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Luxembourg Abandons 'Unrealistic' Withholding Tax Model

by Ulrika Lomas, Tax-News.com, Brussels

14 May 2013


Luxembourg's Finance Minister Luc Frieden has made clear that the withholding tax model "has no future," as an instrument under the Savings Tax Directive with which to combat tax evasion and ensure tax compliance.

While conceding that the withholding tax model is a more efficient and altogether "better system," Finance Minister Frieden insisted that it is no longer a "realistic" option or solution. Frieden defended the Grand Duchy's change of stance, and in particular its decision to apply from 2015 an automatic exchange of information provision for interest payments made to individuals resident in European Union (EU) countries, other than Luxembourg. The u-turn was made in view of ongoing negotiations with the US on a Foreign Account Tax Compliance Act (FATCA) agreement and in view of the failure of the Swiss-German withholding tax accord in the German Parliament, Frieden said.

Given that the withholding tax model has no future, Luxembourg now aims to take steps to guarantee legal certainty and to actively shape the Principality's future by participating in developments at international level, the Minister explained. Frieden underlined the importance of creating a level playing field, whereby all the big financial centers are subject to the same rules. Finance Minister Frieden highlighted the pivotal role of the Organization for Economic Cooperation and Development (OECD) in achieving this objective, noting that not only EU member states but also the US and Switzerland participate with the OECD. Frieden stressed the importance of Singapore and Hong Kong taking part in the discussions, to prevent a relocation of capital.

Concluding, the Luxembourg Minister underlined his conviction that an automatic exchange of information mechanism will become the global standard. Warning that protecting the private sphere remains of vital importance, and that information must therefore only be exchange between tax administrations in legal states with whom a bilateral treaty has been concluded, Frieden emphasized that Luxembourg's long-term aim is to become a key global financial center and to be able to attract international clients rather than negotiating from a corner.

TAGS: individuals | compliance | Finance | Foreign Account Tax Compliance Act (FATCA) | tax | tax compliance | tax avoidance | interest | FATCA | Organisation for Economic Co-operation and Development (OECD) | Luxembourg | Singapore | withholding tax | Hong Kong | Switzerland | Compliance | Tax

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