State aid: Commission opens formal investigation into Luxembourg‘s 1929 tax-exempt holdings
European Commission - IP/06/132 08/02/2006
Brussels, 8th February 2006
The European Commission has launched under EC Treaty state aid rules a formal investigation into Luxembourg’s 1929 legislation exempting holdings and financial companies from corporate taxation. The Commission is concerned that the 1929 legislation creates significant distortions to competition and market efficiency particularly in the financial sector, without contributing to any significant extent to economic development. The inquiry will allow interested parties to comment on the measures under scrutiny. It does not prejudge the Commission’s final decision.
“It is time to review this old-established regime favouring multinational groups setting up their financial activities in Luxembourg, as it appears it may unduly affect the functioning and competitiveness of the EU’s financial industry” commented Competition Commissioner Neelie Kroes.
The exempt holdings regime
Luxembourg’s 1929 legislation on exempt holdings establishes a special corporate vehicle to attract multinational groups’ financing, licensing and coordination activities to Luxembourg. The 1929 exempt holdings are companies established in Luxembourg, which solely exercise certain activities such as financing, licensing, management and coordination services within the multinational groups to which they belong. The 1929 holdings are exempt from Luxembourg’s business taxes on earnings, including dividends, interest and royalties as well as on payments, including dividends and royalty fees. While the original objective of the scheme was to favour the distribution of profits within a multinational group without incurring multiple taxation, the globalisation of financial markets and the modern regulatory framework for financial services have rendered the 1929 legislation obsolete.
In parallel with the Member States’ action to tackle harmful tax competition pursuant to the Council’s Code of Conduct on Business Taxation (see IP/03/787), the Commission decided to investigate Luxembourg’s 1929 exempt holdings regime on the grounds that the tax exemption may constitute a disguised subsidy in favour of multinational companies based in Luxembourg and may distort the European financial market.
The Commission probe
Following a three-year preliminary review under the cooperation procedure of Article 88 of the EC Treaty, applicable to aid measures existing before the entry into force of the Treaty, on 21 October 2005 the Commission proposed appropriate measures to Luxembourg to gradually review the scheme. Luxembourg rejected these measures and the Commission has now launched an in-depth investigation to verify whether the tax exemptions granted to the 1929 holdings constitute state aid and are compatible with the Single Market.
By means of this probe, the Commission also invites Luxembourg and interested parties to submit their comments as to the preliminary qualification of the scheme as incompatible aid and the possible existence of legitimate expectations as to the future duration of such a long-lasting regime.