Playbook Logo

Client Login

Click to toggle search bar

Luxemburg Tax Schemes

Our Latest Insights

The Green Group
November 24th, 2014

Over 340 international companies have made secret deals in Luxemburg to save billions of dollars in taxes while maintaining little presence in the country based on leaked documents tied to the transactions.  These large companies can save in taxes by creating accounting and legal structures in Luxemburg to effectively pay tax rates less than 1 percent of the profits shifted in this country.  The leaked documents included diagrams of the complicated business structures and hundreds of pages of private tax rulings.  These letters asked for favorable tax treatment for the corporations.                

The tax scheme used hybrid loans.  Traditionally, when a company headquarters gives a loan to a subsidiary in another country, they must be taxed on the interest it receives.  Likewise, the subsidiary gets a tax deduction for the interest paid.  To bypass this tax, a company will set up 2 companies: the first a HQ branch and the second, a subsidiary of that branch, all located in Luxemburg.  The actual company HQ will then give a loan to the HQ in Luxemburg.  Following that transaction, the newly set up Luxemburg subsidiary will mirror that same loan and lend the money to the subsidiary in another country; this is where they private tax rulings come to play.  The company will persuade the Luxemburg tax authorities to consider the HQ branch in Luxemburg and the subsidiary of that branch in Luxemburg to be treated as one entity and receive favorable tax treatment.  In essence they can net the tax deduction and taxable income from interest, resulting in almost no tax.  Since the Luxemburg HQ is an integral part of the company headquarters, the payments of the loan are not seen as taxable.  The end result is a tax deduction in the subsidiary and almost no tax for the interest payments received.  The tax rate for companies in Luxemburg can be less than 1 percent.    

The companies created in Luxemburg have very little physical presence in the country.  They might simply have a mailbox or a solitary office but no visible employees.  For example, one corporate building in the country is home to more than 1,600 companies. 

Big companies such as Pepsi, Coach Inc., Ikea, Amazon, and many more have saved millions using this strategy.  PWC (PricewaterhouseCoopers), an accounting firm, has helped companies such as these get 548 tax rulings in Luxembourg from 2002 to 2010.  These tax rulings are usually 20 to 100 pages and are very complicated and detailed.  They negotiated with the Luxemburg tax officials and often the written proposals are approved the same day they were submitted.  Because of these deals, the European Commission is investigating whether Luxemburg’s tax rulings for Amazon and Fiat were considered illegal state aid.  It is illegal to offer deals to one company that are not available to all. 

In 2011, Luxemburg passed new laws to require companies in the country that serve as internal banks for larger corporations station a majority of their managers and board members there.  It is unclear whether this law is enforced.  The European Union recently banned the use of hybrid loans and Luxemburg and other EU members have until the end of 2015 to enact the ban into law within their borders.  

Share This:

Related Insights

Click on link below to learn more!

Clare Bork
11/22/17

How The Green Group Can Help You Prepare For The Upcoming Tax Reform

admin
11/17/17

Due to an error, taxpayers are receiving Identity Protection PIN letters with an incorrect year listed.

The Green Group
1/6/16
Taxonomy: 

Over 340 international companies have made secret deals in Luxemburg to save billions of dollars in taxes while maintaining little presence in the country based on leaked documents tied to the transactions.  These large companies can save in taxes by creating accounting and legal structures in Luxemburg to effectively pay tax rates less than 1 percent of the profits shifted in this country.  The leaked documents included diagrams of the complicated business structures and hundreds of pages of private tax rulings.  These letters asked for favorable tax treatment for the corporations.                

The tax scheme used hybrid loans.  Traditionally, when a company headquarters gives a loan to a subsidiary in another country, they must be taxed on the interest it receives.  Likewise, the subsidiary gets a tax deduction for the interest paid.  To bypass this tax, a company will set up 2 companies: the first a HQ branch and the second, a subsidiary of that branch, all located in Luxemburg.  The actual company HQ will then give a loan to the HQ in Luxemburg.  Following that transaction, the newly set up Luxemburg subsidiary will mirror that same loan and lend the money to the subsidiary in another country; this is where they private tax rulings come to play.  The company will persuade the Luxemburg tax authorities to consider the HQ branch in Luxemburg and the subsidiary of that branch in Luxemburg to be treated as one entity and receive favorable tax treatment.  In essence they can net the tax deduction and taxable income from interest, resulting in almost no tax.  Since the Luxemburg HQ is an integral part of the company headquarters, the payments of the loan are not seen as taxable.  The end result is a tax deduction in the subsidiary and almost no tax for the interest payments received.  The tax rate for companies in Luxemburg can be less than 1 percent.    

The companies created in Luxemburg have very little physical presence in the country.  They might simply have a mailbox or a solitary office but no visible employees.  For example, one corporate building in the country is home to more than 1,600 companies. 

Big companies such as Pepsi, Coach Inc., Ikea, Amazon, and many more have saved millions using this strategy.  PWC (PricewaterhouseCoopers), an accounting firm, has helped companies such as these get 548 tax rulings in Luxembourg from 2002 to 2010.  These tax rulings are usually 20 to 100 pages and are very complicated and detailed.  They negotiated with the Luxemburg tax officials and often the written proposals are approved the same day they were submitted.  Because of these deals, the European Commission is investigating whether Luxemburg’s tax rulings for Amazon and Fiat were considered illegal state aid.  It is illegal to offer deals to one company that are not available to all. 

In 2011, Luxemburg passed new laws to require companies in the country that serve as internal banks for larger corporations station a majority of their managers and board members there.  It is unclear whether this law is enforced.  The European Union recently banned the use of hybrid loans and Luxemburg and other EU members have until the end of 2015 to enact the ban into law within their borders.