Introduction
The Grand Duchy of Luxembourg is a small country surrounded by Belgium, France and Germany, and its history has been inextricably linked with that of its larger neighbors. It is largely made up of rolling hills and forests.
Luxembourg has been under the control of many states and ruling houses in its long history, but it has been a separate, if not always autonomous, political unit since the 10th century. Nowadays, Luxembourg is a hereditary Grand Duchy with a unicameral parliamentary system.
Luxembourg is one of the smallest countries in Europe, and ranked 175th in size of all the 194 independent countries of the world; the country is about 2,586 sq km (998 sq mi) in size, and measures 82 km (51 miles) long and 57 km (35 miles) wide. Luxembourg has a population of fewer than half a million people. Luxembourgers speak German, French and Luxembourgish (de jure since 1984).
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. Favorable 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.
Economic Environment
Luxembourg’s stable, high-income economy features moderate growth, low inflation, and low unemployment. The industrial sector, which was dominated until the 1960s by steel, has diversified to include chemicals, rubber, and other products. During the past decades, growth in the financial sector has more than compensated for the decline in steel. Services, especially banking and other financial exports, account for the majority of economic output. Luxembourg is the world’s second largest investment fund center (after the USA), the most important private banking center in the Euro zone and Europe’s leading center for reinsurance companies. Moreover, the Luxembourgish government has tried to attract internet start-ups. Skype, Jajah and eBay are only a few of the many internet companies that have shifted their local or global headquarters to Luxembourg.
Agriculture is based on small, family-owned farms. Luxembourg has especially close trade and financial ties to Belgium and the Netherlands, and as a member of the EU it enjoys the advantages of the open European market. Luxembourg possesses the highest GDP per capita in the world (US$87,995 as of 2006), the eighteenth highest Human Development Index, and the fourth highest rated in the quality of life index. As of March 2006, unemployment is 4.8% of the labor force. For the fiscal year of 2005 and 2006, Luxembourg has run a budget deficit for the first time in many years, mostly because of slower international economic growth.
Taxation
Luxembourg’s fiscal climate is among the most favorable in Europe with the lowest VAT rate, moderate corporate income tax and an attractive personal income tax.
A business entity is subject to Luxembourg tax either if the registered office or the principal establishment is located in Luxembourg. Resident companies are subject to tax on their worldwide income, unless exempt under the terms of the European Treaty or a non double taxation treaty.
Non-resident companies whose registered office and place of management are located outside Luxembourg are subject to corporate income tax only on their income derived from Luxembourg sources.
Main business taxes
Business taxation is composed of the following:
• Corporate income tax: range from 20% to 22% depending on the income level;
• Unemployment solidarity tax: 4 % of the corporate income tax;
• Municipality business tax: range from 6 % to 10,5 % depending on municipalities.
The following is an example of a tax calculation for a company based in Luxembourg City:
Banking
Since January 1, 2002, the Grand Duchy of Luxembourg uses the Euro.
Luxembourg is the second largest banking jurisdiction in Europe (behind the UK) and the largest private banking country in Europe. Although not as rich in history or as well known to laymen as Switzerland, Luxembourg banks have gained enormous popularity over the years; especially since 1980 when it solidified its long history of favorable taxation and banking secrecy into law. Since that time, managed fund assets have grown from $3 billion to $1.85 trillion, 2238 managed funds in all, at the end of 2006. Total assets held by banks amounted to $1.1 trillion of that figure.
Luxembourg offers commercial banking services for non-resident businesses. Luxembourg is suitable for clients seeking private banking and investment services or for large businesses that may have an interest in establishing a physical presence in Luxembourg.
Offshore Banking
Luxembourg does not use the term “offshore” in any of its legislation, regulations or anything describing its company forms. The key to typical “offshore” tax status for Luxembourg business lies in the various forms of “holding companies”, collective investment vehicles and investment funds outlined in legislation such as the 1929 Holding Company, Milliardaire Holding Company, Financial Holding Company, SOPARFI, Fond Commun de Placement, SICAV, SICAF and SICAR. These basically provide several options for favorable tax status for both resident holding and investment companies as well as non-resident companies. Individuals holding accounts with Luxembourg banks and financial institutions are also exempt from local taxation on capital gains, dividends and interest unless they reside in one of the EU member countries.
One potential negative to banking in Luxembourg is their agreement to begin information exchange with the EU by 2009 as a result of the EU Savings Directive 2005; however, for individual clients not residing in any of the countries affected by this Directive and non-resident corporate clients, Luxembourg taxes will likely be non-applicable to you allowing you to bank there with no local tax obligations. As always, it is advisable to seek the counsel of your tax professional to identify your status.
