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Luxembourg's Finances Improving, Says Fitch Ratings

by Ulrika Lomas,, Brussels

12 January 2016

The Organisation for Economic Co-operation and Development's base erosion and profit shifting process will not have significant implications on Luxembourg-based companies, Fitch Ratings has said.

The agency on January 8 re-affirmed Luxembourg's AAA rating, with a stable outlook.

According to Luxembourg for Finance, the territory's financial services promotional agency, the agency had highlighted the good supervision of Luxembourg's public finances and its low level of Government debt. In particular, the rating agency emphasized the favorable economic trends in the country.

Pierre Gramegna, Minister of Finance, commented: "This new confirmation of our AAA proves the effectiveness of the Government's fiscal policy and the measures taken to consolidate our public finances. It is very good news for the attractiveness of the Luxembourg economy and the labor market."

Luxembourg's value-added tax (VAT) rates rose on January 1, 2015, to counteract the revenue hit for the nation from changes to EU place of supply rules for broadcasting, telecommunications, and electronic (BTE) services from the same date.

With the exception of its super reduced rate, Luxembourg hiked each of its VAT rates by two percent, establishing a headline rate of 17 percent and reduced rates of 8 and 14 percent. The rate of the super reduced rate was unchanged at three percent, but its scope was altered. The supply of alcohol and alcoholic beverages sold by pubs and restaurants became newly subject to the new 17 percent headline VAT rate. In addition, the super reduced rate now only applies to work done on a person's own primary residence and not to housing for third parties. A transitional rule was allowed for projects notified before January 1, 2015, providing they are completed by December 31, 2016.

The rate changes were announced in response to the EU place of supply rule changes, which mean that BTE services are, from January 1, 2015, newly taxable in the location of the consumer at that member state's rate, rather than in the location of the supplier. The previous rules had favored Luxembourg, which has the European Union's lowest VAT rates, as businesses had located their operations in the nation to make tax-efficient digital supplies to EU consumers.

In a last-minute concession, Luxembourg secured compensation from European Union member states worth about USD1.375bn over four years.

TAGS: Finance | VAT rates | tax | investment | business | value added tax (VAT) | fiscal policy | financial services | Organisation for Economic Co-operation and Development (OECD) | Luxembourg | agreements | G20 | trade | services | business investment | Europe | BEPS

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