Luxembourg: Country and Foreign Investment Regime

Luxembourg Population, Language and Culture

The population of Luxembourg is just over 500,000 (2011 est), with about 90,000 of these living in and around Luxembourg City. About 32% of the population is foreign. French and German are the official languages, but Luxembourgish, a Mosel-Frankish dialect, attained in 1984 the status of a national language and is the everyday language of native Luxembourgers. English is also widely spoken. French is the language most commonly used in public life.

Luxembourg's modern history began with the Congress of Vienna, which created the autonomous Grand Duchy; then in 1867 the Treaty of London established Luxembourg's permanent neutrality. Until 1990 the Grand Duchy was merged with the Netherlands under the House of Orange-Nassau, but has since been ruled by its own dynasty. In 1948 Luxembourg gave up its neutrality in order to join the emerging institutions of post-war Europe, and was a founder member of the EU.

Culturally, Luxembourg has been most influenced by France and Germany, but has developed a strong sense of its own identity, associated with the formalisation of its own language.

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Luxembourg 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% (20% from 2008, and 35% from 2011), which has applied since 1st July 2005.

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.

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Luxembourg Government

Luxembourg is a constitutional monarchy. The current sovereign is HRH Grand-Duke Henri; and the heir apparent is Prince Guillaume (son of the monarch). Under the Grand-Duke there is an Executive Cabinet of 12 Ministers; legislative power is in the hands of the Chamber of Deputies (Parliament) elected by universal suffrage under proportional representation for a term of not more than 5 years.

The Parliament has 60 members, and there are three main political parties, Christian Democrats, Socialists and Liberals, who alternate as coalition partners and who over time have provided a good measure of stability and continuity. Proposed legislation is reviewed by the Conseil d'Etat, who have some powers to block legislation from continuing to a final vote.

Luxembourg law reflects the country's history: most civil and commercial law is French in origin, while company and penal law has Belgian roots, and direct taxes are essentially those introduced by the Germans during their occupation of the country in the Second World War. EU law is of course adopted into national law and is the source of VAT regulation among other things.

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Luxembourg Economy and Currency

The Luxembourg economy is stable and prosperous, with unemployment at 5.5% (2010 est). There has been a gradual and painful replacement by financial services as the engine of the economy.

The iron ore in Luxembourg was discovered in 1850, and an important steel industry was built up which dominated the economy for much of the 20th century. Despite shedding labour in the 1980s, the industry remains by far the largest employer in the country, and accounts for 25% of export earnings. However, the US protectionist tariffs of up to 30% imposed on steel imports in April 2002 had a severe effect.

Since the war, the Government has made determined and largely successful efforts to diversify the economy, although as in most developed countries services have tended to take over from industrial production. Growth in the financial sector, which now accounts for about 28% of GDP, has more than compensated for the decline in steel.

The financial services sector has boomed, helped along by old and new tax breaks. There are more than 12,000 Holding Companies in Luxembourg, along with more than a thousand Investment Funds and 144 banks, at the time of writing. There is also a substantial Eurobond issuance sector.

The country's small size and its position have naturally led it into close economic co-operation with its neighbours. There has been a close economic union with Belgium since 1921, and after the Second World War Benelux was formed by bringing in the Netherlands; this was the first step towards creation of the EU.

Luxembourg is the third richest country in the world, with GDP per head at purchasing power parity for 2010 estimated at USD82,600. GDP in 2010 was USD41.09bn.

Growth of 3.4% was estimated for 2010, after -3.7% was recorded for 2009.

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Luxembourg Entry and Residence

Entry to Luxembourg for up to 90 days for nationals of EU countries requires a passport or identity card; entry for up to 90 days for nationals of a group of about 35 other 'advanced' countries including the US requires a passport; nationals of other countries require a 'short-stay' visa or a 'Schengen' visa. A short-stay visa is issued by a Luxembourg Mission or Consulate; a Schengen visa is issued by a Schengen member state. Both types are issued for 90 days and neither permits remunerated activity or 'the exercise of trade for profitable ends'.

Any stay for the purposes of employment or remunerated activity requires the advance issue of a work permit by the Ministry of Labour and the advance issue of a 'provisional residence permit' by the Ministry of Justice. Any stay of more than 90 days within a 6-month period requires the advance issue of a residence permit by the Ministry of Justice. EU citizens other than Spanish or Portuguese nationals are not subject to the requirement for work permits.

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Luxembourg Business Environment

In terms of business and communications infrastructure, Luxembourg offers Western European standards. The business environment is particularly well-attuned to the finance sector as a result of the heavy concentration of banks and investment funds. A wide range of professional services is available, but costs are high, particularly since legal and regulatory procedures in this 'Civil Code' jurisdiction may seem cumbersome and bureaucratic by comparison with more relaxed anglo-saxon countries.

To counter the economy's dependence on the steel industry, the government encourages manufacturing industry and high-technology companies by providing a range of incentives and grants. Favourable tax and legal regimes have also been developed for insurance, reinsurance, group treasury operations, and other financial service sectors. Interestingly for a land-locked country, Luxembourg has also introduced a maritime shipping register. See Offshore Business Sectors for descriptions of these various special regimes.

The government also provides equity funding for certain types of project. This applies to small and medium-sized companies and those located in development areas.

Some capital grants are provided by the National Credit and Investment Corporation. New companies, or those introducing new manufacturing systems, can also apply for temporary or restricted income tax exemptions.

There are fairly extensive registration requirements for different types of professional and business activity in Luxembourg, although to some extent these have been eaten away by more liberal EU single market legislation. 'Reserved' activities, including many types of state work, and the professions, are accessible only through the appropriate governing body.

Individuals or companies wanting to carry on other types of economic activity must obtain a permit from the Ministry of the Middle Classes (Ministre des Classes Moyennes); issue of the numbered permit takes from two to four months, and the number must be printed on letterhead, etc

A survey in October, 2005, ranked the city of Luxembourg as the European capital with the most expensive property, ranking it above several European capitals with expensive reputations. In 2009 it was ranked the 11th most expensive city in the world by UBS.

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Luxembourg Foreign Investment

The Luxembourg government actively encourages foreign investment. There are no formalised legal regimes aimed at foreign investment as such (other than the tax-exempt 'holding' companies and collective investment funds - see Offshore Legal and Tax Regimes) but on an ad hoc basis the government offers a variety of types of assistance including guarantees, cash, tax incentives, subsidised loans, assistance with development and construction projects etc.

Luxembourg has a wide range of customised investment incentives specifically for new ventures to the principality. This includes the offer of land with favourable conditions at one of the country's municipal business parks or national industrial parks which are equipped with the infrastructure necessary to support a successful business.

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