The European Commission has opened a formal investigation into Luxembourg's tax treatment of  McDonald’s, after assessment showed its Europe Franchising arm has paid virtually no corporate tax in either Luxembourg or the US on its profits since 2009.

In particular, the Commission will assess whether Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg-US double taxation treaty and thereby gave McDonald's an advantage not available to other companies in a comparable factual and legal situation.

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 €250m (£177m) in 2013).

Commissioner Margrethe Vestager, in charge of competition policy, stated: ‘A tax ruling that agrees to McDonald's paying no tax on their European royalties either in Luxembourg or in the US has to be looked at very carefully under EU state aid rules. The purpose of double taxation treaties between countries is to avoid double taxation – not to justify double non-taxation.’

The burger chain’s profits in question 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 claims that 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 then followed by 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.

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 did not recognise 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.

In October 2015 the Commission decided that tax rulings for Fiat in Luxembourg and Starbucks in the Netherlands granted illegal selective tax advantages to the companies in breach of EU state aid rules.

The Commission also has ongoing in-depth state aid investigations into tax rulings concerning Apple in Ireland and Amazon in Luxembourg.