a tax audit to verify the submission of a taxpayer, to examine factual assertions and to request or inspect documents in this regard in order to carry out a corresponding verification (cf. FG Köln, decisions of 23 May 2017, 2 V 2498/16, EFG 2017, 1322; of 20 October 2017, 2 V 1055/17, EFG 2018, 351). 120 The prerequisites for an external audit in accordance with the provisions of the Fiscal Code are also and precisely in line with this. Pursuant to section 193(1) AO, an external audit is permissible in the case of taxpayers who maintain a commercial or agricultural and forestry business, who are self-employed or who are taxpayers within the meaning of section 147a AO. In the case of taxpayers other than those referred to in section 193(1) AO, an external audit is permissible under the conditions specified in section 193(2) AO. The external audit serves to determine the tax circumstances of a taxpayer (section 194(1) AO). The tax circumstances of other persons may be audited insofar as the taxpayer was or is obliged to pay taxes or to withhold and pay taxes for the account of these persons (section 194, paragraph 1, sentence 4, first half-sentence AO). 121 As follows from the statutory wording in § 193(1) AO, an external audit is permissible, inter alia, in the case of taxpayers who maintain a commercial business, without any further preconditions (cf. BFH rulings of 7 February 2002 IV R 9/01, BStBl. II 2002, 269; of 2 October 1991 X R 89/89, BStBl. II 1992, 220; ruling of 27 July 2001 XI B 133/00, BFH/NV 2001, 1534). For the order of a routine audit of taxpayers covered by section 193(1) AO, it is generally sufficient if the legal basis, i.e. the legal provision governing the audit order, is stated as the reason (cf. BFH ruling of 10 February 1983 IV R 104/79, BStBl. II 1983, 286). The regulation in § 193 (1) AO is based on the idea that the tax circumstances of the named group of persons are in principle subject to examination. In particular, there is no need for a special reason for an audit. This means, above all, that the taxpayer’s tax conduct need not have given reason for suspicion (cf. Schallmoser in Hübschmann/Hepp/Spitaler, § 193 AO marginal no. 42). 122 With regard to the ordering of an external audit, however, limits arise according to the meaning and purpose of the provision insofar as it is at the discretion of the tax authority whether and with whom an external audit is actually carried out. Thus, an external audit is inadmissible if the audit findings cannot be used for tax purposes from any conceivable point of view, for example because the tax assessment period has already expired (cf. BFH ruling of 10 April 2003 IV R 30/01, BFH/NV 2003, 1234) or if the lack of possibilities for use is undoubtedly established for other reasons. Likewise inadmissible are external audits which are investigations “out of the blue”, i.e. if there are no indications of a possible tax liability (cf. Intemann in Pahlke/König, § 193 AO marginal no. 35; on this also BFH judgements of 26 July 2007 VI R 68/04, BStBl. II 2009, 338; of 17 November 1992 VIII R 25/89, BStBl. II 1993, 146 in each case on the justification of audit orders under § 193, paragraph 2, no. 2 AO). On the other hand, an external audit is not already unlawful because the tax claims to be audited may be statute-barred (cf. BFH decision of 3 March 2006 IV B 39/04, BFH/NV 2006, 1250; Intemann in Pahlke/König, § 193 AO marginal no. 26). 123 According to these standards, an external audit of the applicants as well as the sister companies of the Z group resident in the other states involved would in principle be permissible without any further preconditions, since these companies maintain a commercial enterprise. 124 e) Furthermore, there are no legal reservations with regard to the fact that the defendant has so far – due to the present application for a temporary injunction – participated purely “passively” in the coordinated audit. There are no indications that the defendant has already participated in the exchange of information and disclosed information available to him or the German tax authorities. The mere passive receipt of information does not constitute a violation of the protection of tax secrecy within the meaning of § 30 AO. Tax secrecy can only be ...

The European Commission found that Luxembourg did not grant illegal State aid to McDonald’s as a consequence of the exemption of income attributed to a US branch. “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.” McDonald’s Corporation is a Delaware public limited company with its principal office located in Oak Brook, Illinois, USA. It operates and franchises McDonald’s restaurants, which serve food and beverages. Of the 37,241 restaurants in over 100 countries approximately 34,108 are franchised and 3,133 are operated by the company. McDonald’s Corporation is therefore primarily a franchisor, with over 80% of McDonald’s restaurants owned and operated by independent franchisees. In 2017, McDonald’s Corporation had around 400 subsidiaries and 235,000 employees and recorded total revenues of USD 22.8 billion, of which USD 12.7 billion was from company-operated sales and USD 10.1 billion from franchised revenues. A Luxembourg group company made a buy-in payment to enter a cost sharing arrangement with a US related company, and thereby acquired beneficial ownership of certain existing and future franchise rights. These rights were allocated to the US branch of the Luxembourg company. The royalty fees due by franchisees would first be paid to a Swiss branch of the Luxembourg company, which provided services associated with the franchise rights. The royalty fees would then be transferred to the US branch, deduction being made of a service fee to the benefit of the Swiss branch consisting of cost coverage, plus a profit mark-up. Although royalty fees was booked in the US no tax was levied. This was due to the fact that the activities carried out in the US did not constitute a trade or business. The income allocated to the US branch was also not taxed in Luxembourg. According to the US-LUX tax treaty the residence State was prevented from taxing as (1) the US activity would constitute a permanent establishment under the Luxembourg interpretation of the treaty and (2) the existence of such a permanent establishment would oblige Luxembourg to apply the article on the elimination of double taxation. In a tax ruling Luxembourg found that the income would be exempt although not taxed in the US. The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the contested tax rulings granted State aid to McDonald’s 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. 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 McDonald’s Europe. Following the investigation, the Commission concluded that Luxembourg did not give a selective advantage to McDonald’s by exempting the income allocated to the US branch. The conclusions of the European Commission on the issue of state aid does not relate to the arm’s length nature of the transfer pricing setup used by McDonald’s in relation to the European marked ...

Following an investigation into Luxembourg’s tax treatment of McDonald’s under EU state aid regulations since 2015, the EU Commission concluded that the tax rulings granted by Luxembourg to McDonald’s in 2009 did not provide illegal state aid. According to the Commission, the law allowing McDonald’s to escape taxation on franchise income in Luxembourg – and the US – did not amount to an illegal selective advantage under EU law. The double non-taxation of McDonald’s franchise income was due to a mismatch between the laws of the United States and Luxembourg. See the 2015 announcement of formal opening of the investigations into McDonald’s tax agreements with Luxembourg from the EU Commission ...

The European Commission has opened an in-depth investigation into the Netherlands’ tax treatment of Inter IKEA, one of the two groups operating the IKEA business. The Commission has concerns that two Dutch tax rulings may have allowed Inter IKEA to pay less tax and given them an unfair advantage over other companies, in breach of EU State aid rules. Commissioner Margrethe Vestager in charge of competition policy said: “All companies, big or small, multinational or not, should pay their fair share of tax. Member States cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherlands’ tax treatment of Inter IKEA.” In the early 1980s, the IKEA business model changed into a franchising model. Since then, it has been the Inter IKEA group that operates the franchise business of IKEA, using the “IKEA franchise concept”. What this means more concretely is that Inter IKEA does not own the IKEA shops. All IKEA shops worldwide pay a franchise fee of 3% of their turnover to Inter IKEA Systems, a subsidiary of Inter IKEA group in the Netherlands. In return, the IKEA shops are entitled to use inter alia the IKEA trademark, and receive know-how to operate andexploit the IKEA franchise concept. Thus, Inter IKEA Systems in the Netherlands records all revenue from IKEA franchise fees worldwide collected from the IKEA shops. The Commission’s investigation concerns the tax treatment of Inter IKEA Systems in the Netherlands since 2006. Our preliminary inquiries indicate that two tax rulings, granted by the Dutch tax authorities in 2006 and 2011, have significantly reduced Inter IKEA Systems’ taxable profits in the Netherlands. The Commission has concerns that the two tax rulings may have given Inter IKEA Systems an unfair advantage compared to other companies subject to the same national taxation rules in the Netherlands. This would breach EU State aid rules. Between 2006-2011 (the 2006 tax ruling) The 2006 tax ruling endorsed a method to calculate an annual licence fee to be paid by Inter IKEA Systems in the Netherlands to another company of the Inter IKEA group called I.I. Holding, based in Luxembourg. At that time, I.I. Holding held certain intellectual property rights required for the IKEA franchise concept. These were licensed exclusively to Inter IKEA Systems. Inter IKEA Systems used these intellectual property rights to create and develop the IKEA franchise concept. In other words, it developed, enhanced and maintained the intellectual property rights. Inter IKEA Systems also managed the franchise contracts and collected the franchise fees from IKEA shops worldwide. The annual licence fee paid by Inter IKEA Systems to I.I. Holding, as endorsed by the 2006 tax ruling, made up a significant part of Inter IKEA Systems’ revenue. As a result, a significant part of Inter IKEA Systems’ franchise profits were shifted from Inter IKEA Systems to I.I. Holding in Luxembourg, where they remained untaxed. This is because I.I. Holding was part of a special tax scheme, as a result of which it was exempt from corporate taxation in Luxembourg. After 2011 (the 2011 tax ruling) In July 2006, the Commission concluded that the Luxembourg special tax scheme was illegal under EU State aid rules, and required the scheme to be fully repealed by 31 December 2010. No illegal aid needed to be recovered from I.I. Holding because the scheme was granted under a Luxembourg law from 1929, predating the EC Treaty. This is a historical element of the case and not part of the investigation opened today. However, as a result of the Commission decision I.I. Holding would have had to start paying corporate taxes in Luxembourg from 2011. In 2011, Inter IKEA changed the way it was structured. As a result, the 2006 tax ruling was no longer applicable: Inter IKEA Systems bought the intellectual property rights formerly held by I.I. Holding. To finance this acquisition, Inter IKEA Systems received an intercompany loan from its parent company in Liechtenstein. The Dutch authorities then issued a second tax ruling in 2011, which endorsed the price paid by Inter IKEA Systems for the acquisition of the intellectual property. It also endorsed the interest to be paid under the intercompany loan to the parent company in Liechtenstein, and the deduction of these interest payments from Inter IKEA Systems’ taxable profits in the Netherlands. As a result of the interest payments, a significant part of Inter IKEA Systems’ franchise profits after 2011 was shifted to its parent in Liechtenstein. The Commission’s investigation The Commission considers at this stage that the treatment endorsed in the two tax rulings may have resulted in tax benefits in favour of Inter IKEA Systems, which are not available to other companies subject to the same national taxation rules in the Netherlands. The role of EU State aid control is to ensure that Member States do not give selected companies a better tax treatment than others, via tax rulings or otherwise. More specifically, transactions between companies in a corporate group must be priced in a way that reflects economic reality. This means that the payments between two companies in the same group should be in line with arrangements that take place under comparable conditions between independent companies (so-called “arm’s length principle”). The Commission will now investigate Inter IKEA Systems’ tax treatment under both tax rulings: The Commission will assess whether the annual licence fee paid by Inter IKEA Systems to I.I. Holding, endorsed in the 2006 tax ruling, reflects economic reality. In particular, it will assess if the level of the annual licence fee reflects Inter IKEA Systems’ contribution to the franchise business; The Commission will also assess whether the price Inter IKEA Systems agreed for the acquisition of the intellectual property rights and consequently the interest paid for the intercompany loan, endorsed in the 2011 tax ruling, reflect economic reality. In particular, the Commission will assess if the acquisition price adequately reflects the contribution made by Inter IKEA Systems to the value of the franchise business, and the ...

The Spanish Tax administration made an income adjustment of Citresa (a Spanish subsidiary of the Schweeps Group) Corporate Income Tax for FY 2003, 2004, 2005 and 2006, resulting in a tax liability of €38.6 millon. Citresa entered into a franchise agreement and a contract manufacturing agreement with Schweppes International Limited (a related party resident in the Netherlands). The transactions between the related parties were not found to be in accordance with the arm’s length principle. In the parent company, CITRESA, the taxable income declared for the years 2003 to 2005 was increased as a result of an adjustment of market prices relating to the supply of certain fruit and other components by Citresa to Schweppes International Limited. In the subsidiary, SCHWEPPES, S.A. (SSA), the taxable income declared for the years 2003 to 2006 was increased as a result of adjustment of market prices relating to the supply of concentrates and extracts by the entity Schweppes International Limited, resident in Holland, to SSA. The taxpayer had used the CUP method to verify the arm’s length nature of the transaction while the Spanish Tax administration – due to lack of comparable transactions – found it more appropriate to use the transactional net margin method (TNMM). Prior to 1 December 2006, the Spanish Corporate Income Tax Act (CIT) established three methods of pricing related transactions (the “Comparable Uncontrolled Price Method”, the “Cost Plus Method” and the “Resale Price Method”) and if none were applicable it established the application of the “Transactional Profit Split Method”. Thus, the “Transactional Net Margin Method” was not included at the time the market value of related transactions was established. However, as the Tax Treaty between Spain and the Netherlands was applicable, the Spanish Tax Authorities considered that the OECD Transfer Pricing Guidelines could be directly applicable. Consequently, as the “Transactional Net Margin Method” was envisaged in the above-mentioned Guidelines, the Spanish Tax Authorities understood that this method could be used as a valid pricing method. The case ended up in Court where Citresa argued that the assessment was in breach of EU rules on freedom of establishment and that the TNM method had been applied by the authorities without any legal basis in Spain for the years in question. Judgement of the Court In regards to the claimed violation of the principle of freedom of establishment cf. TFEU article 49, the Court stated: “….the mere purposes of argument, that there can be no doubt as to the conformity with European Union Law of the regime of related-party transactions in Spain, in the terms in which this infringement is proposed to us, which is what is strictly speaking being postulated in cassation for the first time, it being sufficient to support this assertion to record some elementary considerations, such as that the censure is projected indiscriminately on the whole of the law (that is to say, on the legal regime of related-party transactions), which is to say, on the legal regime of related-party transactions, on the legal regime of related-party transactions regulated by Article 16 of Law 43/1995, of 27 December 1995, on Corporate Income Tax, and then Article 16 of Royal Legislative Decree 4/2004, of 5 March 2004, which approves the revised text of the Law on Corporate Income Tax – TRLIS), while, at the same time and in open contradiction, it advocates the application of the precept to resolve the case, thus starting from its compliance with European Union Law.” In regards to application of the transactional net margin method, the Court stated: “…tax years cover the period from January 2003 to February 2006. Article 16.3 of Law 43/1995, in the wording applicable to the case, and the same provision of the TRLIS, in its original version, established the following: “In order to determine the normal market value, the tax authorities shall apply the following methods: Market price of the good or service in question or of others of similar characteristics, making, in this case, the necessary corrections to obtain equivalence, as well as to consider the particularities of the transaction. The following shall be applicable on a supplementary basis: The sale price of goods and services calculated by increasing the acquisition value or production cost of the goods and services by the margin normally obtained by the taxable person in comparable transactions entered into with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions entered into with independent persons or entities. Resale price of goods and services established by the purchaser, reduced by the margin normally obtained by the aforementioned purchaser in comparable transactions arranged with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions arranged with independent persons or entities, considering, where applicable, the costs incurred by the aforementioned purchaser in order to transform the aforementioned goods and services. Where none of the above methods are applicable, the price derived from the distribution of the joint result of the transaction in question shall be applied, taking into account the risks assumed, the assets involved and the functions performed by the related parties”. This hierarchical list exhausts the possible methods available to the administration for establishing the market value of the transactions to which it has been applied. It consists of four methods: one of them, which we can call direct or primary, that of the market price of the good or service in question (art. 16.3.a) LIS); two others that the law itself declares to be supplementary, that of the increase in acquisition value and that of the resale price (art. 16.3.b) of the legal text itself); and finally, as a residual or supplementary second degree method, that of the distribution of the joint result of the operation in question (art. 16.3.c) LIS). These obviously do not include the valuation method used by the tax inspectorate in this case, that of the net margin of all transactions, introduced ex novo by Law 36/2006, of 29 November, on measures for the ...

The European Commission has formally opened an investigation into Luxembourg’s tax treatment of McDonald’s. Tax ruling granted by Luxembourg may have granted McDonald’s an advantageous tax treatment in breach of EU State aid rules On the basis of two tax rulings given by the Luxembourg authorities in 2009, McDonald’s Europe Franchising has paid no corporate tax in Luxembourg since then despite recording large profits (more than €250 million in 2013). These profits are derived from royalties paid by franchisees operating restaurants in Europe and Russia for the right to use the McDonald’s brand and associated services. The company’s head office in Luxembourg is designated as responsible for the company’s strategic decision-making, but the company also has two branches, a Swiss branch, which has a limited activity related to the franchising rights, and a US branch, which does not have any real activities. The royalties received by the company are transferred internally to the US branch of the company. The Commission requested information on the tax rulings in summer 2014 following press allegations of advantageous tax treatment of McDonald’s in Luxembourg. Subsequently, trade unions presented additional information to the Commission. The Commission’s assessment thus far has shown that in particular due to the second tax ruling granted to the company McDonald’s Europe Franchising has virtually not paid any corporate tax in Luxembourg nor in the US on its profits since 2009. In particular, this was made possible because: A first tax ruling given by the Luxembourg authorities in March 2009 confirmed that McDonald’s Europe Franchising was not due to pay corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the US. This was justified by reference to the Luxembourg-US Double Taxation Treaty. Under the ruling, McDonald’s was required to submit proof every year that the royalties transferred to the US via Switzerland were declared and subject to taxation in the US and Switzerland. However, contrary to the assumption of the Luxembourg tax authorities when they granted the first ruling, the profits were not to be subjected to tax in the US. While under the proposed reading of Luxembourg law, McDonald’s Europe Franchising had a taxable presence in the US, it did not have any taxable presence in the US under US law. Therefore McDonald’s could not provide any proof that the profits were subject to tax in the US, as required by the first ruling (see further details below). McDonald’s clarified this in a submission requesting a second ruling, insisting that Luxembourg should nevertheless exempt the profits not taxed in the US from taxation in Luxembourg. The Luxembourg authorities then issued a second tax ruling in September 2009 according to which McDonald’s no longer required to prove that the income was subject to taxation in the US. This ruling confirmed that the income of McDonald’s Europe Franchising was not subject to tax in Luxembourg even if it was confirmed not to be subject to tax in the US either. With the second ruling, Luxembourg authorities accepted to exempt almost all of McDonald’s Europe Franchising’s income from taxation in Luxembourg. In their discussions with the Luxembourg authorities, McDonald’s argued that the US branch of McDonald’s Europe Franchising constituted a “permanent establishment” under Luxembourg law, because it had sufficient activities to constitute a real US presence. Simultaneously, McDonald’s argued that its US-based branch was not a “permanent establishment” under US law because, from the perspective of the US tax authorities, its US branch did not undertake sufficient business or trade in the US. As a result, the Luxembourg authorities recognised the McDonald’s Europe Franchising’s US branch as the place where most of their profits should be taxed, whilst US tax authorities didnotrecognise it. The Luxembourg authorities therefore exempted the profits from taxation in Luxembourg, despite knowing that they in fact were not subject to tax in the US ...