How Luxembourg Get So Rich

Luxembourg is the smallest and one of the wealthiest economies in Europe. Luxembourg is 47 times smaller than New York City. But its GDP per capita is 115k dollars. It is one of the highest in the world.

Many large banks around the world have their European headquarter in Luxembourg. This is astonishing because its population is only 600k, and half of them are foreigners from neighboring countries like Germany, French, or Belgium, who come to work here.

Luxembourg ranked as a country with the highest quality of life.

The minimum wage in Luxembourg is 2000 euros a month, While the average salary in Luxembourg is around 4 or 5000 euros a month. Thats why it has such a high number of immigrants relative to other economies. But it is also one of the most expensive countries in Europe.

Most people think the reason behind Luxembourg’s economic success is its destination as a tax haven for corporations and wealthy individuals.

But there are other tax haven countries like Malta or Cyprus that are nearly not as rich as Luxembourg. So this tiny nation must have done something besides being a tax haven that made them so wealthy.

So how did this tiny nation become so rich?

Iron and International Trade

In 1815, Luxembourg declared its independence, but none of its neighbors officially recognized the independence of this tiny country.

Despite the country’s desire for independence, Its territories were owned by king William the 3rd of the Netherlands.

At that time, Luxembourg was a poor economy mainly based on agriculture and iron mining. Most people in Luxembourg were moving to developed economies for a better quality of life, like in the UK or US.

France and Germany were rivals back then, and in between was Luxembourg. Living between two rival countries is certainly not a good thing.

But it does provide some crucial advantages for Luxembourg. In the 1800s, Germany had different kingdoms and republics united under a confederation. So German states traded among themselves freely and created free trade zones called Zollverein.

In 1942, Luxembourg became a member of Zollverein and traded freely with different German republics.

International trade was one of the critical factors that improved its economic growth.

It was the time of the industrial revolution. So steel was used in almost everything. Its demand was high in many western economies.

Luxembourg had blessed with a ton of iron which it exported to other economies which desperately needed steel for their industrial development.

Steel exported from Luxembourg is used in many skyscrapers in New York City. The export of iron helped improve their economy in their earlier days of economic growth.

Today, ArcelorMittal is a Luxembourgish company that is the second largest steel producer in the world.

Holding Law of 1929

In 1929, Luxembourg passed a holding law that permitted companies to hold multiple subsidiaries businesses under one holding company.

For example, Meta is a holding company that has many subsidiaries, such as Instagram, Facebook, and WhatsApp. The role of the holding company is mainly to manage its subsidiary companies.

The holding law of 1929 provided a lot of tax benefits for holding companies that were paying just 1% or even no taxes.

Although the 1940s or 50s were good decades for Luxembourg’s economic growth, it wasn’t growing fast enough because there weren’t many big holding companies at the time that come to this tiny country with generous tax benefits.

But in the 1970s, big US holding conglomerates were expanding to European markets and wanted to make their European headquarters in the economy, which gave them the best tax conditions. So they set up their European headquarters in this tiny country called Luxembourg.

One of the reasons was that many big banks, law firms, and accountants were already operating in Luxembourg, which provided help to these big conglomerates to set up their headquarters to take advantage of generous tax benefits. It was the time the economic boom of Luxembourg began.

The Arrival of Big Tech In The 2000s

Many new big tech conglomerates began expanding their operation in Europe. They found Luxembourg the best place for their headquarters because of its favorable tax conditions and big financial institution, which would help them avoid paying taxes on the profit they earned from foreign countries like the UK.

But how did they dont pay taxes on countries where they earned their profit? Well, these big conglomerates provide huge loans with high-interest rates to their subsidiaries in the UK.

Interest payments won’t get taxed because it is an expense. So as soon as they receive their income, they would have to pay all their income as an interest to their holding company in Luxembourg, which won’t be taxed. It is one of the ways big conglomerates avoided paying taxes on their income earned from abroad.

In the 2000s, Luxembourg had seen its economic growth reaches its full potential as many big conglomerates came into their country. Luxembourg’s economy almost doubled in only five years, which is an astonishing growth.

Luxembourg is a hub for financial institutions like big banks and investment companies. The financial sector accounts for 35% of GDP.

Luxembourg is the second largest investment fund asset domicile, with 4 trillion dollars of assets in the custody of financial institutions.

Conclusion

Luxembourg joined the European Union in 1999 and is also a member of OECD.

Luxembourg lost some of its advantages as a tax haven country because of pressures from the OECD and EU.

The situation was made worse by the leak of so-called Luxleaks in 2014, which revealed tax advantages offered to foreign corporations directly by the government.

In 2015, the government’s compliance with EU requirements to implement automatic exchange of tax information on savings accounts, ending banking secrecy.

Despite this, Luxembourg is still growing its economy and attracting many foreign businesses and individuals to work here.

Today, the government is concentrating on developing innovative industries such as biotech, clean energy, and space technology. It is giving special treatment to those startups in that industry to work here in the country, So it can continue to improve its economic growth into the future.

Originally Published On Medium

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