Brussels, 19/07/2006 (Agence Europe) - The European Commission has decided that the preferential tax regime in favour of Luxembourg's Financial Holdings violates EC state aid rules. The scheme is granted under a Luxembourg law from 1929, predating the EC Treaty, and therefore constituting existing aid. Following an in-depth investigation opened in February and a preliminary four-year review, the Commission has concluded that the scheme grants unjustified tax advantages to providers of certain financial services who set up holding structures in Luxembourg. Granted exemptions from all direct business taxation in Luxembourg, these holdings provide a certain financial and capital-intensive services to related and unrelated business entities within a multinational group. The Commission claims that the scheme distorts competition and trade by altering the level playing field between financial undertakings and induces them to create dedicated structures in Luxembourg to reduce their current tax liabilities. Despite the modifications introduced in June 2005 followed Council injunctions in June 2003 which condemned the exemption as contravening the EC Code of Conduct on business taxation), because the regime still constitutes state aid as the tax advantages remain unchanged. The Commission decision requires the scheme to be repealed by the end of 2006, while its effects for the existing holdings must be definitively eliminated by the end of 2010. As the scheme is existing aid, the Commission's decision is only for the future and the beneficiaries need not repay aid received until its final elimination.
In a press release the Luxembourg government said that it was satisfied with the Commission decision that would allow existing companies prepare for restructuring. It indicated that it would be taking the necessary measures to abrogate the tax regime “because, in exchange, a lengthy transition period has been granted of more than 4 years…which should confer the legal security necessary for companies in the sector to restructure”.