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Luxembourg Holding Strong Despite International Pressure

Marius Kohl, a bearded 61-year-old with a ponytail, spent years engineering Luxembourg's most valuable export: tax relief.

As head of a federal agency called Sociétés 6, Mr. Kohl had sole authority to approve or reject thousands of tax arrangements for multinational corporations, sometimes helping save them billions.

The European Union's executive arm said this month it would be looking into whether Luxembourg's tax deal with Inc. violated rules against state subsidies to an individual company. It also said it would be investigating similar arrangements with Fiat Chrysler Automobiles NV and gave reason to believe more probes will follow. Luxembourg, as well as the companies involved, say they have adhered to international tax rules and have done nothing wrong.

Foreign companies in Luxembourg have access to deductions and holding structures that can slash their tax bills from the 29% corporate rate to nearly nothing at all. Most companies end up paying little or no tax on income from royalties, interest, dividends, liquidation proceeds or capital gains.

Regulators have grown frustrated with Luxembourg in recent years, saying no other country has been as aggressive in using tax breaks and confidentiality to lure international business. A review conducted by the Organization for Economic Cooperation and Development last year found that Luxembourg failed to comply with international standards of transparency and exchange of information.

"Luxembourg's wealth comes from helping companies not pay taxes in the countries where the value was created," says Pascal Saint-Amans, a senior official at the OECD who is spearheading an international effort to overhaul corporate-tax rules. "Instead of creating value, they create tax advice."

Pierre Gramegna, Luxembourg's finance minister, disagrees, saying his country fully complies with global standards and isn't a tax haven.

"We always go by international rules," says Mr. Gramegna, who until last year led the country's chamber of commerce. He said legislation to address the OECD concerns would be implemented this year.

Luxembourg's ability to retain its allure as a tax home in spite of international pressure highlights its sway in Europe.

The OECD issued guidance last month in an attempt to standardize rules for taxing international companies. The plan seeks to force transparency as well as make the practice of relocating to a country with lower taxes, otherwise known as inversions, less appealing.

Source: Karnitschnig, Matthew, "Luxembourg Tax Deals Under Pressure," The Wall Street Journal, October 21st, 2014

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