McDonald's under EU investigation over Luxembourg tax deals

* Inquiry into European franchise royalties

* Commission says no tax on royalties in Luxembourg or U.S (Other OTC: UBGXF - news) .

* McDonald's says pays taxes in EU, including franchises

* Luxembourg says no special treatment of McDonald's (Adds Vestager, Commission spokesman comments, details)

By Foo Yun Chee

BRUSSELS, Dec 3 (Reuters) - EU regulators are to investigate tax deals between McDonald's and Luxembourg which enabled the U.S. chain to escape paying taxes on European franchise royalties from 2009, a move which could lead to hefty back taxes for the company.

Confirming what sources with knowledge of the matter previously told Reuters, the bloc's antitrust regulators said on Thursday they would launch the probe into arrangements which could be defined as illegal state aid.

The investigation comes two months after the European Commission ordered Luxembourg to recover up to 30 million euros ($32 million) from Fiat Chrysler Automobiles, and the Dutch to do the same for Starbucks (Swiss: SBUX.SW - news) , because of tax deals seen as unlawful aid.

The EU competition enforcer said McDonald's had not paid any corporate taxes in Luxembourg or the United States on royalties paid by franchisees in Europe and Russia since 2009, as a result of two tax rulings by the Luxembourg authorities.

"We decided to open an investigation into two Luxembourg tax rulings to McDonald's because we have the concern that those two rulings have resulted in ... double non-taxation, and that may be state aid," Competition Commissioner Margrethe Vestager told Reuters.

"This is not a question of the Luxembourg tax regime or their rules, this is a question of how rules are actually applied," Vestager said.

Luxembourg's finance ministry said the country had granted no special tax treatment or selective advantage to McDonald's and would cooperate fully with the investigation.

McDonald's said it complied with all tax rules in Europe and that its companies had paid more than 2.1 billion euros in corporate taxes in the EU from 2010 to 2014, with an average tax rate of almost 27 percent.

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It (Other OTC: ITGL - news) also paid social, real estate and other taxes, while its independent franchises, operators of about 75 percent of its outlets, paid corporate and other taxes. "We are confident that the inquiry will be resolved favourably," it said.

In the United States, senior Treasury official Robert Stack told a Senate committee on Tuesday that the EU seemed to be singling out U.S. companies.

"U.S. taxpayers would wind up footing the bill for these state aid settlements when the affected U.S. taxpayers either repatriate amounts voluntarily or Congress requires a deemed repatriation as part of tax reform," Stack said.

The Commission said McDonald's Europe Franchising was exempted from paying taxes on this income in Luxembourg on the grounds that profits were subject to tax in the United States. But this was not the case when the ruling was granted in 2009.

In a second ruling, Luxembourg had agreed McDonald's did not have to prove this income was subject to U.S. tax, the Commission said, adding Luxembourg had exempted the profits from tax despite knowing they were not subject to tax in the United States.

The case presents yet another headache for Commission President Jean-Claude Juncker, as Luxembourg developed its favourable tax system during the near quarter-century that he served as the Grand Duchy's finance minister or prime minister.

Junker has said he was not involved in any tax deals with individual companies but has also said he would take political responsibility for what happened in Luxembourg during his mandate. He has also said Vestager has the freedom to pursue any investigations she wished.

($1 = 0.9471 euros) (Additional reporting by Philip Blenkinsop and Mirande Alexander-Webber; Editing by Mark Potter and David Holmes)