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European Commission decides that Luxembourg's preferential tax regime for 1929 holding companies constitutes incompatible state aid — Orbitax Tax News & Alerts

On 19 July 2006, the European Commission announced that it had decided that the Luxembourg's tax-exempt "Milliardiare and 1929 holding companies" regime constitutes incompatible existing state aid. Previously, in June 2003, the Council of EU Finance Ministers had already considered the "Exempt Holding" exemption from dividends as harmful tax competition.

The Commission concluded that the scheme grants unjustified tax advantages to providers of certain financial services that set up holding structures in Luxembourg. It distorts competition and trade between financial undertakings by inducing them to create holding structures in Luxembourg to reduce their current tax liabilities. The modifications introduced by Law of 21 June 2005, narrowed down the scope, but the regime still constitutes state aid according to the Commission.

The Commission observed that the tax exemption was not linked to any specific investments and that its beneficiaries, therefore, cannot have legitimate expectations concerning its permanency.

Therefore, the Commission has set strict conditions for the phasing-out of the scheme and requires Luxembourg to repeal the scheme by the end of 2006. For existing holding companies, the advantages must be terminated at the latest by the end of 2010. As it concerns existing aid, the beneficiaries do not have to repay the aid received.