“Luxembourg can no longer afford to apply a higher rate of corporation tax than its EU partners” argues Carlo Thelen, the director general of the Luxembourg Chamber of Commerce. Archive photo: Matic Zorman / Maison Moderne

“Luxembourg can no longer afford to apply a higher rate of corporation tax than its EU partners” argues Carlo Thelen, the director general of the Luxembourg Chamber of Commerce. Archive photo: Matic Zorman / Maison Moderne

Carlo Thelen advocates for a significant tax overhaul, which includes aligning the grand duchy’s 25% corporate tax rate with the European average of 21%, modifying the wealth tax and introducing incentives for the digital, environmental and startup sectors, all to enhance Luxembourg’s economic competitiveness and attractiveness while ensuring sustainable revenue generation.

In his recent , as Luxembourg gears up for its October parliamentary elections, , the director general of the chamber of commerce and a leading voice for the economic interests of businesses in Luxembourg, highlighted the emerging political narratives on taxation. Some of these suggest a greater contribution from capital or legal entities.

Thelen counters this by stating that such an approach is misleading. It arises from an imbalanced analysis of both direct and indirect tax contributions and overlooks Luxembourg’s tax appeal for corporations and other legal entities.

He also cautions against the mistaken belief that investors committed to the grand duchy won’t seek alternatives if conditions become less favourable.

Economic cohesion at stake

Pitting the tax burdens of individuals against those of corporations is not only economically senseless but also threatens social cohesion, cautioned Thelen.

He noted that with over 6,000 sole traders operating in Luxembourg as of 2020, it’s essential to recognise the symbiotic relationship between consumers and businesses. Tax policies should be framed considering that high taxation can impede economic growth by diminishing both consumer demand and business investment. As Thelen aptly reminds, “too much tax kills tax.”

Corporate contributions

Luxembourg businesses have consistently been major contributors to tax revenues. OECD data from 2021 revealed that the nation sourced 11.7% of its total tax income from corporate profits.

These figures are commendably high, outpacing Germany (5.9%), France (5.6%) and Belgium (9.0%). The additional wealth tax, which fetched Luxembourg a whopping €878m in 2022, further underscores the corporate sector’s significant fiscal role.

However, Thelen emphasised the need for change.

The current wealth tax structure restricts companies from utilising their capital for financing, a preference that becomes more appealing with rising interest rates, he said.

While an outright removal of this tax seems unlikely due to its fiscal significance, Thelen advocates for a reduction roadmap and immediate wealth tax deductions for companies fortifying their balance sheets.

Changing perceptions

The Luxembourg Attractiveness Survey 2023 unveiled a shift in corporate sentiments. About 35% of companies perceive Luxembourg’s tax policies as less appealing compared to other investment destinations. This is concerning, especially given Luxembourg’s historical edge over its neighbours in fiscal attractiveness.

The ever-evolving financial sector, which remarkably contributed 76% to corporate income tax in 2021, remains particularly sensitive to these shifts. Recent legislative initiatives, like the one from 11 July 2023, , hint at efforts to enhance Luxembourg’s allure.

Path forward

Thelen’s overarching argument is for the reformation of Luxembourg’s tax system to bolster its competitiveness and attractiveness.

He recommends aligning the 25% corporate tax rate with the European average of 21%.

Alongside this reduction, Thelen highlights the need to reevaluate current wealth and subscription taxes, which he views as financial stressors on businesses, especially within the finance sector.

Applauding the Luxembourg Chamber of Commerce’s efforts, he noted their push for tax benefits like super-deductions that further environmental and digital transitions. Thelen also commended the recent bill tabled by the government on beginning 2024.

For startups, he suggests increased tax incentives and, referencing the Luxembourg ministry of the economy’s , urges their swift implementation.

In Thelen’s view, while tax incentives might pose short-term fiscal challenges, they are vital for long-term economic growth. By blending smart tax policies with effective public spending, he believes Luxembourg can retain its esteemed triple A rating and foster lasting prosperity.