In the run-up to elections, the various political parties’ programmes tend to include proposals whose medium- and long-term cost to society and taxpayers, as well as the associated sources of funding, aren’t clearly defined. Sometimes simplistic solutions are put forward, such as making capital or legal entities contribute more. Occasionally, the argument is put forward that in Luxembourg, taxing labour and individuals is a greater burden than taxing capital and companies. This clearly misleading idea stems from a biased analysis of the direct and indirect tax contributions of economic players and of Luxembourg’s current attractiveness in terms of taxation for legal entities and companies. The idea is also based on the mistaken conviction that investors who have chosen the Grand Duchy will subsequently be unable to move to where the grass is greener. More than any other European Union member state, Luxembourg’s prosperity depends on its ability to attract foreign talent and investors.
Comparisons between the tax burden on individuals (in 2020, Luxembourg had some 6,075 sole traders taxed as individuals) and on companies (taxed as legal entities) make little economic sense, are sterile and can only harm social cohesion. Companies and individuals are closely linked in socio-economic terms. Businesses thrive on consumer demand. Excessive taxation of individuals can reduce their purchasing power and weaken demand for goods and services from businesses. Similarly, excessive taxation of businesses and a lack of attractiveness and predictability in tax policy can reduce their ability to invest, create jobs and sustain economic growth. The adage “too much tax kills tax” applies to all categories of taxpayer.
Luxembourg companies make a major contribution to tax revenue
According to the OECD, tax on company profits represented 11.7% of total tax revenue in Luxembourg in 2021. This may seem relatively low, but in fact it’s high compared with our neighbours. For the same year, this percentage was a mere 5.9% in Germany, 5.6% in France and 9.0% in Belgium. Social security contribution rates are relatively low in Luxembourg, which is to be welcomed, since it is essential to maintaining a degree of competitiveness at a time when our economy has the highest labour costs in the EU. Despite this, when employer contributions are taken into account, it’s still Luxembourg companies that contribute the most to total tax revenue.
The major contribution of companies to Luxembourg’s budget doesn’t stop there. Tax paid on wealth is again higher in Luxembourg than in neighbouring countries and a large proportion of this is attributable to companies via the wealth tax, which in 2022 brought in EUR 878 million for the Grand Duchy’s budget. Since Luxembourg is one of the only countries in Europe to apply this tax, it risks undermining its attractiveness for investors in terms of taxation. The wealth tax has shown its harmful effect on the economy over time, which has been exacerbated by high interest rates. Wealth tax limits the ability of companies to finance themselves using their own capital, which is the preferred option when interest rates are on the rise. While abolishing this tax would be a challenge due to its importance for tax revenues, a roadmap for reducing the rate should be agreed upon. In the meantime, extending wealth tax deductions for companies that strengthen their balance sheets would help limit the adverse effects of the tax on capital accumulation. Note that this tax is only payable by companies and no longer exists for individual taxpayers.
Companies therefore contribute more to tax revenue in Luxembourg than in Germany, France or Belgium. However, there is nothing automatic or self-evident about companies having a high capacity to contribute to government revenue. This depends directly on the attractiveness of the business location (comprising mainly service, financial and non-financial companies), the legal and regulatory framework and the tax system applied to economic players (consumers, producers, investors). Although Luxembourg’s attractiveness was often considered quite high in the past, particularly compared with neighbouring countries, this major competitive factor is now under threat due to changes in the tax system that result, among other things, from new European and international rules and a reduction in tax predictability.
Reduced tax appeal
Luxembourg companies believe that the country’s tax policies make it a less attractive destination than other countries in which they invest. So say 35% of Luxembourg companies, according to the Luxembourg Attractiveness Survey 2023[1], compared with 27% who feel that the Grand Duchy’s tax policies make it a more attractive destination. This survey has only been around for two years, but it’s a safe bet that Luxembourg’s tax attractiveness would have been viewed much more positively 10 or 15 years ago.
Companies, investors and particularly financial market players now have expectations in terms of taxation. In the latest Baromètre de l’Economie[2] (Economic Barometer), financial market participants put the need for a more attractive tax system as the top requirement for maintaining the financial centre’s attractiveness and competitiveness, ahead of more widespread teleworking and an enhanced regulatory framework to attract talent. It should be borne in mind that Luxembourg’s fund industry is particularly penalised by the subscription tax, against a backdrop of growing competition in the sector from contenders such as Ireland. No other EU member state taxes the net assets of investment funds established on its territory. We should therefore welcome the new law adopted by Luxembourg’s Chamber of Deputies on 11 July 2023 aimed at modernising the legislative framework governing investment funds, which provides grounds for hope that the Grand Duchy will become a more attractive location for this sector, bearing in mind that the law goes beyond the tax component. Over the coming months, political decision-makers should remain attentive to this constantly evolving industry in order to offer it the most competitive framework at international level. The sector generates a very high share of direct and indirect tax revenue, accounting for 76% of corporate income tax (IRC) and 70% of communal business tax (ICC) in 2021, according to Luxembourg’s Chamber of Deputies.
Ways of making our tax system more attractive
In general terms, a more attractive tax system is essential to restoring the competitiveness of the Grand Duchy and its financial centre, which in turn is essential to creating the wealth that underpins the country’s socio-economic prosperity.
To achieve this, the overall rate of corporation tax, currently 25%, needs to be brought into line with the European average of 21%. As a small economy heavily dependent on European and international investors, Luxembourg can no longer afford to apply a higher rate of corporation tax than its EU partners.
This reduction should be accompanied by the above-mentioned overhaul of wealth tax and subscription tax, which constitute “onerous idiosyncrasies” of our tax system for economic players, particularly in the financial centre. The introduction of tax incentives, such as a super-deduction, to encourage investment in the environmental and digital transitions, is a long-standing proposal of the Chamber of Commerce. The announcement on July 12 of an “in-depth change” to the tax credit for investment, applicable from January 2024, is to be welcomed. On the other hand, the development of start-ups should be given even more support by introducing a tax shelter for their financial backers or tax-free bonuses.[3] These support measures are included in the roadmap recently presented by the Luxembourg Ministry of the Economy and should be swiftly implemented.
Taxation is a major instrument of economic policy and the source of attractiveness and competitiveness for Luxembourg’s economy, two factors that are vital to the country’s present and future diversification and development. Innovative fiscal stimulus measures may well involve tax erosion in the short or medium term, but ultimately they should enable the creation of new economic activities that generate the tax revenues needed to replenish the Grand Duchy’s budget. At the same time, more efficient public spending (through greater digitalisation of public services, better targeted social transfers, ambitious and clearly defined investments, etc.) will ensure healthy and balanced public finances, the guarantors of Luxembourg’s triple A rating.
[1] Luxembourg Attractiveness Survey 2023
[2] Luxembourg Chamber of Commerce Baromètre de l’Economie for the first half of 2023.
[3] All of these proposals form an integral part of the Chamber of Commerce’s contribution to the 2023 general election: Dossier Elections 2023 – Quel avenir pour les entreprises? (2023 Elections Dossier – What does the future hold for businesses?