Luxembourg: Country and Foreign Investment
Relationship with the EU
Luxembourg is of course a founding member of the EU, and has high rates of personal and corporate taxation, so it cannot be called 'offshore' as such. However, the Luxembourg holding company form, created in 1929, and the more recent investment fund form, traditionally both exempt from all taxes, made the country as attractive as many out and out 'offshore' jurisdictions. In 2007, the EU forced Luxembourg to replace the 1929 regime.
The EU Savings Tax Directive also threatened substantial damage to Luxembourg's attractiveness to investors.
Towards the end of 2002, Luxembourg, together with Austria, was threatening to veto the Union's exchange of information plans under the Savings Tax Directive because competitor Switzerland's compromise proposals fell short of being 'equivalent measures'. However, Luxembourg eventually signed up to the compromise reached in January, 2003, and agreed to impose a withholding tax on non-residents' investment returns, like Switzerland, initially at 15% rising to 20% in 2008, and 35% in 2011, it has applied since 1st July 2005. Luxembourg is set to implement automatic exchange of information from 1 January 2015, thereby removing the option of a withholding tax being deducted from interest payments.
In May 2008, Switzerland and Luxembourg announced that while they supported the European Union's efforts to ensure that investment income is properly taxed under the Savings Tax Directive, they would not be persuaded by Brussels to adopt exchange of information with other member states for tax purposes.
This was the message relayed at the time by Swiss Finance Minister Hans Rudolf Merz following discussions on the issue of tax and banking secrecy with Luxembourg Prime Minister Jean-Claude Juncker, in which he stressed that a paying agent tax, as opposed to automatic exchange of information, was the only means to accomplish the EU's goal of taxing capital yields.
"Switzerland will not deviate from this stance," the Swiss Federal Department of Finance confirmed after Merz's meeting with Juncker in Luxembourg, going on to reveal that his stance on the matter was shared by the authorities in Luxembourg.
In December 2008, the European Commission asked Luxembourg to amend legislation which it argued incorrectly transposed certain provisions of the savings tax directive.
The STD seeks to ensure that paying agents (banks, financial institutions etc) either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received, and according to the Commission, Luxembourg cannot provide an exemption from withholding tax in situations other than those expressly provided by Article 13 of the directive.
This is the so-called "voluntary disclosure" procedure which allows the beneficial owner expressly to authorise the paying agent to report information to tax authorities and the certificate procedure which ensures that withholding tax is not levied when the beneficial owner presents to his paying agent a certificate drawn up by his member state of residence for tax purposes.
However, Luxembourg also gives an exemption from withholding tax to interest payments made to beneficial owners who benefit from "non-domiciled resident" status in their country of residence. This status is granted by some member states to residents who are generally exempt from income tax in their state of residence or provided the interest payments, in the absence of a transfer to the state of residence, are not subject to tax in that state.
The EC stated that:
"The Commission is of the opinion that the paying agent has the obligation to establish the residence of the beneficial owner on the basis of minimum standards, as provided by article 3(3) of the directive. Therefore, if the beneficial owner is a resident of another member state in accordance with these standards, the member state of the paying agent must ensure that the latter applies the Directive and, in the case of Luxembourg, that the paying agent levies a withholding tax on interest payments to such a beneficial owner."
"Consequently, the Commission considers that Luxembourg's legislation, in its current state, is not compatible with articles 2, 3, 10 and 11 of the directive and will have to take the necessary steps to amend their legislation."
Many EU institutions are based in Luxembourg, not least the Commission itself, the Court of Justice, the Secretariat of the Parliament, the EIB, and the European Court of Auditors.