Tax Advisers - Deloitte

Luxembourg
Luxembourg on the move
René Beltjens
PricewaterhouseCoopers
Luxembourg
Ever since 1929 when it introduced a participation
exemption regime before the term was even coined,
Luxembourg has always demonstrated that international
structures were right up its alley. Over time, Luxembourg
has become a key player in investment funds and holding,
financial or intellectual property structures.
For instance, Luxembourg is the second-largest investment
fund centre in the world after the USA based on the number
of assets under management. The country’s stock exchange
has branched out heavily in order to attract investors.
Recently, it developed a new market geared mainly towards
less regulated investment funds (Mifid). The latter market is
now booming and is increasingly successful
Luxembourg’s location at the heart of Europe places the country as a gateway to the
vast single market of the European Union. Through regulations, directives and other
instruments, it levels the playing field for business exchanges and transfers across the
soon to be 27 member states. Luxembourg is the hub of an economic region that has
over five million German, French, Belgian and Luxembourg residents living close by.
Highly skilled professionals from these four countries are the backbone of the
country’s development.
Luxembourg relies on a successful participation exemption regime, the absence in
most cases of withholding tax on interest and royalties and an extensive double tax
treaty network to secure a neutral tax environment. But there is more: Luxembourg’s
stable legislative framework facilitates the implementation of long-term structures and
the use of complex instruments such as hybrids. In other words, major international
groups can look to Luxembourg to optimize their consolidated tax position.
Therefore, many international groups have located in Luxembourg, where they have
holding companies or financial centres, which they use as an internal bank. A number
of international groups have also chosen to locate in Luxembourg their quoted
company. Interestingly, 56% of issuers are European, 32% are American and a vast
majority of the remaining issuers are located in Asia.
Changes in certain techniques such as the migration of companies from one country
to the next, which has just been made easier by the introduction of the European
company (Societas Europeae), or the more liberal rules for paying interim dividends are an
added incentive for structures looking to seize the opportunities offered by the
Luxembourg tax and regulatory framework. In a world where most of the groups have
shareholders located in many different countries, with investments all over the world and
a top management geographically spread, a neutral headquarters becomes more relevant.
If it is not the case, it leaves open the opportunity for a third party, such as private equity
players, to make a favourable arbitrage.
Further effort is still required in a number of areas. Luxembourg must abolish the old
fashioned capital duty and should consider getting rid of net wealth tax on companies,
amending withholding tax on dividends (the reduction of the non-treaty rate from 20%
to 15% goes in the right direction) or decreasing direct tax rates. Luxembourg legislation
has always been quick to adapt and has kept up with the changes in international business.
Now, in a fast moving world, and with several changes made in neighbouring countries,
is the time to prove it once again. In this respect the announcement by the Luxembourg
government that it will consider a number of positive tax changes in 2007 is welcome.
In a different area, the government has introduced a bill relating to a new type of
investment company reserved for natural persons. This vehicle will efficiently manage the
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