Why Is Luxembourg Considered a Tax Haven?

Luxembourg has been a tax haven of choice for corporations and the wealthy since the 1960s, when the small European country rose as a financial center for the off-shore trade of European bonds. Luxembourg was popular with companies looking to issue debt because it lacked a withholding tax, did not require a stamp duty, and did not require bond issuers to publish a prospectus.

Though Luxembourg has a population of around 630,000, it attracts as much foreign direct investment (FDI) as the United States.  Its $4 trillion in FDI comes out to $6.6 million per person. The International Monetary Fund describes these inflows and outflows as "phantom investment." Much of the money flows into empty corporate shells for the purpose of minimizing the taxes of the entities that control the shells.

A favorable tax regime encourages corporations to establish special purpose entities in Luxembourg. One benefit is the lack of withholding taxes on interest payments and royalty payments, which may allow these payments to escape taxation in the jurisdiction in which these receipts were generated.

Economists estimate that 80% of profits shifted from EU countries wind up in tax havens located in the EU, namely Luxembourg, Ireland and the Netherlands. Luxembourg accounted for $47 billion in shifted profit in 2015. Ireland accounted for $106 billion and the Netherlands accounted for $57 billion in the same year.

Favorable Tax Deals

The top rate for companies operating in Luxembourg is 24.94%. This consists of a 17% corporate tax rate, a municipal business tax of 6.75% and a 1.19% contribution to an employment fund.

However, documents obtained by the International Consortium of Investigative Journalists revealed hundreds of multinational corporations had entered into tax agreements with Luxembourg that allowed them to pay an effective tax rate less than 1%. The documents, known as the Luxembourg Leaks, showed that FedEx Corp established two affiliates in Luxembourg for the purpose of transferring earnings from its operations in Mexico, France and Brazil to the company's affiliates in Hong Kong. Luxembourg agreed to tax the income at a rate of 0.25%, leaving 99.75% of the transfers tax-free.

The Bottom Line

Luxembourg is one of the most notable tax havens around the world. More than 340 companies around the world have set up subsidiaries in the country and sought beneficial arrangements for the purpose of seeking tax relief. Companies named in the Luxembourg Leaks include Amazon, Apple, AIG, FedEx, Fidelity, Heinz, IKEA, Office Depot, Pepsi Bottling Group and Staples. 

Article Sources
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  1. Government of Luxembourg. "Corporate Income Tax."

  2. U.S. Bureau of Economic Analysis. "Direct Investment by Country and Industry, 2019."

  3. Central Intelligence Agency. "The World Factbook: Luxembourg."

  4. International Monetary Fund. "The Rise of Phantom Investments."

  5. European Commission. "Commission Staff Working Document: Country Report Luxembourg 2018," Page 2.

  6. National Bureau of Economic Research. "The Missing Profits of Nations," Pages 25, 41.

  7. Deloitte. "Luxembourg Highlights 2020," Pages 1-2.

  8. International Consortium of Investigative Journalists. "Leaked Documents Expose Global Companies’ Secret Tax Deals in Luxembourg."

  9. International Consortium of Investigative Journalists. "Explore the Documents: Luxembourg Leaks Database."

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