Tax-Avoidance Initiatives on Luxembourg Tax Planning

Categories: STEP News

On Thursday lunchtime, STEP BeNeLux held a Lunch & Learn meeting at the Cercle Munster in Luxembourg-Grund, with James O’Neal guest speaker on the topic of Luxembourg Tax Planning in the New BEPS World.

James O’Neal was introduced by STEP BeNeLux committee member Paolo Panico as an American tax lawyer and Tax Principal at AMMC Law, and explained the concept of BEPS as Base Erosion and Profit Shifting, with the presentation focusing on the impact of recent trends at OECD, G20, and EU levels regarding anti-tax avoidance initiatives on Luxembourg tax planning.

James O’Neal has been based in the Grand Duchy for 11 years working in the domain of international taxation and has advised Fortune 500 companies, start-ups, and institutional investors on a broad range of Luxembourg tax planning solutions.

The presentation was focused towards those working in the tax domain in Luxembourg; he explained that tax law is covered comprehesively in the media nowadays. He initially put things in context by showing a diagram of the US national debt which he described as a “tsunami of red ink” illustrating the massive government debt which puts pressure on tax revenues. World government debt has increased by 15% over the past two years and is increasing at double the rate of growth, with developed countries (US, Europe, Japan) being most guilty. The BRIC countries are being much more prudent.

Governments can increase taxes such as corporate, individual and consumption taxes, as well as going after tax cheats. Countries are moving towards automatic transparency instead of negotiating multiple bilateral treaties, and are also trying to get multinational corporations to “pay their fair share” of taxes, but how countries will agreen on a global common approach is unsure.

He referenced Google’s tax structure which used a non-resident Irish company structure to ensure they hardly paid any taxes, through entities in The Netherlands and Bermuda. while the profit for such comapnies was significant, and the local economies benifitted, the state tax returns did not reflect this growth.

At the behest of the G20, the OECD initiated BEPS; there is an inherent conflict, where profit shifting is to be more carefully managed. He explained that online services can result in companies pay (almost) no taxes in the (high-tax) countries where they do most business, by placing IP rights and entrepreneurial risk in low-tax countries.

The Luxembourg proposed tax reforms will probably affect Luxembourg holding companies, but he does not think by much. He used the example of the Irish “double structure” where subsidiaries pay large royalties to a Bermuda-based company which is not subject to tax. Such cases are of foreign profits being indefinitely deferred. Dutch structures can do the same thing, and so can Luxembourg. The OECD predicts that such structures will be shut down, but it has not yet happened. The rules as they are support such structures and it is not illegal to avail of them.

If and when the rules do change, without any change of the flow of profits, foreign companies with no employees could result in significant profits which could then be taxed. Intra-EU hybrid structures will be a thing of the past. Changes are being proposed to Article 41 of the EU Parent Subsidiary Directive which will change such facilities, applying only within EU Member States.

Common in Luxembourg is the prevention of double taxation in tax planning; he explained that it is however a matter of double exemption. He presented various examples involving availing of tax structures in Switzerland and others in the Cayman Islands. On the issue of the end of non-resident Irish companies, the issue will in effect be a non-issue as the companies involved will simply establish a company in Bermuda, for example.

The new coalition government in Luxembourg’s proposed tax reforms have not been developed into a law project; the issue is really about making Luxembourg a key location for attracting talent. He concluded by saying that future tax planning needs to be focused on business reasons.

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Photo by Geoff Thompson (L-R): Paolo Panico, STEP BeNeLux; James O’Neal, speaker; Chris Vigar, STEP BeNeLux


Presentation: the slides are available upon request to the speaker James O’Neal

Author: STEP BeNeLux