Luxembourg is built on expertise, not tax rulings
Recent media reports have suggested that a number of corporations may have chosen to settle in Luxembourg mainly to benefit from alleged “secret tax deals”. Why would multinationals choose Luxembourg, if not for tax favors?
As appealing as this story may be, it is misleading. In fact, the practice of granting tax rulings to corporations that request them is not limited to Luxembourg but is used in 22 out of 28 EU member States.
Over more than half a century, Luxembourg has developed an international financial centre that is globally recognised for its high level of expertise. This financial center is serviced by a comprehensive and mature ecosystem. While many other countries have a more domestic market focus, Luxembourg has become a leader in international finance and its professionals have developed best-in-class expertise on cross-border issues. This includes, among many other activities, holding and financing activities.
Many trades and activities are concentrated in certain hubs, whether Antwerp or Geneva for jewelry, Silicon Valley for IT or other places for aeronautics or the car industry. This is due to the concentration of expertise and skills that is available in these places and has been cultivated for many decades. Such hubs allow for synergies. Once such hubs or clusters are established their reputation attracts experts in their respective fields.
In the investment fund sector, for example, there are asset managers in every country, while there are investors in every corner of the world. So why have most asset managers chosen Luxembourg as their global distribution platform? Luxembourg developed into the largest investment fund hub because of the existence of this ecosystem and the fact that Luxembourg has become a centre of excellence on cross-border issues.
Luxembourg’s responsiveness to the needs of international investors and its determination to continuously modernize its legal framework in order to ensure it remains state-of-the-art as well as an efficient bureaucracy are elements that attract the international business community. It is this expertise and responsiveness that has allowed Luxembourg to become one of Europe’s leading financial centres.
This concentration of expertise also explains why many multinationals structure their holding and financing operations, which are legitimate and necessary activities in and of themselves, through a hub like Luxembourg. Multinational companies also choose to locate in Luxembourg because of the presence of banks and other financial intermediaries which can provide them with financial services. For a number of business and legal reasons, companies manage their holding and financing activities by creating sub-entities, often one for each transaction. That multiplies the number of individual companies and adds to the perception of thousands of companies being registered in one location. Some of these entities are subject of advance tax decisions ("tax rulings").
In Luxembourg, the tax administration sets out in these decisions how it intends to apply the existing tax legislation to a specific situation. This provides legal certainty and predictability for both parties, the taxpayer, and the state. Tax rulings are not secret; they are kept confidential from the public, just like any other document relating to a person’s tax filing. The rulings were however accessible to the tax authorities of the home base of the companies, either via Luxembourg's tax authorities or via the company itself. Neither are they “deals”. The tax rates are not negotiated, but are the result of the application of existing national and international rules, as well as of the relevant double taxation treaties. The European Commission has confirmed that the practice of issuing tax rulings is not in conflict with European law, provided that all taxpayers in a similar situation are treated equally.
It is not the presence of a company in one specific country that triggers low taxation but the interaction of complex tax regimes of different countries. Since the financial and economic crisis, the legitimacy of certain mechanisms, which comply with all applicable laws, has been put in doubt. Luxembourg shares those concerns. In particular, Luxembourg believes that it is not acceptable that companies take advantage of the international legal framework to avoid all taxation. The relevant national and international rules need to be adapted to today's realities. All countries should see the current discussions as an opportunity for introspection and to review their national tax regimes. The solution to this furthermore requires a coordinated effort by the international community.
Luxembourg will certainly do its share as a member of OECD to find a fair and efficient solution. We have already, on the European level, contributed to tackling some of these issues by adopting a revised parent-subsidiary directive earlier this year and, at national level, introduced a number of changes. Luxembourg has embraced transparency and last week laid the final act in the process of abolishing tax secrecy. In the same spirit, Luxembourg's government can be counted on to contribute to resolving the issue of non-taxation of corporate actors. We have embarked on this road well before the publication of the ICIJ's articles.
Criticism about Luxembourg is often related to statistics about the size of the country, the number of company headquarters per inhabitant, the size of the financial industry or Luxembourg's GDP figures. In the context of a European single market with open borders and free movement of people, services, goods and capital, this is a truncated way of presenting the economic realities. Our domestic market is the European market.
Finally, important as finance may be, Luxembourg's economy holds a few other surprises for those who only take a cursory glance at us before judging. The country’s economy is indeed very diversified. While financial services play an important role (25% of GDP), other sectors such as steel production, logistics and car components are very well developed. Just like in the financial arena, Luxembourg did not produce steel only for the domestic market. Steel products made in Luxembourg are exported around the world where they are used, to give but two significant examples, as ultra-high quality steel beams in the construction of the One World Trade Center in New York or as special sheet piles for the gates that will prevent flooding in Venice. Car component technology made in Luxembourg equips many cars around the world, in particular sensors for airbags and safety belts, that help save lives every single day. Hundreds of millions of people watch television in their homes thanks to the world's largest satellite operator SES, which was founded by the Luxembourg government 25 years ago. RTL (Radio Television Luxembourg) has ruled the airwaves for generations and broadcast rock music to millions who had no other access to it. Luxembourg is one of Europe's key logistics centers with its airport being the 6th largest cargo airport in Europe. Glass made in Luxembourg is fitted in many buildings around Europe and the Middle East, including all of the window panes of the world's tallest building, the Burj Khalifa in Dubai.
Tax deals are not part of our business model. We build our success on expertise.