Luxembourg is a relatively small country in the European Union with a population of 600.000 inhabitants, however it is the leader among OECD countries in terms of GDP per capita according to World Bank classifications. The country’s economy is open, diversified and stable with solid macroeconomic foundations (rated AAA by Standards & Poor). Another key aspect is the state of the art infrastructure with excellent connections not only to the European Union but also to the entire world market. Due to its geographical location – in the center of the continent – 60% of the European Union is within a day’s reach, with the main European capitals just an hour’s flight away. For 20 years Luxembourg has generated significant commercial surpluses due to the development of its financial system and its low unemployment rates and inflation.
According to the World Bank, the most competitive tax rates can be found in Luxembourg. It ranks first in Europe in terms of average tax burden indicators and average tax compliance deadlines. The country’s tax regime favors income, capital gains and wealth related to the holding of major shareholdings, combined with a VAT rate of 17% and an intellectual property tax regime that allows an 80% exemption on income derived from this concept.
In this economic and geographical context it is easy to realize why the country’s economic activity became focused and specialized in financial and fiscal areas. In fact, this fiscal framework has attracted numerous business conglomerates and investment funds seeking to streamline their fiscal operations.
Attraction area for southern countries
After the financial crash of 2009, Luxembourg began to assume greater importance in a European environment of austerity, attempts of deficit reduction and increasing tax collection, especially in the Southern European region (Greece, Italy, Spain, Portugal, and France). From that moment on, the number of companies and private equity funds looking to move the center of their operations to Luxembourg to benefit from the favorable fiscal environment has significantly increased. It also coincided with the growing persecution of tax havens; however, this was not enough to reduce the growing number of entrepreneurs and investors seeking a safe haven from the fiscal pressure of the rest of Europe in Luxembourg.
The degree of development of its financial sector and the country itself, combined with its location and its flexible tax system make the country an excellent alternative for the mother companies of significant business conglomerates and private investment funds, embodying one of the main precepts of the European Union: the liberty and freedom (of movement) of its citizens and capital within its borders.
In conclusion, in an increasingly globalized world it would be crucial to optimize, within the Europeans Union´s regulations and legislation, the fiscal framework in response to the even greater competitiveness. Many businesses do not have an internal infrastructure and the fiscal expertise that would allow them to navigate the still varied fiscal environment of the European Union in order to maximize the potential of their operations. This brings an important role to specified business consultancies that can advise in these complex matters.