Extended Background

Global retail and franchising models like McDonald’s hinge on the payment of royalties for brand, know-how, and business support. France, a key market, became ground zero for challenges to the cross-border payment of royalties to group entities in favored tax jurisdictions—in this case, Luxembourg.

Detailed Arguments

Taxpayer

• Justified the royalty increase by referencing the growing value of McDonald’s global brand and IP.

• Cited internal benchmarking and asserted the fees reflected genuine business support, rights, and services.

Tax Authority

• Claimed the spike in royalties was untethered to additional services or value, serving only to shift profits and erode the French tax base.

• Argued for functional analysis and rejected reliance on contractual or nominal agreements alone.

Authorities and Court Reasoning

• Investigators confirmed a lack of substantive changes in services rendered, supporting the profit-shifting position.

• Grounded their judgment in economic substance, not form, demanding direct business justification for elevated intercompany charges.

Procedural Journey

• Triggered largest tax and criminal royalty-based settlement in French history: over €1.25B (€609M tax plus a €508M criminal fine).

• Dealt with both tax recovery and criminal penalties, handled through a French judiciary-approved deferred prosecution agreement.

Implications Beyond the Case

• Stark warning to all retail/franchise MNEs: increases in royalties demand robust evidence of value and service; rates cannot rise on paper alone.

• Cemented France’s aggressive audit and prosecution stance, emboldening further actions against perceived IP and royalty abuses.

• Lesson: Arm’s-length benchmarking is vital, but actual business substance must match contractual claims.

Original Case Link:

CJIP (French, PDF)