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Brussels, 19th July 2006

State aid: Commission demands repeal of Luxembourg’s preferential tax regime for financial holdings

The European Commission has decided that the preferential tax regime in favour of Luxembourg’s Exempt, Milliardaire and Financial Holdings of 1929 violates EC Treaty state aid rules (Article 87). The scheme is granted under a Luxembourg law from 1929, predating the EC Treaty, and therefore constituting existing aid. Following an in-depth investigation opened in February (see IP/06/132) and a preliminary four-year review, the Commission has concluded that the scheme grants unjustified tax advantages to providers of certain financial services who set up holding structures in Luxembourg. It distorts competition and trade by altering the level playing field between financial undertakings and induces them to create dedicated structures in Luxembourg to reduce their current tax liabilities. Modifications introduced by a law of 21 June 2005 narrowed the scope of the scheme but the regime still constitutes state aid as the tax advantages remain unchanged. The Commission decision requires the scheme to be repealed by the end of 2006, while its effects for the existing holdings must be definitively eliminated by the end of 2010 (allowing the existing beneficiaries to exit from the existing holding structures without incurring tax penalties). As the scheme is existing aid, the Commission’s decision is only for the future and the beneficiaries need not repay aid received until its final elimination.

Competition Commissioner Neelie Kroes said: “Today’s decision to eliminate a scheme providing sizable tax advantages to Luxembourg’s financial holdings will help to restore a level playing field in the EU’s financial services industry”.


Under the 1929 law, exemptions from direct business taxation are granted to Luxembourg’s holdings providing certain financial and capital-intensive services to related and unrelated business entities within a multinational group. The Exempt 1929 Holdings are companies which are exclusively engaged in holding the stocks of companies, managing collective investments, providing financing and licensing intangibles to related entities within a group. The Milliardaire Holdings are a subgroup of Exempt Holdings which have been formed by initial cash or stock contributions of at least €24 million (formerly one billion Luxembourg Francs). The Financial Holdings are another subdivision of the Exempt Holdings, specialised in providing structured finance to related entities and managing collective investment funds. The revenues earned by all categories of Exempt 1929 Holdings are tax free and the distributions made by such Holdings are exempt from withholding taxes.

The June 2003 Council of EU Finance Ministers considered that the Exempt Holdings’ exemption from dividends constituted a harmful tax measure within the meaning of the EC Code of Conduct on business taxation on the grounds that the exemption was not conditional upon the payment of a sufficient tax by the distributing company (IP/03/787). The Council accordingly recommended that Luxembourg eliminate this harmful legislation by 31st December 2010 at the latest.

On 21st June 2005 Luxembourg amended its 1929 Law to abolish the exempt status for holdings receiving more than 5% of their yearly dividend income from participating companies which have not been subject to a tax comparable to the one applied in Luxembourg (the non-comparable tax was defined as a tax of 11% on the business profits computed under Luxemburg’s rules). For the Exempt Holdings existing at the time of entry into force of the new law (1st July 2005), however, the potential loss of the exempt status would apply only as of 1st January 2011.


In parallel with the Member States’ review under the Code of Conduct on business taxation, in 2002 the Commission initiated a state aid review, under the cooperation procedure applicable to existing aid. On 21 October 2005 the Commission proposed appropriate measures to Luxembourg to gradually review the scheme. Luxembourg rejected these measures and in February 2006 the Commission opened an in-depth investigation to verify whether the tax exemptions granted to the 1929 holdings constituted state aid and were compatible with the Single Market (see IP/06/132). The in-depth investigation provided an opportunity for interested parties to submit their comments on the measures.

The Commission has set strict conditions for the phasing-out of the scheme because the tax exemption was not linked to any specific investments and its beneficiaries therefore cannot have acquired legitimate expectations about its permanent nature. This has been confirmed by the EU Court of Justice in its judgement of 22 June (joined cases C-182/03 and C-217/03) on a similar tax scheme concerning Belgian coordination centres.

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