Luxembourg: Tax measures in 2011 Budget announced

The Luxembourg Prime Minister presented an outline of the FY 2011 budget to the Chamber of Representatives on 5 May 2010, with measures aimed at improving the economic, financial and social situation of the country.

The notable tax measures proposed are as follows:

- The separate unemployment fund contribution that is levied as a surcharge on the corporate income tax would be increased from 4% to 5%. While the corporate income tax rate would remain unchanged, the surcharge-inclusive rate would increase from 21.84% to 22.05%.

- A flat tax for companies (e.g. financing companies) that do not directly participate in the economic activities of Luxembourg would be introduced. While the Prime Minister did not provide further details, in light of an April 2010 report of the Ministry of Economy on improving national competitiveness, the tax may correspond to a lumpsum amount between EUR 2,000 and EUR 3,000.

- Exchange traded funds would be exempt from the subscription tax. An exchange traded fund is a fund listed on the stock exchange that duplicates an index. It allows an investor to gain exposure to an index without having to buy a share in every company included in the index.

- The investment tax credit system relating to environmental fixed assets and energy saving materials would be improved.

- A ceiling would be introduced for companies on the deductibility of large bonuses (including, e.g. "golden parachutes").

- The employer contribution rate for accident insurance would be set to 1.25% (currently the rate ranges from 0.45% to 6% according to the risk class of the sector of activity). The Prime Minister also emphasized that the competitiveness of the current legislative and tax environment for Luxembourg

Financial Centres must be maintained and enhanced where needed. To this end, the government will support the Ministry of Economy's April 2010 competitiveness proposals and the current efforts to extend Luxembourg's tax treaty network will be further encouraged (e.g. seeking negotiations with South American countries and Australia). The above measures are still subject to the approval of the Chamber of Representatives, as well as the enactment of a law, and should not enter into force before the 2011 tax year.