The “Report on financial crimes, tax evasion and tax avoidance” (PDF) was drafted by the parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) and endorsed in a plenary session by a vote of 505 to 63 (with 87 abstentions) on 26 March.

According to the EP report, “the high level” of investment flows into and out of Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands “can only to a limited extent be explained by real economic activities taking place in these member states”.

Foreign direct investment “is usually held by special purpose entities (SPEs) that often serve to exploit loopholes”, the report stated.

The committee cited a study estimating that “tax avoidance via six EU member states results in a loss of €42.8bn in tax revenue in the other 22 member states”.

Referring to European Commission analyses published in 2018, the European Parliament document:

“Recalls that the Commission has criticised seven Member States – Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands – for shortcomings in their tax systems that facilitate aggressive tax planning, arguing that they undermine the integrity of the European single market; takes the view that these jurisdictions can also be regarded as facilitating aggressive tax planning globally; highlights that the Commission has acknowledged that some of the aforementioned Member States have taken measures to improve their tax systems to address the Commission’s criticism; notes that a recent research study has identified five EU Member States as corporate tax havens: Cyprus, Ireland, Luxembourg, Malta and the Netherlands; stresses that the criteria and methodology used to select those Member States included a comprehensive assessment of their harmful tax practices, measures that facilitate aggressive tax planning and distortion of economic flows based on Eurostat data, which included a combination of high inward and outward foreign direct investment, royalties, interests and dividend flows; calls on the Commission to currently regard at least these five Member States as EU tax havens until substantial tax reforms are implemented”.

Steps taken

The European Commission has since issued a new set of analyses, noting twice in its dispatch on the grand duchy that: “Luxembourg is acting to curb aggressive tax planning through the implementation of European and internationally agreed initiatives.” 

The European Commission’s “Country Report Luxembourg 2019” (PDF) published on 27 February stated:

“Luxembourg’s tax rules appear to be used by multinationals engaged in aggressive tax  planning structures, but some steps are being taken to limit such practices. Some elements that may facilitate tax planning include the absence of withholding taxes on interests and royalties as well as possible exemption on dividends. However, Luxembourg has taken steps to amend aspects of its tax system to curb aggressive tax planning, in particular by implementing European and internationally agreed initiatives.”

The commission paper repeated observations that:

“High capital flows, coupled with the absence of withholding taxes on interests and royalties and possible exemption on dividends, may be an indication that Luxembourg’s  tax rules are used by companies that engage in aggressive tax planning. Inward and   outward foreign direct investments are among the highest in the EU, with a majority  linked to special purpose entities.”

That said, the commission report remarked that Luxembourg’s parliament adopted the EU’s Anti-Tax Avoidance Directive in December 2018, tightened some double taxation loopholes and ratified the OECD’s “Beps” rules.

Transparency standards

Luxembourg’s finance ministry declined to comment on the European Parliament vote. However, a finance ministry spokesman did tell Delano on 27 March that: “Luxembourg has successfully deployed efforts over the course of the last five years in order to bring its tax system in line with the European and international tax transparency standards.”

He pointed to several steps that Luxembourg’s government has taken to improve fiscal transparency which are detailed on the finance ministry’s website.

The EP report also called on the European Commission to set up EU financial crime, EU financial intelligence, EU anti-money laundering and support the establishment of a UN global tax agency.

Luxembourg’s finance ministry had no comment on these recommendations.