Finance remains the largest economic driver, contributing around one third of the GDP, with the country specialising in cross-border fund administration business. An internationalised banking sector, skilled labour force and access to other European centres have further propelled Luxembourg's financial sector.

Business-friendly regulatory frameworks, competitive tax rates, and research and development (R&D) incentives have driven foreign investment and innovation within the country. The government has offered subsidies to small to medium-sized enterprises (SMEs) and tax exemptions for start-ups to increase entrepreneurship in the country. Moreover, due to the small size of the country, public institutions have less bureaucratic structures, which enhances the efficiency of administrative procedures.

Luxembourg is one of the biggest financial centres in Europe, with more than 120 banks and USD5 trillion in assets in the custody of financial institutions.

Corporate Treasury in Luxembourg

Luxembourg is one of the wealthiest countries in Europe and is a founding member of the European Union (EU). It has a highly developed financial services sector. In this section, we highlight some of the key factors relevant to treasury and cash management in Luxembourg. 
  

Financial Market Development

• Luxembourg is ranked 17th in the 2021 Global Financial Centres Index by Z/Yen Group. 
• Luxembourg has excellent business infrastructure, an international and highly skilled labour force, an attractive legal framework and a stable macroeconomic environment. 
• There are no foreign-exchange controls in Luxembourg.
• Luxembourg has a dedicated national financial technology (fintech) platform called the Luxembourg House of Financial Technology (LHoFT) Foundation. This public-private sector initiative brings together financial institutions, fintech innovators, academia and public authorities to drive fintech development and connect with other fintech centres globally.  

Sophistication of Banking Systems

• The vast majority of the more than 120 banks operating in Luxembourg are foreign-owned, with only five having their head office in the country.
• Luxembourg is a key private banking centre in the eurozone and one of the largest fund management centres in the world. 
• Luxembourg has a well-developed debt market with both government and corporate bonds available. The government issued its first sovereign sustainability bond in 2020. Outstanding debt securities stood at USD890 billion at the end of 2020. 

Regulatory Bodies

• The banking industry is regulated by the Commission de Surveillance du Secteur Financier (CSSF). As a eurozone country, it is also covered by the Single Supervisory Mechanism (SSM). Luxembourg’s central bank is the Banque Centrale du Luxembourg (BCL). 

Tax

• For businesses with taxable income of less than EUR175,000, the corporate tax rate is 15%. For businesses with taxable income between EUR175,000 to EUR200,001, the corporate tax will be computed as EUR26,250 plus 31% of the taxable income over EUR175,000. For companies with taxable income above EUR200,001, the corporate tax rate is 17%. 
• In addition to the corporate tax above, companies also pay a solidarity surtax of 7% on the corporate income tax rate and a municipal business tax, which varies according to location. 
• Companies are subject to a net wealth tax of 0.5% on their net wealth up to EUR500 million and 0.05% on the component above this amount. 
• Resident companies are subject to tax on their worldwide income whilst non-resident companies are taxed on Luxembourg-sourced income. 
• The standard Value Added Tax (VAT) is 17% with certain goods and services qualifying for lower rates of 14%, 8%, 3%, or are VAT-exempt. 
• Interest income is taxed as corporate income. Interest expenses are generally tax-deductible. Whilst there are no thin capitalisation rules in Luxembourg, in practice the tax authorities apply an 85:15 debt-to-equity ratio on intra-group financing participation. The interest in excess of the prescribed ratio will be disallowed for corporate tax purpose and may be subject to 15% withholding tax. 
• There is no stamp duty in Luxembourg. 
• Tax incentives, usually in the form of investment tax credits, are available for companies in the areas of risk capital, audio-visual activities, environmental protection, R&D, professional training, and the recruitment of unemployed people. 
• There is no withholding tax (WHT) on interest in Luxembourg. WHT on dividends is either 0% or 15% for resident companies. Withholding tax of 0% or 15% is charged on dividends paid or payable to non-resident companies, where no tax treaty is in place. Rates range from 0% to 15% where a tax treaty is in place and the non-resident can provide a Certificate of Residence. 
• Luxembourg has tax treaties with more than 80 countries and territories. 
• Luxembourg is a signatory to the Organisation for Economic Co-operation and Development's Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises. 

  Benefits for Regional Treasury Centres

• Luxembourg’s stable tax, legal and regulatory regimes make it a highly popular location for companies to base their regional and worldwide treasury operations and shared service centres. 
• It offers access to a wide range of banking services and flexible structuring solutions, as well as an attractive tax regime, including the lowest VAT rate in Europe. 
• Notional pooling is available in Luxembourg on a domestic and cross-border basis. Multiple legal entities can participate in a notional cash-pooling structure. 
• Luxembourg is a eurozone country with trading hours that overlap with Asia, Europe and North America.