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EC investigates Luxembourg tax loopholes

27th November 2014

MGI World EC investigates Luxembourg tax ‘magical fairyland’

Luxembourg is to be pressed by the European Commission (EC) on several tax rulings involving more than 300 global companies.

The country, a European Union (EU) member state, is famous for having a tax system that allows multinational establishments to use complex tax loopholes to minimise their tax exposure.

The complicated accounting laws and legal structures in Luxembourg allow for the creation of systems to move profits from countries with higher tax to low-tax Luxembourg. Some companies likely attained effective tax rates of less than one per cent on the profits they moved through the nation.

What’s now being investigated is if any of the hundreds of private tax rulings that were granted by Luxembourg authorities to corporations were improper.

In member states of the EU, such tax rulings are common practice. However, Margrethe Vestager, the European commissioner for competition, noted they could constitute state aid if, in such tax rulings, member states accept that “a tax base of a specific company is calculated in a favourable way which does not correspond to market conditions”.

Such rulings “may give to the company a more favourable treatment than what other companies would normally get under the country's tax rules”, she added.

These investigations come at a sensitive time for Jean-Claude Juncker, the EC’s new president, as these tax concessions were arranged while he was still prime minister of Luxembourg.

But, he stresses the arrangements were completely legal under the laws and rules of Luxembourg.

Juncker argues the problem lies with the different tax systems spread across the EU and believes he is still suitable for the role as EC president stating there is “no conflict of interest”.

The EC is also investigating two other Member State countries, Ireland and Malta, with their involvement in such tax avoidance schemes and also accused The Netherlands of granting such favourable conditions or state aid to companies.

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