MCD McDonalds Corp

By Emre Peker 

BRUSSELS -- European Union regulators said Wednesday that McDonald's Corp.'s tax arrangement in Luxembourg is legal, dropping an investigation against the U.S. fast-food giant while lauding efforts to close tax loopholes in the probe's wake.

The closure contrasts with a slew of fines and tax bills slapped on other American companies, particularly tech giants. President Trump and his predecessor, Barack Obama, have accused the EU of unfairly punishing U.S. firms with antitrust and tax cases.

European Competition Commissioner Margrethe Vestager said the investigation showed the EU acts objectively.

"The good thing about this outcome is of course that it's a case that proves that we don't see state-aid where there is no state-aid," Ms. Vestager said.

Rather than state-aid, the commission found tax loopholes that had allowed a McDonald's franchising unit to avoid paying taxes on either side of the Atlantic. Ms. Vestager said Luxembourg's treatment of McDonald's defies tax fairness but doesn't amount to a special deal because it is in line with a U.S.-Luxembourg double-taxation treaty. Luxembourg is now changing its domestic tax laws to close loopholes.

Mr. Trump had previously complained that Ms. Vestager "really hates the U.S." and that as the EU's "tax lady" she was going after American companies. In 2015, Mr. Obama said EU probes were driven by commercial interests to help European firms compete with U.S. tech giants. Ms. Vestager and EU officials deny the allegations.

In a sign that the EU would continue aggressively with antitrust investigations, Ms. Vestager confirmed Wednesday that Brussels had initiated a preliminary probe into Amazon.com Inc.'s business practices.

"We are gathering information," she said. "These are very early days. We have no conclusions. We haven't formally opened a case."

Last October, Ms. Vestager slapped the U.S. online-retailing behemoth with a tax bill of more than EUR260 million ($304 million), saying its arrangement with Luxembourg is illegal.

The European Commission, the EU's executive arm and antitrust authority, has repeatedly targeted Luxembourg's tax practices. In 2016, Ms. Vestager ordered the country to recoup EUR23.1 million in back-taxes from Fiat Chrysler Automobiles NV, which prompted Luxembourg to tighten its tax laws.

Luxembourg introduced an amendment over the summer to close a loophole that allows for double non-taxation of companies, as in the McDonald's case.

Under international tax rules, companies and individuals with footprints in multiple jurisdictions are generally taxed in one of them and, where double-taxation treaties exist, other relevant jurisdictions accept that taxes have been paid. Playing off technicalities and loopholes between jurisdictions where a company operates to avoid taxes altogether is generally not permitted.

Ms. Vestager welcomed Luxembourg's shift.

"Over the past few years, we have seen an international determination to deal with the issue of tax avoidance," Ms. Vestager said. "Member states take responsibility themselves to say 'Well, this should not be the way for the future.'"

The decision to drop the case against McDonald's comes on the heels of massive tax fines as the EU cracked down on sweetheart deals in member states including Belgium, Ireland, Luxembourg and the Netherlands. The commission is also investigating a U.K. tax scheme for multinationals and the Dutch treatment of Swedish furniture giant IKEA.

"We welcome the European Commission's decision," McDonald's spokesman Sanjay Misty said in an email.

McDonald's companies paid more than $3 billion in corporate income taxes in the EU from 2013-2017, he said. Mr. Mistry declined to comment on the potential impact of Luxembourg's proposed amendment, which would require McDonald's and similarly situated companies to certify the existence of a taxable entity in another country.

In 2016, the commission slapped Apple Inc. with a bill for more than EUR13 billion in Irish back-taxes, and last year referred Ireland to the EU's top court for failing to recover illegal benefits from Apple.

Ireland's Finance Minister Paschal Donohoe said Tuesday that Dublin had fully recovered EUR14.3 billion in alleged state-aid, plus interest, from Apple. The money has been deposited into an escrow account pending Ireland's appeal of the EU tax decision.

Since October 2015, Brussels has also targeted Starbucks Corp.'s tax deal with the Netherlands, ordered Belgium to recoup about EUR900 million from 35 mostly European companies and slapped French utility Engie SA with a EUR120 million bill for undue tax benefits granted by Luxembourg.

"These are important steps forward to tackling multinationals' tax avoidance and to meeting our ultimate goal of ensuring that all companies, big or small, pay their fair share of tax in the future," Ms. Vestager said.

Write to Emre Peker at emre.peker@wsj.com

(END) Dow Jones Newswires

September 19, 2018 10:21 ET (14:21 GMT)

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