2010 Investment Climate Statement - Luxembourg

2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010

Openness to Foreign Investment

Foreign Direct Investment (FDI) reflects how willing foreign entities are to invest in a given country.

The Grand-Duchy of Luxembourg offers an overall public policy framework (export model) and political stability which, despite the continuing economic crisis, remain highly attractive for foreign investors and particularly for investors from the U.S., owing to the strong bilateral partnership and trust built up over the past fifty years between the two countries. Luxembourg offers a very favorable and welcoming attitude toward FDI through the willingness of successive Luxembourg governments to continually optimize the business framework – a policy that can be termed unique in Europe – as well as offer incentives for new ventures, including deferred corporate tax payment schedules, capital investment subsidies and financing of equipment and start-up entities through the state lending agency, SNCI. The primary recent example of this is how effectively the Government of Luxembourg (GOL) has attracted new investment in medium, light and high-tech industries, especially in the areas of Health Technologies and Research and Development (R&D).

Luxembourg remains the most promising location for business investment in Europe - along with Switzerland - with the advantage of being a member of the European Union (EU).

The key points of climate attractiveness for FDI in Luxembourg are:

  • Economic and political stability – even in the midst of the financial crisis, Luxembourg maintains relative fiscal stability (although has a budget deficit for the first time in 2010) and strength in productivity and growth as compared to other EU countries.
  • Openness to and accessibility of government officials and decision-makers; coordination of vision by government leaders for the country’s future development.
  • Though not a “tax haven”, Luxembourg is a “tax-efficient” country and signed twenty protocol agreements or amended double-taxation treaties with countries, including the U.S., in 2009, in order to comply fully with OECD transparency guidelines and combat tax-evasion by foreign depositors in Luxembourg financial institutions, by facilitating information exchange on a justified basis.
  • Recent abolition of withholding tax on dividends (formerly 5%) paid by a Luxembourg entity to a shareholder located in a foreign jurisdiction.
  • Presence of “critical mass” of U.S.-origin companies in diverse sectors (industry; e-commerce/IT; financial/investment services; and the fast-growing biotech/health technologies), facilitating due diligence by incoming companies and cooperation on common policy and business issues.

As a measure of the pro-active willingness to attract foreign investment, the GOL created two promotional agencies in 2008, LuxembourgforBusiness (attached to the Ministry of Economy) and LuxembourgforFinance (attached to the Ministry of Finance). The former concentrates on attracting industrial investments, whereas the latter is oriented toward banking and the investment fund industry.

Continuing leading sectors of investment opportunity

1. Biotechnology / Health Technologies

In June 2008, Luxembourg announced a major investment initiative (USD 200 million from GOL over the first five years) in biomedical research in collaboration with cutting-edge U.S. biotech firms (TGen) and research institutions (the Institute for Systems Biology (ISB) and the Partnership for Personalized Medicine (PPM)), led by Nobel Prize-winning American scientists. The objective is to develop a center of expertise in the area of molecular medicine. Unique opportunities have thus been created for foreign private investment in technological excellence and scientific research toward preventive medicine, in particular cancer (with lung cancer as chosen lead project). This project is open and attractive to highly-skilled workers of all nationalities and serves as a strong export platform for incorporating U.S. products and services. Part of this project is to be located with the expanded University of Luxembourg at the new campus in Esch/Belval, a redeveloped industrial area south of the capital city. This new center of excellence for academia, research and technology offers diverse opportunities for investment and partnership.

2. E-Commerce

The European Union (EU) directive on services provided electronically attracted a number of non-EU companies to establish European headquarters in Luxembourg thanks to its low VAT (sales tax) rate (lowest in Europe at 15 percent as opposed to Ireland's 21 percent or Germany’s 19 percent). Services offered by a company registered outside the EU are subject to the VAT levy of the customer's country of residence, whereas if registered in an EU member state, the VAT of company headquarters’ country is applied. In the past four years, major U.S. electronic service (e-commerce) providers have chosen Luxembourg as their European base of operations, including Amazon, Apple i-Tunes, Digital River, PayPal (eBay) and most recently, Rovi (formerly Macrovision).

However, following a challenge by some member states of the EU directive and intense negotiations, on December 5th, 2007 the EcoFin (committee of finance ministers of the EU) decided to extend the current directive for VAT on electronic services but only through 2014. This allows for a continued favorable investment situation for U.S. e-commerce companies to establish their European headquarters in Luxembourg and benefit from the lowest VAT rate of 15%. However, starting in 2015, the proposed change to the directive will be implemented to divide VAT revenue between the country of supply and the country of consumption of the service, at a progressively decreasing share for the country of supply - thereby decreasing the incentive to locate point of supply in Luxembourg specifically for the VAT rate. Despite the loss of this decision factor, Luxembourg’s attractiveness as a headquarters location will continue to be driven by a favorable fiscal climate (moderate consolidated corporate tax rate equivalent to the EU average of around 29%, no capital gains tax, no tax on dividend income…), a rapidly-developing technological infrastructure (led by the government initiative “LuxConnect” to enhance bandwidth availability and connectivity), a well-educated and multilingual workforce and a high quality of life as measured yearly by the Mercer Consulting worldwide survey. Together this enables Luxembourg to present itself as a “center of excellence” for IT and e-commerce companies, as well as the innovative and growing internet service sector (domain name management, etc).

3. Telecommunications

Thanks to an EU directive recently implemented to open up the telecommunications market, the Luxembourg national postal and telecommunications entity (P&T), which has been for all intents and purposes a monopoly, is now challenged by new actors entering the market, especially in the area of mobile telephone technologies. With the expansion of smart phone product offerings (iPhone; HTC – Windows Mobile), there are greater opportunities for new mobile operators to enter the market.

Since 1960, U.S. firms have figured among the most prominent foreign investors and employers in Luxembourg, producing tires (Goodyear), chemicals (DuPont), glass (Guardian Industries) and a wide range of industrial equipment, as well as performing cutting-edge technical research and development (Delphi).

The major laws affecting incoming foreign investment through acquisitions, mergers, takeovers, and "greenfield" (starting from nothing) investments are based on the Luxembourg company laws, which are regularly updated and in line with EU regulation. The Luxembourg judicial system upholds sanctity of contracts.

There is no overall economic or industrial strategy that has discriminatory effects on foreign investors. There are no limits on foreign ownership or control (for example, all the banks are wholly-owned subsidiaries of their parent entities). General screening of foreign investment exists in line with that of domestic investment, with routine and non-discriminatory screening mechanisms. There are no major sectors/matters in Luxembourg in which foreign investors are denied national treatment (equivalent to domestic firms). Following a decision to prioritize the simplification of administrative procedures which had been a deterrent to the creation of small businesses and the spirit of entrepreneurship in Luxembourg, the Ministry of Middle Classes (small and medium-sized businesses), in cooperation with the Ministry of the Economy of GOL established a National Committee for administrative simplification (alleviating bureaucratic red-tape). This measure is intended not only to enhance the competitiveness of the Luxembourg economy but will also provide easier access to the Luxembourg market for all entrepreneurs, including Americans. This measure, directly related to the national plan for innovation and full employment, provides for a reduction of paperwork and a long-term commitment by the appropriate agencies to study the impact of future draft laws on the small business community. On average, a company can expect to be registered within six months of application, especially with the support of the Luxembourg Chamber of Commerce, which requires all commercial enterprises to become members (register).

This measure is also designed to streamline the process of transcribing European Union directives into local law, as well as the adoption of legal texts and regulations into common practice. http://www.simplification.lu 

Luxembourg generally boasts a liberal investment regime. There are no officially "closed" sectors (see section on Competition from State-Owned Enterprises), although cable television is still dominated by one provider per region such as Coditel for the capital city area and Eltrona for the Moselle region.

Foreign investors are allowed to participate equally in ongoing privatization programs, and the bidding process is transparent with no barriers erected against foreign investors at the time of the initial investment or after the investment is made. Moreover, there are no laws or regulations specifically authorizing private firms to adopt articles of incorporation or association which limit or prohibit foreign investment, participation, or control, and there are no other practices by private firms to force local ownership or restrict foreign investment, participation in, or control of domestic enterprises. Potential conflicts of interest (GOL officials sitting on boards of directors, for example) do not impact freedom of investment in the private sector.

As one of the most competitive countries in the world with favorable economic conditions, the government's proactive policies in attracting FDI contribute to consistent investment growth and continuing positive projections for future investment, despite the current global economic crisis. Many international firms find it convenient to locate European headquarters or holding companies in Luxembourg as a result of the country's openness to foreign cultures, the high quality of life and consumer purchasing power (currently USD 88,000 GDP per capita), as well as the highly-qualified workforce available. Approximately 55 percent of Luxembourg residents and over 60 percent of the workforce are composed of foreigners (non-Luxembourgers), mainly from EU countries (Italy, Portugal), and especially from neighboring countries (150,000 cross-border workers daily from Belgium, France and Germany).


TI Corruption Index: Luxembourg ranks #12 on Transparency International’s Corruption Perception Index for 2009

Heritage Economic Freedom: Luxembourg ranks #15 on the Heritage Foundation/Wall Street Journal Index of Economic Freedom for 2009

World Bank Doing Business: Luxembourg ranks #64 in Ease of Doing Business for 2008-2009

MCC (Millennium Challenge):

Conversion and Transfer Policies

There are no restrictions on converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, lease payments) into a freely usable currency and at a legal market-clearing rate. There have also not been any recent changes to remittance policies with respect to access to foreign exchange for investment remittances. There is no difficulty in obtaining foreign exchange, which has been freely traded since the 1960’s, and the Luxembourg stock market trades in forty different currencies, so is truly international.

The average delay period currently in effect for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal, legal channels is quite brief, approximately 24 hours. Investors can remit through a legal parallel market including one utilizing cash and convertible negotiable instruments (such as dollar- denominated host government bonds issued in lieu of immediate payments in dollars). There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.

All this said, it has been reported by international firms that some banks are starting to refuse to open an individual bank account for an American, after recent reporting requirements imposed by the IRS.

Expropriation and Compensation

The laws governing expropriation of property are quite complex, and the process can be arduous and lengthy, depending on the building. The Ministry of the Interior, along with the Ministry of Justice, sets forth the specific regulations according to each type of case. There have been no known expropriatory actions in the recent past or policy shifts which would point to expropriatory actions in the near future, and there appear to be no tendencies of the host government to discriminate against U.S. investments, companies or representatives in expropriation. There are also no sectors (e.g., mining, banking, telecommunications, large land holdings, etc.) that are more at risk for expropriatory or similar actions, and no laws that force local ownership.

Instances of "creeping expropriation" or governmental action tantamount to expropriation, such as confiscatory tax regimes, that might warrant special investigation (particularly by OPIC prior to offering coverage), have not been found.

Dispute Settlement

There are arbitration possibilities available for domestic dispute settlements with the Luxembourg Chamber of Commerce and the Mediation Center and, on an international level, with the International Chamber of Commerce. There have been no known investment disputes over the past few years involving U.S. or other foreign investors or contractors in Luxembourg.

That said, a newly-developed issue which could be viewed in terms of a brewing “trade dispute” concerns the financial sector, largely as a result of the world economic crisis and protectionist tendencies to support domestic financial markets. According to the Association of the Luxembourg Fund Industry (ALFI), the EU had issued a draft directive on Alternative Investment Fund Managers (ie, non-traditional investment fund vehicles such as derivatives, private equity, etc) which would have forced all U.S. managers looking to distribute their products in Europe to comply with European legislation. This draft is now in the process of being amended. The latter initiative may be a response to the new U.S. proposed legislation (the “Rangel-Baucus Bill”, proposed jointly by Representative Charles Rangel of New York and Senator Max Baucus of Montana), of extreme concern to the European financial industry as a whole. The European Banking Federation, as well as the European Fund and Asset Management Association, are currently trying to make their voices heard on this potential measure on the distribution of non-U.S. funds in the United States of America.

The Grand-Duchy's legal system is based on the Napoleonic Code. Luxembourg has assimilated the laws of neighboring countries according to the nature of the laws: German tax law, French civil law, and Belgian commercial law (written and consistently applied). Judgments of foreign courts are accepted and enforced by the local courts, and Luxembourg does have a written and consistently applied bankruptcy law, which is based, like other European countries, on EU-wide legislation. Monetary judgments are usually made in local currency.

The government accepts binding international arbitration of investment disputes between foreign investors and the state, and the courts recognize and enforce foreign arbitral awards. International arbitration is accepted as a means for settling investment disputes between private parties, and there is indeed a domestic arbitration body within the host economy, the Centre de Mediation (Mediation Center).

Luxembourg is a full member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention, signed in 1965 with entry into force in 1970).

Performance Requirements and Incentives

Luxembourg maintains measures that are consistent with WTO trade related investment measures (TRIMs) requirements, and in general the country adheres to WTO regulations in conformity with internal EU market directives. Performance requirements and incentives are applied uniformly and systematically to both domestic and foreign investors.

Luxembourg is considered to be a very attractive tax location for conducting business: low effective corporate tax rates (now 21%); the lowest VAT (value-added tax) rate in Europe at 15 percent; continued relatively low personal tax burden, despite the fiscal crisis, for high-income individuals (among the lowest individual rates in the EU with a maximum of 38.9 percent); and a variety of tax incentives (investment tax credits, new business tax credit, audiovisual certificates for film productions, venture capital investment certificates, small business incentives, regional and national incentives, research and development incentives, environmental incentives).

Luxembourg is one of the world's largest financial centers, with USD 2 trillion Luxembourg-domiciled investment fund assets, second only to the United States of America. These funds are generally exempt from corporate income tax, municipal business tax, and withholding tax on dividends and are only subject to the subscription tax. The Grand-Duchy is also a major banking and insurance (especially reinsurance) center, with banks, securities depositaries, insurance and reinsurance companies, as well as other financial service companies benefiting from preferential regulations when establishing their taxable basis for corporate income tax.

Several other available incentives for industry or other sectors are not given in the context of taxation but rather as general business or financial incentives, mostly by the state-financing agency SNCI, such as: loans at reduced interest rates; government guarantees on loans; real estate development assistance in certain industrial sites and buildings; cash grants (for high-technology investments, reorganizations of economically justified sectors, research and development of innovative products, services or manufacturing processes); and financial incentives for audiovisual productions using production facilities and locations in Luxembourg, within the EU framework for co-production financing. Particularly now in R&D, government subsidies are important and highly open to foreign investors, under the condition that they create a local company.

Performance requirements are imposed on a case-by-case basis, for example with respect to employment, as a condition for establishing, maintaining or expanding the investment, or for access to tax and investment incentives. There is no requirement that investors purchase from local sources or export a certain percentage of output or only have access to foreign exchange in relation to their exports. In the case of foreign investments, there is no requirement that nationals own shares, that the share of foreign equity be reduced over time, or that technology be transferred on certain terms. The government does not impose "offset" requirements, whereby major procurements are approved only if the foreign supplier invests in manufacturing, R&D, or service facilities related to the items being procured.

The government uses incentives to favor investment in certain locations and specific geographic areas, for example, abandoned or vacant industrial sites such as in Esch-sur-Alzette, the second largest city in the country (the developing Esch/Belval high-tech zone for example, with the new University of Luxembourg campus and partner biotech R&D facilities). These incentives are dependent on the size of the operation and nature of the investment. There are no enforcement procedures for performance requirements; U.S. and other foreign firms are able to participate in government-financed and/or subsidized research and development programs on a national treatment basis. However, local companies must have local resident members on their board of directors.

There are no discriminatory or excessively onerous visa, residence or work permit requirements inhibiting foreign investors’ mobility. The Luxembourg employer must apply for the work permit, and if granted, the work permit entitles a person to a residence permit. Work permits will only be granted if the vacancy was registered with the ADEM, the Employment Administration (under the authority of the Ministry of Labor). A business license is required for independent activities; a complete file must be submitted to the Ministry of Small Business (Ministère des Classes Moyennes), where a commission will review each case and, if applicable, give the authorization.

That said, the process for obtaining a driver’s license, while streamlined and transparent, frequently proves very frustrating to Americans. The GOL requires that residents of Luxembourg must obtain a Luxembourg driver’s license within one year of arrival. In order for an American citizen to get a Luxembourg driver’s license, they must first obtain an affidavit from the U.S. Embassy stating that they do not have a criminal record, and that they have been licensed to drive in the U.S. since “xxxx” year. In addition to this requirement, they are still required to surrender their U.S. licenses to the government. It is not clear what the GOL does with this inventory of U.S. licenses. The argument, according to U.S. Embassy Consular Affairs, is that this is Luxembourg’s way of telling foreign drivers they do not have to submit to the Luxembourg driving test. Meaning that if the foreign driver did not want to surrender his foreign license, that does not mean he/she cannot get a Luxembourg license, it just means he/she has to submit to Luxembourg testing or what they require of a Luxembourg driver. While this is their prerogative, it does seem onerous that an alien would have to surrender his or her home driver’s license (especially since the license is used for identification purposes in the U.S.) It inevitably leads to problems when Luxembourg-licensed, but American-citizen drivers return to the U.S. either temporarily or permanently and encounter issues with not having a U.S. license or have to begin yet again the process of getting a “new” U.S. state license (most states will not consider it a renewal without the previous license submitted). The affidavit mentioned above is a very routine service provided in American Citizen Services (ACS) – it is probably the most frequently-requested notarial service at the Embassy.

Otherwise, there are few barriers to foreign investors’ mobility and no discriminatory or preferential export policies or import policies affecting foreign investors. Luxembourg’s trade policy is the same as that of other member states of the European Union. The common EU weighted average tariff rate is approximately 2.1%. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors (somewhat still in telecommunications) and inconsistent customs administration across EU members.

Right to Private Ownership and Establishment

According to common laws, there is a right of foreign and domestic private entities to establish and own business enterprises and engage in all forms of remunerative activity in Luxembourg. There is also a right of private entities to freely establish, acquire, and dispose of interests in business enterprises. In fact, competitive equality is the standard applied to private enterprises in competition with public ones with respect to access to markets, credit, and other business operations, such as licenses and supplies.

Protection of Property Rights

Secured interests in property in Luxembourg, both movable and real, are recognized and enforced through intellectual property and community laws. The legal system that protects and facilitates acquisition and disposition of all property rights, such as land and buildings, is based on a "land register" called "cadastre" in French, where each parcel of property is documented in terms of ownership and duration. There is adherence to key international agreements on intellectual property rights, as well as adequate protection for: intellectual property, patents, copyrights, trademarks, and trade secrets.

Adequate steps have also been taken to implement and enforce the WTO TRIPS agreement (Trade-Related aspects of Intellectual Property Rights). The regulation stipulating the measures to prohibit the release for free circulation, export, re-export or entry for a suspensive procedure of counterfeit and pirated goods states that the authority competent to receive applications must be a customs authority. In Luxembourg, this is the Litigation and Research Department (Division des Contentieux et Recherches) of the Directorate of Customs and Excise (Direction des Douanes et Accises). The merits of a case are decided by judicial proceedings, thus the ordinary law courts are responsible for deciding whether there are grounds for a case. A number of provisions within the agreement deal with different intellectual property rights and allow for the possibility of confiscating, or even destroying, counterfeit goods and the tools or implements used for their production. The Luxembourg customs authorities may impose measures for a period of six months, which may be renewed at the request of the right-holder.

The main rules of civil procedure are contained in the Luxembourg Code of Civil Procedure and in the Administration of Justice Act. In the absence of specific rules concerning material and local jurisdiction for certain intellectual property rights, ordinary law applies.

Transparency of Regulatory System

The Government of Luxembourg (GOL) uses transparent policies and effective laws to foster competition and establish "clear rules of the game". The legal system is quite welcoming with respect to FDI. Tax, labor, environment, health and safety, and other laws and policies in no way distort or impede investment. Bureaucratic procedures, including those for licenses and permits, are sufficiently streamlined and transparent, and there is far less "red tape" than in larger European countries. Official Luxembourg government websites offer clear and detailed information, unfortunately only in French, except for that of the Ministry of Foreign Affairs (MFA), which has limited detail. Various relocation companies in Luxembourg provide assistance with filing the required paperwork.

There are no informal regulatory processes managed by nongovernmental organizations or private sector associations; all procedures are managed by government entities. Proposed laws and regulations are published in draft form for public comment in the “Memorial”, the government’s official journal. In addition, the legal, regulatory, and accounting systems are transparent and consistent with international norms. Regarding the accounting standards, large companies in Luxembourg use the international accounting standards “IFRS” (International Financial Reporting System), which closely parallels the U.S. “GAAP” (General Accounting Principles). There has been an attempt to harmonize these standards further over the past years, however the standards have not been fixed over the long term.

There are no private sector and/or government efforts per se to restrict foreign participation in industry standards-setting consortia or organizations, however the national regulations agency is a public entity.

Efficient Capital Markets and Portfolio Investment

Luxembourg government policies, which reflect the EU’s free movement of capital framework, facilitate the free flow of financial resources to support the product and factor markets. Credit is allocated on market terms, and foreign investors are able to get credit on the local market, thanks to the sophisticated and extremely developed international financial sector, depending of course on the banks’ individual lending policies. With the financial crisis, banks everywhere have become more selective in their lending practices. The private sector has access to a variety of credit instruments, including those issued by the SNCI, and there is an effective regulatory system established to encourage and facilitate portfolio investment. In recent years, Luxembourg has been recognized as a model of fighting money-laundering activities within its banking system through the enactment of strict regulations and monitoring of fund sources.

Luxembourg's banking system is relatively sound and strong, despite the continuing world financial crisis and thanks partly to the emergency investments made by GOL in the two major banks, BGL BNP Paribas (formerly Banque Generale du Luxembourg and then Fortis) and Dexia BIL, in 2008. As of September 2009, a total of 152 banks (stable vs. year-ago) were operating, with total assets of EUR 932 billion (USD 1.34 trillion, an increase of 6% vs. year-ago, most likely reflecting merger activity) and approximately 27,200 employees.

There are no "cross- shareholding" and "stable shareholder" arrangements used by private firms to restrict foreign investment through mergers and acquisitions. Also, measures to prevent hostile takeovers by foreign investors do not exist, since the situation is largely non-applicable. The one recent important example was the initially “hostile” takeover attempt by Lakshmi Mittal of Arcelor, the country’s largest employer (originally Arbed, the Luxembourg national steel company) in 2006. The GOL was careful to stay out of the debacle until it became clear that Mittal would be able to force a merger via Arcelor shareholders, at which point the GOL exercised its muscle as shareholder to negotiate maintaining the headquarters in Luxembourg.

Competition from State-Owned Enterprises

Private enterprises are allowed to compete with public enterprises in Luxembourg under the same terms and conditions in all respects. All markets are now open or have been “liberalized” via EU directives to encourage market competition vs. monopolistic entities. There is a national regulator (National Institute of Regulation), which sets forth regulations and standards for economic sectors, mostly derived from EU directives transposed into local law. While markets continue to open up, the intent of the government is to maintain a large enough stake in critical sectors such as energy, in order to be able to influence the future direction of the economy.

The most evident example of a state-owned enterprise (SOE) market dominance is in the postal and telecommunications sector, traditionally a public utility in Europe. In Luxembourg, the SOE actor is P&T (postal and telecommunications), whose sole shareholder is the government of Luxembourg and whose board of directors is composed of civil servants (most important, the chairman, Gaston Reinesch, is the director of the Ministry of Finance). P&T has had to react to the market competition by new incoming players (Orange, Mobistar, Voxmobile, Vodafone) by transforming itself from a passive utility company into a private enterprise recruiting from the corporate sector and improving the offer to the consumer. P&T also publishes an annual report and communicates in similar fashion to a private company.

The larger economic question is whether the Luxembourg market is worth entering, considering its small size (just under 500,000 population) and lower growth rate potential as a mature telco market.

Another sector where SOE’s were very active has been the energy sector (electric and gas utilities), which is now open and “liberalized” as well. Anyone can become a provider or distributor (via networks) of electricity and gas. The former state electricity utility, Cegedel, was recently absorbed into a new private company, Enovos, along with a nearby German utility and the former state gas utility, with an independent board of directors. Creos, the new distribution network for energy, is jointly held by the government and private shareholders.

Finally, an important market which appears to have barriers to entry is freight air transport, due to the dominance of the (now) majority state-owned Cargolux, Luxembourg’s national all-freight airline based at Findel Airport. Cargolux, the largest U.S. “customer” in Luxembourg in value terms, owing to their all-Boeing fleet of sixteen 747 freighter aircraft, was recently rescued from bankruptcy by the government, which facilitated a capital increase in return for a larger share of the company. As this was deemed a temporary “crisis” measure due to the global downturn in the freight transport market however, the government is looking to attract new private investors to help decrease their share in the airline over time.

In general, if the government has a share in an enterprise, they will receive board of directors seats on a comparable basis to other shareholders and in proportion to their share, with no formal management reporting directly to a line minister.

There is no Sovereign Wealth Fund (SWF) currently in place in Luxembourg. There is a “special reserves fund”, which could be considered to be a variation on a SWF, in which surplus funds have been set aside. Due to the global economic crisis starting in late 2008, the government has begun dipping into the reserve fund for operational needs, as opposed to the intended policy of using for special projects or initiatives.

Corporate Social Responsibility

Generally speaking, there is a heightened awareness of corporate social responsibility (CSR) in Luxembourg, whether it is in the corporate sector or among the consuming public. While Luxembourg has always taken a lead role in ecological matters, owing to its small size and resource-management constraints (stringent trash sorting and recycling procedures and systems for plastic, glass and paper for example), the global discussion on climate change, and especially pressure from the EU in terms of concrete goals and directives, has pushed this issue to the forefront of CSR priorities. Multinational companies operating in Luxembourg are now primarily aligning their policies on international trends – adopted from the parent offices – for example, in the area of carbon emission reductions. One of the Big 4 multinational audit firms has set a local goal of reducing their emissions by 20-25% per year, by reducing copy machine and fax usage, for example. Companies are directing their staff to use public transportation (trains) where possible for business travel, in place of air or car usage.

The clearest public expression of increased CSR among the corporate community has been the launching of public foundations (Fondation de Luxembourg, or Luxembourg’s national charitable foundation, formally launched last year) and corporate charitable foundations, such as the ArcelorMittal Foundation. This not only serves pure CSR objectives of supporting designated worthy charitable causes (in the case of ArcelorMittal, supporting schools and public infrastructure for health and the environment in their production site locations), but also serves to enhance the company’s overall image and reputation as a good “corporate citizen”. The Luxembourg government took measures in 2009 to ameliorate the legal and tax framework concerning charitable donations by doubling the allowable tax deduction and participating in a new network of countries facilitating cross-border donations by partnership (currently 14 European countries, including Switzerland). For example, a donor can now contribute to the Foundation of France and designate a recipient organization in Luxembourg via the Luxembourg Foundation.

The government of Luxembourg has not only implemented EU directives concerning emissions reduction, but also set forth major new energy policies to promote clean energies and energy conservation in consumer households. Ecological “bonuses”, Car-e and Car-e Plus programs that promote the purchase of low-CO2 emitting vehicles have been extended until July 2010. The Car-e bonus will be increased to EUR 1500 (USD 2160) for a car that emits less than 100 mg of CO2 per kilometer. The Cool bonus that promotes low-consuming freezers or fridges (A++ rating) is also extended for a year. In 2010, the “energy pass” becomes compulsory for existing dwellings (houses and residences) that change owner, tenant, or accommodation that undergoes substantial installation transformation (www.myenergy.lu website).

Regarding OECD guidelines, large companies in Luxembourg appear to be following the OECD Millenium Report guidelines, which suggest directing a percentage of turnover (gross sales) toward the corporate foundation, in order to increase initial endowment.

Nevertheless, CSR is still in the early stages of development in Luxembourg, as opposed to Anglo-Saxon countries (U.S. and UK), which have a longer and more deeply-ingrained tradition of charitable giving. This is partly due to the broader and deeper heritage of support provided by the government sector.

Political Violence

Luxembourg has consistently ranked among the overall safest or lowest risk countries and most politically stable in the world (longest-serving Prime Minister in the EU for example, Jean-Claude Juncker). There have been no recent serious incidents involving politically motivated damage to projects or installations (with the notable exception of a contained labor union demonstration in front of ArcelorMittal headquarters in 2009 against planned lay-offs). The environment is not growing increasingly politicized such that civil disturbances would be likely, with the possible exception of specialized non-governmental organizations (NGO’s) such as Greenpeace. Of note is that many of the demonstrations which occur in Luxembourg are not aimed at the Grand-Duchy, but rather at the EU offices located within Luxembourg (for example, the European Court of Justice and the European Court of First Instance). There are no known nascent insurrections, belligerent neighbors or other politically motivated activities.

According to World Markets Research Centre of London, Luxembourg is rated consistently high as one of the "least risky places to do business" in the world. The risk ratings were all noted "insignificant" for the following reasons: political risk (existence of institutional permanence, internal and external political consensus); economic risk (existence of forward planning, a diverse and resilient economy); legal risk (existence of innovative legislation, transparency, independence and experience); tax risk (coherent and fair taxation system, low "effective" corporate and personal income tax rates below EU average); and operational risk (supportive attitudes toward foreign investment, high quality of infrastructure, existence of "social peace" with Tripartite system of negotiation process involving labor, employers and government, low bureaucracy and corruption).


The Grand-Duchy of Luxembourg has laws, regulations, and penalties to combat corruption effectively, and they are enforced impartially with no disproportionate attention to foreign investors or any other group. The country ranks very favorably on the World Bank’s corruption index (very low) and Luxembourg placed #12 (one rank lower than a year ago) in Transparency International’s 2009 Corruption Perception Index. In particular, Luxembourg has made anti-money laundering and suppression of terrorism financing a priority, given its status as a leading world financial center. The government has taken the lead in freezing bank accounts suspected to be connected to terrorist networks, and in November ‘04 extended the law against money-laundering and terrorist financing to additional professional groups (including auditors, accountants, attorneys, and notaries). Also, local police, who are responsible for combating corruption, work closely with neighboring countries’ law enforcement officials, as well as with Interpol (international police network) and Europol (European police network).

Regulations are enforced by the strong but flexible Financial Sector Surveillance Commission (CSSF, which is equivalent to the U.S. Securities and Exchange Commission). U.S. firms have not identified corruption as an obstacle to FDI in Luxembourg. There are no areas or sectors where corruption is pervasive, whether in government procurement, transfers, performance requirements, dispute settlement, regulatory system, or taxation. Giving or accepting a bribe, including between a local company and a public official, is a criminal act subject to the penal code. Senior government officials take anti-corruption efforts seriously. International, regional or local nongovernmental "watchdog" organizations do not operate in the country, given the lack of need.

According to industry advisors, a local company cannot deduct a bribe to a foreign official from taxes.

Bilateral Investment Agreements

Luxembourg has a bilateral taxation (just amended to upgrade to OECD information exchange standards on bank accounts in 2009), as well as an aviation treaty, with the United States, and there are no taxation issues of concern to U.S. investors.

Other countries with which Luxembourg has bilateral agreements are:
Bahrain (aviation)
Barbados (aviation)
Chile (aviation)
Costa Rica (aviation)
Croatia (aviation)
Cyprus (aviation)
Czech Republic
Gabon (aviation)
Gambia (aviation)
Hong Kong (aviation)
India (aviation)
Iraq (aviation)
Israel (aviation)
Jordan (aviation)
Kenya (aviation)
Kuwait (aviation)
Lebanon (aviation)
Macau (aviation)
Nepal (aviation)
The Netherlands
New Zealand (aviation)
Philippines (aviation)
South Africa
South Korea
Syria (aviation)
Togo (aviation)
Trinidad and Tobago
United Kingdom

OPIC and Other Investment Insurance Programs

Luxembourg is a member of the Multilateral Investment Guarantee Agency (MIGA).


Luxembourg boasts a very stable, diverse, multilingual and qualified labor market, benefiting from the approximately 150,000 readily available cross-border commuter workers (both industrial and service employees) who come to work in Luxembourg on a daily basis from the neighboring countries of Belgium, France and Germany. Foreign (non-Luxembourger) workers are treated the same as nationals. Work permit constraints were recently relaxed for non-EU applicants (including Americans), particularly for qualified persons.

Foreign investors often cite Luxembourg's labor relations as a primary reason for locating in the Grand- Duchy. Unemployment in Luxembourg is on the rise at approximately 6% as of the end of 2009, due to the impact of the global economic downturn and increased layoffs by international corporations. However, this rate remains far below the EU average of 9-10%, and labor relations have been peaceful since the 1930’s. Most industrial workers are organized by unions, linked to one of the major political parties. Luxembourg is proud of the system of representatives of business, unions and government participating in a "tripartite" process in the conduct of major labor negotiations, which serves to avoid strikes, common in the neighboring countries of France and Germany.

Foreign-Trade Zones/Free Trade Zones

At present, there are no foreign trade zones, free trade zones, or free ports in Luxembourg. However, Minister Jeannot Krecke (Economy and Foreign Trade) has informed the Luxembourg Chamber of Deputies of his desire to create a free trade zone, which would be integrated into the developing logistics activities in the Grand-Duchy. This zone, inspired by the system of customs warehousing, would allow the warehousing and handling of merchandise in a secure location free of fiscal constraints. Taxation would only be triggered when the articles left the zone for importing into the country of consumption. This type of zone could be envisaged on the former WSA site (former USG warehousing) in Bettembourg, in southern Luxembourg. A feasibility study is now being conducted on the matter by the GOL.

Foreign Direct Investment (FDI) Statistics

For the latest full year’s data available (2008), the total value of foreign direct investment (FDI) in Luxembourg (“capital inflows”), including financial capital, from worldwide sources was USD 100.5 billion, of which the U.S. accounted for USD 5.2 billion, or 5.2%. The majority of inflows came from countries outside of the European Union (27 Member States), or USD 123.7 billion, which were closely matched by outflows to countries outside of the EU as well (USD 123.3 billion). Total inflows in year 2007 were double the 2008 amount (USD 200.2 billion), largely attributable to the impact of the merger of the country’s largest company and employer, Arcelor, with Mittal Steel to form ArcelorMittal in 2006, the world’s leading steel maker with headquarters remaining in Luxembourg. Mittal Steel, formerly headquartered in Rotterdam, Netherlands and London, England, “imported” a great amount of capital and investment in both 2006 and 2007. Of note most recently, in second quarter 2009, a relatively large inflow came from the U.S. (USD 65.9 billion), due partly to the opening of the company Abbott Overseas Luxembourg, financed by Abbott Health Products of Delaware.

In terms of FDI expressed in stock, or the value of FDI in place in Luxembourg, the total value in 2007 (latest year available) was USD 79.5 billion (at current exchange rates), comparable to USD 65.3 billion in 2006. Both of those years stand out historically due to the significant investment made by Lakshmi Mittal (CEO and Chairman) for the above-mentioned ArcelorMittal merger in 2006. The latter investment accounted for largely half of the total stock in country. Banking and financial activity has consistently represented the major investment sector. On a geographical basis, the EU was the leading source of stock, with an 84% share of the total value, of which neighbor Germany was the clear leading investor country (USD 23.5 billion in 2007), followed by other neighbors Belgium, then France. FDI originating from the U.S. has been consistently important and steady in the past years (2006 and 2007 – latest data available), with an amount comparable to that of France, at USD 8.5 billion (2007), attributable not only to financial interests but also to U.S. companies partnering with the new Luxembourg BioBank project.

In terms of direct investment abroad made by Luxembourg (“outflows”), the world total was EUR 51.8 billion (or USD 74.6 billion) in 2007 (latest available), with only 6.6% directed to the U.S. The bulk of the investment amount, or 72%, was invested in the other European Union countries, with neighboring Belgium in the lead with EUR 13.0 billion (or USD 18.7 billion), followed by neighboring Germany with EUR 9.0 billion (USD 13.0 billion). To illustrate the outweighing importance of the European countries to Luxembourg, the share flowing to non-EU countries was less than that of Germany alone (around EUR 7 billion, or USD 10 billion). Of note was the relatively significant amount invested in “new member states”, primarily eastern European countries such as Czech Republic, Slovakia, Slovenia, as well as the Baltic States, EUR 5.8 billion (USD 8.4 billion). Many industries, especially heavy industry such as manufacturing (steel) and labor-intensive distribution, invested in these low-cost, especially low-labor cost countries.

Considering Luxembourg’s GDP for 2007 (EUR 36.4 billion), the percentage of FDI stock to GDP was 152%. For FDI inflows, the percentage to GDP (for 2008, latest available full year) was 190%.

Source of statistics is STATEC, the national statistics agency of Luxembourg, a division of the Ministry of Economy and Foreign Trade. Of note is that FDI stock data comes from the annual FDI survey, which was launched in 1995 and for which the latest reference year currently available is 2007. The survey covers the entire banking and insurance sectors but includes only the larger companies in the remaining economic sectors. Special-purpose entities (holding companies and “financial participation” companies) are excluded from the survey.

List of major foreign direct investments:

  • Mittal Steel, to form ArcelorMittal 2006-2007 (capital from U.K. and Dutch sources)
  • U.S. partners in IBBL (Integrated BioBank of Luxembourg) in 2009:
    • Integrated Diagnostics, backed by InterWest Partners venture capital (USD 30 million)
    • Abbott Overseas, a subsidiary of Abbott Health Products
  • ·U.S. e-commerce sector – most recent:
    • Rovi (formerly Macrovision)
    • Real (a/k/a Real Networks)

Conversion rate used: 1 EUR = 1.44 USD (January 2010)