Since the 1960s, when the tiny European nation grew as a financial hub for the off-shore trading of European bonds, Luxembourg has been a preferred tax haven for businesses and the rich. Luxembourg was attractive among corporations wishing to issue debt because it had no withholding tax, no stamp duty, and no need for bond issuers to publish a prospectus.
Despite having a population of about 630,000 people, Luxembourg receives as much foreign direct investment (FDI) as the United States. Its $4 trillion in foreign direct investment equates to $6.6 million per person. These inflows and outflows are referred to as “phantom investment” by the International Monetary Fund. Much of the money goes into empty company shells in order to reduce the tax burden on the organizations that control the shells.
A attractive tax structure encourages firms to form Luxembourg-based special purpose organizations. One advantage is the absence of withholding taxes on interest and royalty payments, which may enable these payments to avoid taxation in the country where they were created.
Economists believe that 80% of earnings transferred from EU nations end up in EU tax havens such as Luxembourg, Ireland, and the Netherlands. In 2015, Luxembourg accounted for $47 billion in shifting earnings. In the same year, Ireland accounted for $106 billion while the Netherlands accounted for $57 billion.
Favorable Tax Deals
The highest rate for Luxembourg-based businesses is 24.94%. This includes a 17% corporation tax rate, a 6.75% municipal business tax, and a 1.19% payment to an employment fund.
Documents acquired by the International Consortium of Investigative Journalists, on the other hand, indicated that hundreds of multinational businesses had signed into tax treaties with Luxembourg that permitted them to pay an effective tax rate of less than 1%. The records, known as the Luxembourg Leaks, revealed that FedEx Corp formed two affiliates in Luxembourg to transfer revenues from its businesses in Mexico, France, and Brazil to the company’s Hong Kong affiliates. Luxembourg decided to tax income at a rate of 0.25%, taxing 99.75% of transfers.
The Bottom Line
Luxembourg is a well-known tax haven across the globe. More than 340 corporations from across the globe have established subsidiaries in the nation and sought advantageous arrangements in order to get tax reduction. Amazon, Apple, AIG, FedEx, Fidelity, Heinz, IKEA, Office Depot, Pepsi Bottling Group, and Staples are among the companies listed in the Luxembourg Leaks.
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