Luxembourg Adapting To International Tax Changes, Says S And P

by Ulrika Lomas, Tax-News.com, Brussels

21 September 2017

While Luxembourg is adapting to changes in the international tax environment, a loss of attractiveness due to stricter international tax regulations poses one of the main risks to growth, according to Standard and Poor's.

In affirming Luxembourg's "AAA" rating and "stable" outlook, S&P said that the country "is coping well" with the new standards in corporate tax and tax transparency, having removed some special corporate tax schemes and reduced the main rate of corporate tax.

However, the report observed that the favorable tax environment is important to maintaining the attractiveness of Luxembourg's financial services industry, which accounts for about 20 percent of the country's overall tax take.

"As in other EU countries, such a tax regime is under pressure from various international initiatives, such as the recently adopted EU-wide Anti-Tax Avoidance Directive," S&P said.

The report also noted that the European Commission's ongoing investigations into tax rulings by the Luxembourg tax authority could have a destabilizing effect on the tax regime.

While the repayment of state aid by the companies adjudged to have illegitimately benefited from these tax rulings could provide the Government with a short-term revenue boost, "if these and similar EC decisions are upheld, they could create significant uncertainty in the tax environment," S&P said.

"In this context, changes to corporate tax represent the Government's changing approach to international tax competition, with a greater focus on headline tax rates than on tax exemptions," the ratings agency said.

However, it concluded that: "This does not insulate Luxembourg from further risks stemming from international regulations but such changes are likely to be gradual, and we expect the Government to respond to them proactively to maintain a sound budgetary position over the medium term."

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