The European Commission has ordered Luxembourg to repeal its preferential tax regime for financial holdings by the end of the year. The commission said the scheme gives unjustified tax advantages to providers of certain financial services with holding companies in Luxembourg.
Stable and high-income market economy features moderate growth, low inflation, and a high level of innovation. Unemployment is traditionally low, although it had risen to 6.1% by May 2012, due largely to the effect of the 2008 global financial crisis. Consequently, the economy was forecast to have negligible growth in 2012. In 2011, according to the IMF, Luxembourg was the second richest country in the world, with a per capita GDP on a purchasing-power parity (PPP) basis of $80,119. Luxembourg is ranked 13th in the Heritage Foundation‘s Index of Economic Freedom, 26th in the United Nations Human Development Index, and 4th in the Economist Intelligence Unit’s quality of life index.
External debt is extremely high when external debt per capita or Debt to GDP ratio is taken into consideration. External debt per capita (2014) is $3,696,467 and as a percentage of GDP it is 3443%, the world’s highest by both measurements.
The industrial sector, which was dominated by steel until the 1960s, has since 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 production. Services, especially banking and finance, account for the majority of economic output. Luxembourg is the world’s second largest investment fund centre (after the United States), the most important private banking centre in the eurozone and Europe’s leading centre for reinsurance companies. Moreover, the Luxembourg government has aimed to attract internet start-ups, with Skype and Amazon being two of the many internet companies that have shifted their regional headquarters to Luxembourg.
In April 2009, concern about banking secrecy laws, as well as its reputation as a tax haven, led to its being added to a “grey list” of nations with questionable banking arrangements by the G20. In response, the country soon after adopted OECD standards on exchange of information and was subsequently added into the category of “jurisdictions that have substantially implemented the internationally agreed tax standard”. In March 2010, the Sunday Telegraph reported that most of Kim Jong-Il’s $4 billion in secret accounts is in Luxembourg banks. Amazon.co.uk also benefits from Luxembourg tax loopholes by channeling substantial UK revenues as reported by The Guardian in April 2012. Ranked third on the Tax Justice Network‘s 2011 Financial Secrecy Index of the world’s major tax havens, scoring only slightly behind the Cayman Islands. In 2013, Luxembourg is ranked as the 2nd safest tax haven in the world, behindSwitzerland.
EU Orders Luxembourg to Repeal Tax Breaks
Photo credit: Gwenaël Piaser via Visual hunt / CC BY-NC-SA
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