Economic Policies
#6Key Findings
Having bounced back rapidly from the pandemic crisis, Luxembourg falls into the top ranks internationally (rank 6) for its economic policies. Its score on this measure has improved by 0.6 points since 2014.
Economic effects from the pandemic were comparatively mild. After a decline of 1.3% in GDP in 2020, growth immediately returned to robust levels. Private consumption fell by 9.4% in 2020, but has since recovered. The government has increased its public investment spending significantly.
Cross-border commuters make up fully 45% of the country’s workforce. Unemployment rates jumped during the pandemic, reaching 6.3% in early 2021. The risk of in-work poverty is rising. A major reform of the tax system was put on hold in 2021 due to the pandemic. Public debt is very moderate, having reached about 26% of GDP in 2021.
The country is a major financial center, and has been regarded as a tax haven. Many major companies have created financial subsidiaries and sought beneficial tax deals. After a number of controversies around this issue, the government has reinforced its financial oversight capacities. R&D spending is quite high in cross-EU comparison.
Economic effects from the pandemic were comparatively mild. After a decline of 1.3% in GDP in 2020, growth immediately returned to robust levels. Private consumption fell by 9.4% in 2020, but has since recovered. The government has increased its public investment spending significantly.
Cross-border commuters make up fully 45% of the country’s workforce. Unemployment rates jumped during the pandemic, reaching 6.3% in early 2021. The risk of in-work poverty is rising. A major reform of the tax system was put on hold in 2021 due to the pandemic. Public debt is very moderate, having reached about 26% of GDP in 2021.
The country is a major financial center, and has been regarded as a tax haven. Many major companies have created financial subsidiaries and sought beneficial tax deals. After a number of controversies around this issue, the government has reinforced its financial oversight capacities. R&D spending is quite high in cross-EU comparison.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
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1
1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Despite the coronavirus pandemic, which has unfolded since 2020, Luxembourg’s economy is progressing. Given the structure of Luxembourg’s economy, which is heavily dominated by services (in particular in the financial domain), as well as the support measures enacted by the government to keep the economy afloat, the slump due to COVID-19 was much lower than expected. According to the national statistical office STATEC, after a decline in GDP of 1.3% in 2020, economic growth is expected to return to the positive side with an initial rate of 4%. In medium term, the growth rate is expected to stabilize to at about 2.6%. The OECD’s assessment is more optimistic, forecasting a GDP rise of 6.5% in 2021, followed by moderation to 3.7% in 2022 and 3.1% in 2023. However, the average growth rate of Grand Duchy’s economy over the last five years amounted 2.1%, or almost four times higher than that of the euro area. Some of the support measures enacted by the government will have a deficit-increasing impact in 2020 and 2021. According to the European Commission, Luxembourg’s public debt is expected to increase to 25.4% of GDP in 2020, 27.3% in 2021 and 28.9% in 2022.
Luxembourg is considered to be the third-most-open economy in the world, with an openness ratio of 158.2% of GDP. The country has an export-intensive economy, with a persistent trade deficit. The trade balance in 2020 stood at 10% of GDP, which represents a decrease compared with 2019 (when it stood at 11.9% of GDP). The ratio between exports and imports stands at 65.3%. While the Luxembourg’s trade of goods is in deficit (10% of GDP), the balance of services is largely favorable (33% of GDP). Its volume in 2020 (totaling €172.8 billion) was almost six times higher than the volume of trade in goods (€30.2 billion.), driven essentially by financial services (which reached €17.4 billion in 2020, following a contraction of 4.6% from the year before).
The EU member states are Luxembourg’s main trading partners. In 2020, its three direct neighbors – Germany, France and Belgium – accounted for 65.8% of the country’s trade in goods. Luxembourg’s main customer is Germany (more than 27.2% in 2020) and its top supplier is Belgium (34.1%). Its other important partners are all European, including the Netherlands (5.4% of trade), Italy (3.2%) and the United Kingdom (2.8%). Luxembourg’s main non-EU partners are the United States (in seventh place with 2.5%), China (10th place with 1.6%) and Japan (11th place, 1.3%). The Grand Duchy exports manufactured goods including iron, steel, chemical and rubber products, glass, electrical and electronic equipment, but financial services hold the highest profitability level.
Luxembourg is pursuing its strategy of public investments. Direct and indirect investments are envisaged to reach 4.3% of GDP in 2021, a significantly higher level than the average of 3.7% during the 2015-2019 period. Environmental and climate protection, public transport and soft mobility accounted for about 20% of non-COVID-19 investments in the 2021 budget, while other measures aimed to strengthen solidarity and affordable housing, and support the development of a sustainable and competitive economy.
Luxembourg’s population grew by 31.45% between 2008 and 2022 (mainly driven by immigration). Eurostat expects further growth of 21.3% by 2028. The workforce of the country has two peculiar features: it is highly skilled (approximately 59.6% of the active population, according to World Economic Forum/ILO statistics), and it mainly consist of cross-border workers coming from the neighboring regions in France, Germany and Belgium (the so-called Greater Region), on which the country is highly dependent. In 2020, approximately 203,587 cross-border workers crossed the Luxembourg borders on a daily basis, rising to an estimated 209,014 in 2021 (+2.7%). Overall employment grew by 1.6% over the past 12 months, rising to 2.2% for cross-border employment. In 2021, is expected to stabilize at 2.5%, showing more dynamic growth than the euro area.
Following a contraction of 9.4% in 2020, Luxembourg private consumption was forecast to increase again in 2021, according to the European Commission. Real wages have risen moderately over the same period. Due to the fact that the annual consumer price index inflation rate reached 2.7% in September 2021, the automatic adjustment mechanism was activated, and salaries, wages and pensions were to increase by 2.5% as of 1 October 2021. Real estate prices are rising sharply, reducing the disposable income available for private consumption. Nevertheless, Luxembourg’s per capita consumer expenditure in 2020 of €27,500 was by far the highest such level in the EU, as well as among the OECD member countries.
Luxembourg’s government is pursuing various strategies to increase the country’s attractiveness as a business location. Key activities include the provision of support for the fintech sector, the passage of cybersecurity measures, the digitalization of the public administration and the development of the country’s technological infrastructure. With more than 20 data centers in place today, Luxembourg is already one of the largest data and internet hubs in Europe.
Citations:
Grand Duchy of Luxembourg Statistics Portal. https://statistiques.public.lu/en/. Accessed 03.Jan.2022.
“Luxembourg in figures 2021” (16.09.2021). https://statistiques.public.lu/en/publications/series/lux-figures/2021/lux-figures/index.html. Accessed 03.Jan.2022.
OECD Economic Survey. Euro Area (September 2021). https://www.oecd.org/economy/surveys/euro-area-2021-OECD-economic-survey-overview.pdf. Accessed 03 Jan.2022.
OECD Economic Outlook. Luxembourg. Volume 2021. Issue 2. Preliminary version 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en. Accessed 3 January 2022.
“Stability and Growth Programme of the Grand Duchy of Luxembourg 2021 > 2025”/De Stabilitéits-Programm.”
The Government of the Grand Duchy of Luxembourg. Ministry of Finance. https://ec.europa.eu/info/sites/default/files/2021-luxembourg-stability-programme_en.pdf. Accessed 03 Jan.2021.
“National Plan for a Green, Digital and Inclusive Transition. National Reform Programme of the Grand Duchy of Luxembourg under the European semester 2021.” The Government of the Grand Duchy of Luxembourg. https://ec.europa.eu/info/sites/default/files/2021-european-semester-national-reform-programme-luxembourg_en.pdf. Accessed 03 Jan.2022.
“Economic forecast for Luxembourg 2020-2023. European Commission.” https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/luxembourg/economic-forecast-luxembourg_en. Accessed 03 Jan.2022.
“How Countries are Performing on the Road to Recovery.” World Economic Forum. Special edition 2020. https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2020.pdf. Accessed 03 Jan.2022.
“Digital Luxembourg: Luxembourg’s answer to HPC management came as a public-private partnership.” https://digital-luxembourg.public.lu/stories/meluxina-luxprovide-what-it-takes-run-supercomputer. Accessed 03 Jan.2022.
Luxembourg is considered to be the third-most-open economy in the world, with an openness ratio of 158.2% of GDP. The country has an export-intensive economy, with a persistent trade deficit. The trade balance in 2020 stood at 10% of GDP, which represents a decrease compared with 2019 (when it stood at 11.9% of GDP). The ratio between exports and imports stands at 65.3%. While the Luxembourg’s trade of goods is in deficit (10% of GDP), the balance of services is largely favorable (33% of GDP). Its volume in 2020 (totaling €172.8 billion) was almost six times higher than the volume of trade in goods (€30.2 billion.), driven essentially by financial services (which reached €17.4 billion in 2020, following a contraction of 4.6% from the year before).
The EU member states are Luxembourg’s main trading partners. In 2020, its three direct neighbors – Germany, France and Belgium – accounted for 65.8% of the country’s trade in goods. Luxembourg’s main customer is Germany (more than 27.2% in 2020) and its top supplier is Belgium (34.1%). Its other important partners are all European, including the Netherlands (5.4% of trade), Italy (3.2%) and the United Kingdom (2.8%). Luxembourg’s main non-EU partners are the United States (in seventh place with 2.5%), China (10th place with 1.6%) and Japan (11th place, 1.3%). The Grand Duchy exports manufactured goods including iron, steel, chemical and rubber products, glass, electrical and electronic equipment, but financial services hold the highest profitability level.
Luxembourg is pursuing its strategy of public investments. Direct and indirect investments are envisaged to reach 4.3% of GDP in 2021, a significantly higher level than the average of 3.7% during the 2015-2019 period. Environmental and climate protection, public transport and soft mobility accounted for about 20% of non-COVID-19 investments in the 2021 budget, while other measures aimed to strengthen solidarity and affordable housing, and support the development of a sustainable and competitive economy.
Luxembourg’s population grew by 31.45% between 2008 and 2022 (mainly driven by immigration). Eurostat expects further growth of 21.3% by 2028. The workforce of the country has two peculiar features: it is highly skilled (approximately 59.6% of the active population, according to World Economic Forum/ILO statistics), and it mainly consist of cross-border workers coming from the neighboring regions in France, Germany and Belgium (the so-called Greater Region), on which the country is highly dependent. In 2020, approximately 203,587 cross-border workers crossed the Luxembourg borders on a daily basis, rising to an estimated 209,014 in 2021 (+2.7%). Overall employment grew by 1.6% over the past 12 months, rising to 2.2% for cross-border employment. In 2021, is expected to stabilize at 2.5%, showing more dynamic growth than the euro area.
Following a contraction of 9.4% in 2020, Luxembourg private consumption was forecast to increase again in 2021, according to the European Commission. Real wages have risen moderately over the same period. Due to the fact that the annual consumer price index inflation rate reached 2.7% in September 2021, the automatic adjustment mechanism was activated, and salaries, wages and pensions were to increase by 2.5% as of 1 October 2021. Real estate prices are rising sharply, reducing the disposable income available for private consumption. Nevertheless, Luxembourg’s per capita consumer expenditure in 2020 of €27,500 was by far the highest such level in the EU, as well as among the OECD member countries.
Luxembourg’s government is pursuing various strategies to increase the country’s attractiveness as a business location. Key activities include the provision of support for the fintech sector, the passage of cybersecurity measures, the digitalization of the public administration and the development of the country’s technological infrastructure. With more than 20 data centers in place today, Luxembourg is already one of the largest data and internet hubs in Europe.
Citations:
Grand Duchy of Luxembourg Statistics Portal. https://statistiques.public.lu/en/. Accessed 03.Jan.2022.
“Luxembourg in figures 2021” (16.09.2021). https://statistiques.public.lu/en/publications/series/lux-figures/2021/lux-figures/index.html. Accessed 03.Jan.2022.
OECD Economic Survey. Euro Area (September 2021). https://www.oecd.org/economy/surveys/euro-area-2021-OECD-economic-survey-overview.pdf. Accessed 03 Jan.2022.
OECD Economic Outlook. Luxembourg. Volume 2021. Issue 2. Preliminary version 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en. Accessed 3 January 2022.
“Stability and Growth Programme of the Grand Duchy of Luxembourg 2021 > 2025”/De Stabilitéits-Programm.”
The Government of the Grand Duchy of Luxembourg. Ministry of Finance. https://ec.europa.eu/info/sites/default/files/2021-luxembourg-stability-programme_en.pdf. Accessed 03 Jan.2021.
“National Plan for a Green, Digital and Inclusive Transition. National Reform Programme of the Grand Duchy of Luxembourg under the European semester 2021.” The Government of the Grand Duchy of Luxembourg. https://ec.europa.eu/info/sites/default/files/2021-european-semester-national-reform-programme-luxembourg_en.pdf. Accessed 03 Jan.2022.
“Economic forecast for Luxembourg 2020-2023. European Commission.” https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/luxembourg/economic-forecast-luxembourg_en. Accessed 03 Jan.2022.
“How Countries are Performing on the Road to Recovery.” World Economic Forum. Special edition 2020. https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2020.pdf. Accessed 03 Jan.2022.
“Digital Luxembourg: Luxembourg’s answer to HPC management came as a public-private partnership.” https://digital-luxembourg.public.lu/stories/meluxina-luxprovide-what-it-takes-run-supercomputer. Accessed 03 Jan.2022.
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Luxembourg’s labor market is quite specialized and highly dynamic. For example, from 2005 to 2018, total employment increased by 45.8%, compared with only 5% in the EU as a whole. The workforce is made up of cross-border workers (45%), Luxembourg nationals (27%), EU nationals (24%) and third country nationals (4%). According to STATEC, the country’s working population on 1 January 2020 numbered 474,300 people, of which 197,200 were cross-border workers, coming for the most part from France (105,700), Germany (50,300) and Belgium (48,800). However, cross-border workers face traffic congestion and long commuting hours, while ever-rising housing prices make it difficult to take up residence in Luxembourg. The development of cross-border work in Luxembourg dates back to the mid-1980. It was a response to the rapid economic growth experienced by Luxembourg and to the need to rapidly fill the new jobs created.
Over the past 12 months, the overall employment growth rate was 1.6%, and that related to the cross-border workers was 2.2%. In 2020, the most vigorous sectors were healthcare (+4.3% rise in employment); specialized, scientific and technical activities (+4.2%); construction (+4%); e-commerce (+4%) and financial services (+3.9%). In 2021, the growth in the labor market in Luxembourg was expected to stabilize at 2.5%, a much higher figure than the average in the euro area. Despite the active labor-market measures taken by the national employment agency (Agence pour le développement de l’emploi (ADEM)), the unemployment rate among people under 30 remains high (21%), although this rate has declined significantly in recent years. The most affected is the 15-24 age group, with 66.9% of people of this age in education or training, 24.8% in employment, and 5.3% in non-standard employment. At the same time, the placement of low-skilled workers, older workers and, to a lesser extent, women in employment remains an important policy challenge. In Luxembourg, 59.6% of the population is highly skilled. Moreover, two-thirds of jobs created in Luxembourg are aimed at people with tertiary degrees. In January 2021, the number of job seekers had risen by 20.7% compared with January 2020, while the quantity of available jobs had decreased by 14.4%, and the unemployment rate had reached 6.3%.
The coronavirus crisis produced a major paradigm shift in the Grand Duchy’s labor market. On the one hand, this has been due to the widespread practice of teleworking, thanks to the country’s reliable digital infrastructure and the high proportion of service jobs for which remote work was possible. Sectors that in 2020 and 2021 developed teleworking include education (with home schooling during the periods of school closure); the public sector, with its 31,049 state employees (with 74% working from home); ICT, banks and insurance (61%); and research, science and technology. Those in healthcare or the social services sector, tourism and hospitality, or construction, or who performed local and community-based work or low-skilled work, generally continued to work on site. To alleviate the situation of workers negatively impacted by the restrictions due to the coronavirus pandemic, the government funded partial unemployment measures in numerous sectors of the economy (hospitality, tourism, events, small-scale industry, retail, etc.). Partial unemployment covered 80% of the employee’s salary (or 100% of the social minimum wage, which was €2,201.93 gross per month on 1 January 2021).
The risk of in-work poverty and social exclusion is increasing in Luxembourg. Luxembourg indeed ranks among those EU countries where this risk is the highest. Figures for 2019 show that 12.1% of workers (namely 103,600 people) live below the monetary poverty threshold, considered to be €1,804 per month for a single adult. The groups most exposed to poverty are non-Luxembourgish nationals, low-skilled individuals, job seekers, part-time workers and single-parent families.
Citations:
“Bilan Compétitivité et Résilience 2021: Très bonne résistance de l’économie luxembourgeoise.” Le Gouvernement du Grand-Duché de Luxembourg. Ministère de l’Économie. Perspectives de politique économique, No.37/Décembre 2021.
Danescu, Elena. “Luxembourg Economy.” In Hartly C. (Ed). Western Europe 2022. Western Europe Book Series. Routledge, Abington:UK, 2022. pp. 464-481.
“Boost to growth.” STATEC, Note de conjoncture 1-21. (No.28/08.06.2021). https://statistiques.public.lu/en/news/economy-finance/economic-outlook/2021/06/20210608/Statnews-NDC-1-21-EN.pdf. Accessed 3 Jan.2022.
Rapport d’activité 2020. (Mars 2021). Le Gouvernement du Grand-Duché de Luxembourg. Ministère du Travail, de l’Emploi et de l’Économie sociale et solidaire. https://adem.public.lu/en/publications/adem/2021/rapport-activites-complet-mteess.html. Accessed 3 Jan.2021.
“Working Yet Poor Project.” National Report for Luxembourg (6 July 2021). https://workingyetpoor.eu/press/. Accesed 3 Jan.2022.
“Neistart Lëtzebuerg. Nouvelles mesures de soutien pour préparer la relance économique” (2020). Union des Entreprises luxembourgeoises. https://www.uel.lu/fr/article/neistart-letzebuerg/. Accessed 3. Jan.2022.
Over the past 12 months, the overall employment growth rate was 1.6%, and that related to the cross-border workers was 2.2%. In 2020, the most vigorous sectors were healthcare (+4.3% rise in employment); specialized, scientific and technical activities (+4.2%); construction (+4%); e-commerce (+4%) and financial services (+3.9%). In 2021, the growth in the labor market in Luxembourg was expected to stabilize at 2.5%, a much higher figure than the average in the euro area. Despite the active labor-market measures taken by the national employment agency (Agence pour le développement de l’emploi (ADEM)), the unemployment rate among people under 30 remains high (21%), although this rate has declined significantly in recent years. The most affected is the 15-24 age group, with 66.9% of people of this age in education or training, 24.8% in employment, and 5.3% in non-standard employment. At the same time, the placement of low-skilled workers, older workers and, to a lesser extent, women in employment remains an important policy challenge. In Luxembourg, 59.6% of the population is highly skilled. Moreover, two-thirds of jobs created in Luxembourg are aimed at people with tertiary degrees. In January 2021, the number of job seekers had risen by 20.7% compared with January 2020, while the quantity of available jobs had decreased by 14.4%, and the unemployment rate had reached 6.3%.
The coronavirus crisis produced a major paradigm shift in the Grand Duchy’s labor market. On the one hand, this has been due to the widespread practice of teleworking, thanks to the country’s reliable digital infrastructure and the high proportion of service jobs for which remote work was possible. Sectors that in 2020 and 2021 developed teleworking include education (with home schooling during the periods of school closure); the public sector, with its 31,049 state employees (with 74% working from home); ICT, banks and insurance (61%); and research, science and technology. Those in healthcare or the social services sector, tourism and hospitality, or construction, or who performed local and community-based work or low-skilled work, generally continued to work on site. To alleviate the situation of workers negatively impacted by the restrictions due to the coronavirus pandemic, the government funded partial unemployment measures in numerous sectors of the economy (hospitality, tourism, events, small-scale industry, retail, etc.). Partial unemployment covered 80% of the employee’s salary (or 100% of the social minimum wage, which was €2,201.93 gross per month on 1 January 2021).
The risk of in-work poverty and social exclusion is increasing in Luxembourg. Luxembourg indeed ranks among those EU countries where this risk is the highest. Figures for 2019 show that 12.1% of workers (namely 103,600 people) live below the monetary poverty threshold, considered to be €1,804 per month for a single adult. The groups most exposed to poverty are non-Luxembourgish nationals, low-skilled individuals, job seekers, part-time workers and single-parent families.
Citations:
“Bilan Compétitivité et Résilience 2021: Très bonne résistance de l’économie luxembourgeoise.” Le Gouvernement du Grand-Duché de Luxembourg. Ministère de l’Économie. Perspectives de politique économique, No.37/Décembre 2021.
Danescu, Elena. “Luxembourg Economy.” In Hartly C. (Ed). Western Europe 2022. Western Europe Book Series. Routledge, Abington:UK, 2022. pp. 464-481.
“Boost to growth.” STATEC, Note de conjoncture 1-21. (No.28/08.06.2021). https://statistiques.public.lu/en/news/economy-finance/economic-outlook/2021/06/20210608/Statnews-NDC-1-21-EN.pdf. Accessed 3 Jan.2022.
Rapport d’activité 2020. (Mars 2021). Le Gouvernement du Grand-Duché de Luxembourg. Ministère du Travail, de l’Emploi et de l’Économie sociale et solidaire. https://adem.public.lu/en/publications/adem/2021/rapport-activites-complet-mteess.html. Accessed 3 Jan.2021.
“Working Yet Poor Project.” National Report for Luxembourg (6 July 2021). https://workingyetpoor.eu/press/. Accesed 3 Jan.2022.
“Neistart Lëtzebuerg. Nouvelles mesures de soutien pour préparer la relance économique” (2020). Union des Entreprises luxembourgeoises. https://www.uel.lu/fr/article/neistart-letzebuerg/. Accessed 3. Jan.2022.
Graph View
How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
The regulation and the fiscal policy implemented in Luxembourg from 1960 onward gave rise to a complex but attractive tax environment. Individuals and corporate bodies resident in the Grand Duchy are subject to direct and indirect taxation.
The essential categories of direct taxes include: the personal income tax (“impôt sur le revenue des personnes physiques”), land and property tax (“impôt foncier”), corporate income tax (“impôt sur les revenus des collectivités - IRC”), the withholding tax and the wealth tax (“impôt sur la fortune”). Currently, the personal income tax ranges from 0% to 42%. Property tax, which is an impersonal duty levied by municipalities on all property based in Luxembourg, moves within a range from 0.7% to 1%. The corporate tax, which is debited on gains made by companies during the financial year, is fixed from 15% (taxable income lower than €175,000) to 17% (taxable income higher than € 200,000). An additional charge of 7% (the “solidarity surtax”) is applied as a contribution to the Employment Fund. In Luxembourg City, where the majority of companies are established, the municipal business tax is 6.75%, so that the overall rate on corporate income reaches 24.94%. A withholding tax of 15% is generally collected on dividend payments, even if certain types of income (capital gains, liquidation proceeds) may be legally exempt from taxation. Luxembourg is well known for its favorable taxation system applied to intellectual property rights (80% exemption on royalties and capital gains derived from patents, designs, models, software copyrights, etc.) and securitization vehicles (undertakings for collective investments, private wealth management vehicles, securities on transit funds, etc.).
The indirect taxes include the value added tax (VAT), and registration and transfer duties. The standard VAT rate is 17% (one of the lowest such in Europe), but a range of goods and services considered essential for the population, such as food (14%), books (8%) and newspapers (3%), are subject to reduced rates. Medical and health services, and some financial banking services, are VAT-exempt. Sales of land and buildings, rental leases and donation are subject to registration duties of 6%, and to a transcription tax of 1%.
The government elected in 2018 planned to enact a comprehensive reform of the tax system, aiming to address issues of equity. In particular, the government sought to create a single tax scale regardless of marital status, in order to “guarantee a taxation model that is neutral in terms of people’s way of life.” However, the planned tax reform was put on hold in 2021 due to the coronavirus pandemic.
In order to tackle the negative effects of the pandemic on Luxembourg’s economy, and to further protect taxpayers, on 20 March 2020 the government launched – through the Neistart Lëtzebuerg program – a package of financial measures regarding labor taxation (i.e., postponement of the personal income tax payments for four months, an increase in the deductibility for domestic costs until 31 December 2020, teleworking for cross-border workers from France, Germany and Belgium without their salary being taxed in their country of residence). Due to bilateral agreements that Luxembourg has signed with these countries, remote working was extended until 31 March 2022, and cross-border workers remain eligible for Luxembourg social protection, and can pay income tax exclusively in the Grand Duchy.
The financial and fiscal COVID-19 measures entailed budgetary spending of approximately €2.05 billion (an increase of 21.9% compared with 2019). Capital grants supporting small and medium-sized companies increased by €142.7 million, while investment expenditure rose by €301.8 million. (+26.2% compared with 2019). Social benefits increased by 88.6% recorded in June 2021 in comparison with June 2019 (an increase of €797.6 million.).
Luxembourg’s nominal tax rate (24.94%) is well above the European average (19.12%) and above the EU average (20.94%). According to the Word Bank development indicators 2022, the total tax and contribution rate (percentage of profit) in Luxembourg is 20.4%. This is the lowest total tax rate among European and European Free Trade Association (EFTA) countries. Relative to the OECD average which amounted to 33.5% in 2020, the tax structure in Luxembourg is defined by higher revenues from taxes on personal income (€9.68 billion), profits & gains taxes (€5.92 billion), taxes on corporate income & gains (€3.76 billion), social security contributions (€6.84 billion.), and property taxes (€2.41 billion.). According to EUROSTAT, Luxembourg is the European country that collects the least amount of environmental taxes, despite its strong environmental ambitions. In 2020 only 3.5% of Luxembourg’s tax revenue were “green” taxes, far behind Slovenia (12.3%), Latvia (10.1%) and the EU average (5.4%). However, the country has been able to improve its behavior thanks to the CO2 tax, which has been effective since January 2021 and will increase in 2022 with the introduction of a CO2 tax on fuel (according to the Integrated National Energy and Climate Plan for 2021-2030).
Among the EU member states, Luxembourg has the highest ratio of capital tax to GDP (12.3%), which reflects the systemic importance of the financial sector in Luxembourg. As stated by the 2021 Global Financial Centers Index, the Grand Duchy is ranked eighth on the worldwide list (dominated by the United States, the United Kingdom and China), but is considered to be most important international financial center in the world (with 60% of international activity), the second-biggest hub for investment funds, the third-largest exporter of financial services, and the global leader in corporate bond issuance and in issuance of green, social and sustainable bonds by foreign companies.
In order to avoid double taxation and to facilitate bilateral foreign investments, the Grand Duchy currently has 85 comprehensive double-taxation treaties signed and in force, two treaties under ratification, and 10 other treaties in negotiation. Most of them follow the OECD model convention on income and capital. Such treaties are a real necessity in Luxembourg because of the number of cross-border workers in the national economy. In 2019, the Grand Duchy also signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to prevent Base Erosion and Profit-Shifting (MLI), and has agreed to adopt the minimum standards in the field (principal purpose test, dispute resolution, etc.), as well as certain optional provisions. Luxembourg has been long considered one of the most notable tax havens in the world, alongside other EU countries such as Ireland and the Netherlands. As revealed by LuxLeaks in 2014 and the Panama Papers in 2016, more than 340 large international companies, including Altice, Amazon, Apple, AIG, FedEx, Fidelity, Heinz, IKEA, Kering, LVMH, Pepsi Bottling Group, Pfizer and Staples, established financial subsidiaries and sought beneficial tax deals. In February 2021, the OpenLux investigation carried out by a consortium of media organizations identified alleged shortcomings in the Grand Duchy’s anti-money laundering and tax arrangements. In refuting these allegations, the government stressed that Luxembourg had in recent years implemented all the new EU and OECD tax regulations. The Grand Duchy was one of the first countries in Europe to set up a public ultimate beneficial owners registry (UBO) – a completely open and transparent registry accessible without any restrictions to the public. The completeness rate of the register was, at the end of 2020, around 90%. Thus, according to the Luxembourg authorities, the country is fully compliant with and has implemented all applicable EU and international rules and standards with regards to tax transparency and the fight against tax abuse. The Grand Duchy is among the countries that have signed, on 8 October 2021, a historic agreement to ensure fairer taxation of multinational companies. By imposing a minimum tax rate of 15% on multinationals with a turnover of more than €750 million., this agreement aims to ensure total tax revenues amounting to around €129 billion per year, to be shared by the signatories.
Citations:
“De Budget 2022.” Luxembourg’s Stat Budget 2022 official website. The Government of the Grand Duchy of Luxembourg. https://budget.public.lu/lb.html. Accessed 3 January 2022.
Flamant, Eloi; Godar, Sarah; Richard, Gaspard. “New Forms of Tax Competition in the European Union: An Empirical Investigation.” November 2021. Report no.3. EU Tax Observatory. https://www.taxobservatory.eu/wp-content/uploads/2021/11/EUTAX-rapport-N3.pdf. Accessed 3 January 2022.
Baruch, Jérémie; Ferrer, Maxime; Vaudano, Maxime; Michel, Anne. “OpenLux : the secrets of Luxembourg, a tax haven at the heart of Europe.” Le Monde (9 February 2021). https://www.lemonde.fr/les-decodeurs/article/2021/02/08/openlux-the-secrets-of-luxembourg-a-tax-haven-at-the-heart-of-europe_6069140_4355770.html. Accessed 3 January 2022.
“Statement by the Luxembourg Government on recent press articles published about Luxembourg.” https://gouvernement.lu/en/dossiers/2021/openlux.html
“OECD tax agreement: what will change in Luxembourg.” Delano (14 October 2021). https://delano.lu/article/oecd-tax-agreement-what-will-c. Accessed 3 January 2022.
O’Neal James; Morelli, Jean-Dominique; Annioui-Schildknecht, Inès. “Luxembourg: Corporate Tax 2021.” (August 2021). https://www.mondaq.com/withholding-tax/1099186/corporate-tax-2021–luxembourg-. Accessed 3 January 2022.
“Stability and Growth Programme of the Grand Duchy of Luxembourg 2021 > 2025”/De Stabilitéits-Programm.”
The Government of the Grand Duchy of Luxembourg. Ministry of Finance. https://ec.europa.eu/info/sites/default/files/2021-luxembourg-stability-programme_en.pdf. Accessed 03 Jan.2021.
“Luxembourg 2021: Les impôts sur les salaires 2020.” OECD. https://www.oecd-ilibrary.org/sites/9a77227d-fr/index.html?itemId=/content/component/9a77227d-fr#section-d1e175408. Accessed 3 January 2022.
“National tax system and current development: Luxembourg (2007-2019).” Taxation trends in the European Commission (2021).
https://ec.europa.eu/taxation_customs/system/files/2021-06/taxation_trends_2021_country_chapter_luxembourg.pdf. Accessed 3 January 2022.
De Mooij, Ruud; Prihardini, Dinar; Flugbeil, Antje; Stavrev, Emil. “International Taxation and Luxembourg’s Economy.” International Monetary Fund Working Papers. WP/20/264 (25 November 2020). https://www.imf.org/en/Publications/WP/Issues/2020/11/26/International-Taxation-and-Luxembourgs-Economy-49879. Accessed 3 January 2022.
“Néistart Lëtzebuerg. Fonds de relance et de solidarité pour les entreprises” (20 May 2020). Le Gouvernement du Grand-Duché de Luxembourg. https://gouvernement.lu/dam-assets/documents/actualites/2020/05-mai/Neistart-Letzebuerg-Fonds-de-relance-et-solidarite.pdf. Accessed 3 January 2022.
The essential categories of direct taxes include: the personal income tax (“impôt sur le revenue des personnes physiques”), land and property tax (“impôt foncier”), corporate income tax (“impôt sur les revenus des collectivités - IRC”), the withholding tax and the wealth tax (“impôt sur la fortune”). Currently, the personal income tax ranges from 0% to 42%. Property tax, which is an impersonal duty levied by municipalities on all property based in Luxembourg, moves within a range from 0.7% to 1%. The corporate tax, which is debited on gains made by companies during the financial year, is fixed from 15% (taxable income lower than €175,000) to 17% (taxable income higher than € 200,000). An additional charge of 7% (the “solidarity surtax”) is applied as a contribution to the Employment Fund. In Luxembourg City, where the majority of companies are established, the municipal business tax is 6.75%, so that the overall rate on corporate income reaches 24.94%. A withholding tax of 15% is generally collected on dividend payments, even if certain types of income (capital gains, liquidation proceeds) may be legally exempt from taxation. Luxembourg is well known for its favorable taxation system applied to intellectual property rights (80% exemption on royalties and capital gains derived from patents, designs, models, software copyrights, etc.) and securitization vehicles (undertakings for collective investments, private wealth management vehicles, securities on transit funds, etc.).
The indirect taxes include the value added tax (VAT), and registration and transfer duties. The standard VAT rate is 17% (one of the lowest such in Europe), but a range of goods and services considered essential for the population, such as food (14%), books (8%) and newspapers (3%), are subject to reduced rates. Medical and health services, and some financial banking services, are VAT-exempt. Sales of land and buildings, rental leases and donation are subject to registration duties of 6%, and to a transcription tax of 1%.
The government elected in 2018 planned to enact a comprehensive reform of the tax system, aiming to address issues of equity. In particular, the government sought to create a single tax scale regardless of marital status, in order to “guarantee a taxation model that is neutral in terms of people’s way of life.” However, the planned tax reform was put on hold in 2021 due to the coronavirus pandemic.
In order to tackle the negative effects of the pandemic on Luxembourg’s economy, and to further protect taxpayers, on 20 March 2020 the government launched – through the Neistart Lëtzebuerg program – a package of financial measures regarding labor taxation (i.e., postponement of the personal income tax payments for four months, an increase in the deductibility for domestic costs until 31 December 2020, teleworking for cross-border workers from France, Germany and Belgium without their salary being taxed in their country of residence). Due to bilateral agreements that Luxembourg has signed with these countries, remote working was extended until 31 March 2022, and cross-border workers remain eligible for Luxembourg social protection, and can pay income tax exclusively in the Grand Duchy.
The financial and fiscal COVID-19 measures entailed budgetary spending of approximately €2.05 billion (an increase of 21.9% compared with 2019). Capital grants supporting small and medium-sized companies increased by €142.7 million, while investment expenditure rose by €301.8 million. (+26.2% compared with 2019). Social benefits increased by 88.6% recorded in June 2021 in comparison with June 2019 (an increase of €797.6 million.).
Luxembourg’s nominal tax rate (24.94%) is well above the European average (19.12%) and above the EU average (20.94%). According to the Word Bank development indicators 2022, the total tax and contribution rate (percentage of profit) in Luxembourg is 20.4%. This is the lowest total tax rate among European and European Free Trade Association (EFTA) countries. Relative to the OECD average which amounted to 33.5% in 2020, the tax structure in Luxembourg is defined by higher revenues from taxes on personal income (€9.68 billion), profits & gains taxes (€5.92 billion), taxes on corporate income & gains (€3.76 billion), social security contributions (€6.84 billion.), and property taxes (€2.41 billion.). According to EUROSTAT, Luxembourg is the European country that collects the least amount of environmental taxes, despite its strong environmental ambitions. In 2020 only 3.5% of Luxembourg’s tax revenue were “green” taxes, far behind Slovenia (12.3%), Latvia (10.1%) and the EU average (5.4%). However, the country has been able to improve its behavior thanks to the CO2 tax, which has been effective since January 2021 and will increase in 2022 with the introduction of a CO2 tax on fuel (according to the Integrated National Energy and Climate Plan for 2021-2030).
Among the EU member states, Luxembourg has the highest ratio of capital tax to GDP (12.3%), which reflects the systemic importance of the financial sector in Luxembourg. As stated by the 2021 Global Financial Centers Index, the Grand Duchy is ranked eighth on the worldwide list (dominated by the United States, the United Kingdom and China), but is considered to be most important international financial center in the world (with 60% of international activity), the second-biggest hub for investment funds, the third-largest exporter of financial services, and the global leader in corporate bond issuance and in issuance of green, social and sustainable bonds by foreign companies.
In order to avoid double taxation and to facilitate bilateral foreign investments, the Grand Duchy currently has 85 comprehensive double-taxation treaties signed and in force, two treaties under ratification, and 10 other treaties in negotiation. Most of them follow the OECD model convention on income and capital. Such treaties are a real necessity in Luxembourg because of the number of cross-border workers in the national economy. In 2019, the Grand Duchy also signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to prevent Base Erosion and Profit-Shifting (MLI), and has agreed to adopt the minimum standards in the field (principal purpose test, dispute resolution, etc.), as well as certain optional provisions. Luxembourg has been long considered one of the most notable tax havens in the world, alongside other EU countries such as Ireland and the Netherlands. As revealed by LuxLeaks in 2014 and the Panama Papers in 2016, more than 340 large international companies, including Altice, Amazon, Apple, AIG, FedEx, Fidelity, Heinz, IKEA, Kering, LVMH, Pepsi Bottling Group, Pfizer and Staples, established financial subsidiaries and sought beneficial tax deals. In February 2021, the OpenLux investigation carried out by a consortium of media organizations identified alleged shortcomings in the Grand Duchy’s anti-money laundering and tax arrangements. In refuting these allegations, the government stressed that Luxembourg had in recent years implemented all the new EU and OECD tax regulations. The Grand Duchy was one of the first countries in Europe to set up a public ultimate beneficial owners registry (UBO) – a completely open and transparent registry accessible without any restrictions to the public. The completeness rate of the register was, at the end of 2020, around 90%. Thus, according to the Luxembourg authorities, the country is fully compliant with and has implemented all applicable EU and international rules and standards with regards to tax transparency and the fight against tax abuse. The Grand Duchy is among the countries that have signed, on 8 October 2021, a historic agreement to ensure fairer taxation of multinational companies. By imposing a minimum tax rate of 15% on multinationals with a turnover of more than €750 million., this agreement aims to ensure total tax revenues amounting to around €129 billion per year, to be shared by the signatories.
Citations:
“De Budget 2022.” Luxembourg’s Stat Budget 2022 official website. The Government of the Grand Duchy of Luxembourg. https://budget.public.lu/lb.html. Accessed 3 January 2022.
Flamant, Eloi; Godar, Sarah; Richard, Gaspard. “New Forms of Tax Competition in the European Union: An Empirical Investigation.” November 2021. Report no.3. EU Tax Observatory. https://www.taxobservatory.eu/wp-content/uploads/2021/11/EUTAX-rapport-N3.pdf. Accessed 3 January 2022.
Baruch, Jérémie; Ferrer, Maxime; Vaudano, Maxime; Michel, Anne. “OpenLux : the secrets of Luxembourg, a tax haven at the heart of Europe.” Le Monde (9 February 2021). https://www.lemonde.fr/les-decodeurs/article/2021/02/08/openlux-the-secrets-of-luxembourg-a-tax-haven-at-the-heart-of-europe_6069140_4355770.html. Accessed 3 January 2022.
“Statement by the Luxembourg Government on recent press articles published about Luxembourg.” https://gouvernement.lu/en/dossiers/2021/openlux.html
“OECD tax agreement: what will change in Luxembourg.” Delano (14 October 2021). https://delano.lu/article/oecd-tax-agreement-what-will-c. Accessed 3 January 2022.
O’Neal James; Morelli, Jean-Dominique; Annioui-Schildknecht, Inès. “Luxembourg: Corporate Tax 2021.” (August 2021). https://www.mondaq.com/withholding-tax/1099186/corporate-tax-2021–luxembourg-. Accessed 3 January 2022.
“Stability and Growth Programme of the Grand Duchy of Luxembourg 2021 > 2025”/De Stabilitéits-Programm.”
The Government of the Grand Duchy of Luxembourg. Ministry of Finance. https://ec.europa.eu/info/sites/default/files/2021-luxembourg-stability-programme_en.pdf. Accessed 03 Jan.2021.
“Luxembourg 2021: Les impôts sur les salaires 2020.” OECD. https://www.oecd-ilibrary.org/sites/9a77227d-fr/index.html?itemId=/content/component/9a77227d-fr#section-d1e175408. Accessed 3 January 2022.
“National tax system and current development: Luxembourg (2007-2019).” Taxation trends in the European Commission (2021).
https://ec.europa.eu/taxation_customs/system/files/2021-06/taxation_trends_2021_country_chapter_luxembourg.pdf. Accessed 3 January 2022.
De Mooij, Ruud; Prihardini, Dinar; Flugbeil, Antje; Stavrev, Emil. “International Taxation and Luxembourg’s Economy.” International Monetary Fund Working Papers. WP/20/264 (25 November 2020). https://www.imf.org/en/Publications/WP/Issues/2020/11/26/International-Taxation-and-Luxembourgs-Economy-49879. Accessed 3 January 2022.
“Néistart Lëtzebuerg. Fonds de relance et de solidarité pour les entreprises” (20 May 2020). Le Gouvernement du Grand-Duché de Luxembourg. https://gouvernement.lu/dam-assets/documents/actualites/2020/05-mai/Neistart-Letzebuerg-Fonds-de-relance-et-solidarite.pdf. Accessed 3 January 2022.
Graph View
To what extent does budgetary policy realize the goal of fiscal sustainability?
10
9
9
Budgetary policy is fiscally sustainable.
8
7
6
7
6
Budgetary policy achieves most standards of fiscal sustainability.
5
4
3
4
3
Budgetary policy achieves some standards of fiscal sustainability.
2
1
1
Budgetary policy is fiscally unsustainable.
In the long-term perspective, Luxembourg’s budgetary situation is sound and stable. On 16 December 2021, the state budget for 2022 (titled “Our Way out of the Crisis”) was adopted by the Chamber of Deputies. In his accompanying statement, Finance Minister Pierre Gramegna emphasized that the country’s economic recovery had been fully launched, and that the country had at the start of 2021 already reached its pre-crisis GDP level. Thus, the government stated that the 2022 budget aimed to promote qualitative and job-creating growth, with strong social and digital dimensions, and an emphasis on climate objectives.
Luxembourg will invest around €3.2 billion in infrastructure and innovation projects, or 4.4% of its GDP (the average over 2016-2021 have being 3.9%). Social expenditure (47% of the budget) will be dedicated to subsidies for disadvantaged households, and the National Solidarity Fund will reach €367 million (+5% compared to 2021), due especially to the €200 million. increase in the cost-of-living allowance and social inclusion income. A fund dedicated to housing development will receive €228.2 million (+77% compared to 2021), and €27 million will be applied to the so-called Pacte Logement 2.0 (subsidies for municipalities that are developing housing). The investments in the field of climate and the environment will total €765 million, and will increase by €975 million by 2024 (roughly doubling from 2019). Some €1.8 billion are foreseen for the implementation of the national energy and climate plan. As part of efforts to reduce CO2 emissions, €300 million will be invested in the country’s rail infrastructure in 2022, and €12.6 million annually until 2025 to develop new electric charging stations. In the digital field, €1.1 billion will be spent until 2025, of which €234 million will be dedicated in 2022 to investment in the cybersecurity, 5G infrastructure and high-speed internet fields. Luxembourg’s Innovation Fund will receive €132 million in 2022, and the education budget will reach €3.1 billion (+10% compared to 2021) to finance the recruitment of 1,000 additional teachers, free daycare during school periods, free school lunches for children from low- and middle-income families, and free music education.
Government revenue will amount to €22.3 billion (+4.3% compared to 2021). Due to the ambitious investment policy, public spending will total €23.5 billion (+3.4% compared to 2021). Municipalities are expected to operate with a surplus of €234 million, while the social security surplus should reach €853 million. In 2022, the public administration balance will be almost at the break-even point, with a deficit of €143 million, or 0.2% of GDP, which is well below the bar of 3% of GDP provided by the European treaties and the Stability and Growth Pact principles. The public debt was estimated at 24.8% of GDP in 2020, 25.8% of GDP in 2021, 26.6% of GDP in 2022, and is expected to reach around 27% of GDP in the medium term (below the 30% of GDP cap that the government set in its coalition agreement concluded in 2018).
Citations:
“De Budget 2022.” Luxembourg’s Stat Budget 2022 official website. The Government of the Grand Duchy of Luxembourg. https://budget.public.lu/lb.html. Accessed 3 January 2022.
“Gramegna delivers final budget speech as Minister of Finance.” RTL Today (15.12.2021). https://today.rtl.lu/news/luxembourg/a/1833434.html. Accessed 3 January 2022.
“De Budget 2022.” Volume 1. Le Gouvernement du Grand-Duché de Luxembourg. Ministère des Finances.
Chambre des Députés/Doc.parl. no.7878. Session ordinaire 2021-2022.
“2022 Budget Prioritises Investment in Climate Action, Housing, Digitalization.” Chronicle.lu (13 October 2021). https://chronicle.lu/category/finance-1/38001-2022-budget-prioritises-investment-in-climate-action-housing-digitalization. Accessed 3 January 2022.
“Government at the Glance 2021. Country Factsheet: Luxembourg.” OECD (9 July 2021). https://www.oecd.org/gov/government-at-a-glance-22214399.htm. Accessed 3 January 2022.
“Stability and Growth Programme of the Grand Duchy of Luxembourg 2021 > 2025”/De Stabilitéits-Programm.”
The Government of the Grand Duchy of Luxembourg. Ministry of Finance. https://ec.europa.eu/info/sites/default/files/2021-luxembourg-stability-programme_en.pdf. Accessed 03 Jan.2021.
“National Plan for a Green, Digital and Inclusive Transition. National Reform Programme of the Grand Duchy of Luxembourg under the European semester 2021.” The Government of the Grand Duchy of Luxembourg. https://ec.europa.eu/info/sites/default/files/2021-european-semester-national-reform-programme-luxembourg_en.pdf. Accessed 03 Jan.2022.
Luxembourg will invest around €3.2 billion in infrastructure and innovation projects, or 4.4% of its GDP (the average over 2016-2021 have being 3.9%). Social expenditure (47% of the budget) will be dedicated to subsidies for disadvantaged households, and the National Solidarity Fund will reach €367 million (+5% compared to 2021), due especially to the €200 million. increase in the cost-of-living allowance and social inclusion income. A fund dedicated to housing development will receive €228.2 million (+77% compared to 2021), and €27 million will be applied to the so-called Pacte Logement 2.0 (subsidies for municipalities that are developing housing). The investments in the field of climate and the environment will total €765 million, and will increase by €975 million by 2024 (roughly doubling from 2019). Some €1.8 billion are foreseen for the implementation of the national energy and climate plan. As part of efforts to reduce CO2 emissions, €300 million will be invested in the country’s rail infrastructure in 2022, and €12.6 million annually until 2025 to develop new electric charging stations. In the digital field, €1.1 billion will be spent until 2025, of which €234 million will be dedicated in 2022 to investment in the cybersecurity, 5G infrastructure and high-speed internet fields. Luxembourg’s Innovation Fund will receive €132 million in 2022, and the education budget will reach €3.1 billion (+10% compared to 2021) to finance the recruitment of 1,000 additional teachers, free daycare during school periods, free school lunches for children from low- and middle-income families, and free music education.
Government revenue will amount to €22.3 billion (+4.3% compared to 2021). Due to the ambitious investment policy, public spending will total €23.5 billion (+3.4% compared to 2021). Municipalities are expected to operate with a surplus of €234 million, while the social security surplus should reach €853 million. In 2022, the public administration balance will be almost at the break-even point, with a deficit of €143 million, or 0.2% of GDP, which is well below the bar of 3% of GDP provided by the European treaties and the Stability and Growth Pact principles. The public debt was estimated at 24.8% of GDP in 2020, 25.8% of GDP in 2021, 26.6% of GDP in 2022, and is expected to reach around 27% of GDP in the medium term (below the 30% of GDP cap that the government set in its coalition agreement concluded in 2018).
Citations:
“De Budget 2022.” Luxembourg’s Stat Budget 2022 official website. The Government of the Grand Duchy of Luxembourg. https://budget.public.lu/lb.html. Accessed 3 January 2022.
“Gramegna delivers final budget speech as Minister of Finance.” RTL Today (15.12.2021). https://today.rtl.lu/news/luxembourg/a/1833434.html. Accessed 3 January 2022.
“De Budget 2022.” Volume 1. Le Gouvernement du Grand-Duché de Luxembourg. Ministère des Finances.
Chambre des Députés/Doc.parl. no.7878. Session ordinaire 2021-2022.
“2022 Budget Prioritises Investment in Climate Action, Housing, Digitalization.” Chronicle.lu (13 October 2021). https://chronicle.lu/category/finance-1/38001-2022-budget-prioritises-investment-in-climate-action-housing-digitalization. Accessed 3 January 2022.
“Government at the Glance 2021. Country Factsheet: Luxembourg.” OECD (9 July 2021). https://www.oecd.org/gov/government-at-a-glance-22214399.htm. Accessed 3 January 2022.
“Stability and Growth Programme of the Grand Duchy of Luxembourg 2021 > 2025”/De Stabilitéits-Programm.”
The Government of the Grand Duchy of Luxembourg. Ministry of Finance. https://ec.europa.eu/info/sites/default/files/2021-luxembourg-stability-programme_en.pdf. Accessed 03 Jan.2021.
“National Plan for a Green, Digital and Inclusive Transition. National Reform Programme of the Grand Duchy of Luxembourg under the European semester 2021.” The Government of the Grand Duchy of Luxembourg. https://ec.europa.eu/info/sites/default/files/2021-european-semester-national-reform-programme-luxembourg_en.pdf. Accessed 03 Jan.2022.
Graph View
To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
10
9
9
Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
8
7
6
7
6
Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
5
4
3
4
3
Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
2
1
1
Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Luxembourg has made research, development and higher education one of the cornerstones of the nation’s vision for the future. In February 2020, the government adopted its National Research and Innovation Strategy, with the objective of building a diverse and sustainable knowledge society by 2030, with a strong digital pillar. Luxembourg expects to allocate about 1% of GDP to research and development (R&D) investments by 2023, by providing financing to both the public and private sectors. Public sector spending is expected to reach 0.8% of GDP. According to EUROSTAT, the Grand Duchy ranked first in the EU in 2020 with €648 per capita invested in R&D (followed by Denmark, Germany and Finland), while the EU average stood at €225 per capita. The IMD World Competitiveness Ranking 2021 classified Luxembourg as the 12th most innovative country worldwide, and the European Innovation Scoreboard 2021 assessed it as a “strong innovator country” due to its research systems, human resources and intellectual assets.
The main funder is the National Research Fund (FNR), which oversees a large number of research and aid programs (focused on areas such as materials science, health, ICT, data science, fintech, space industry, automation and robotics), and promotes activities to strengthen the link between science and society. From 2000 to 2020, the FNR devoted €813 million to 4,170 projects, and in 2021 disbursed €97.06 million to 299 projects. In the 2022 state budget, the FNR will receive €132 million. About 2,709 persons currently work on R&D functions in the public sector. The private sector contributes to the R&D activities with an annual budget of €382 million. (0.6% of GDP), and with more than 3,000 specialized staff (2019). The government encourages the development of public-private partnerships, supported by Luxinnovation, which is in turn supported by the Ministry of the Economy, the Ministry for Higher Education and Research, the Luxembourg Chamber of Commerce, the Luxembourg Chamber of Skilled Crafts, and the Association of Luxembourg’s Industry (FEDIL).
In the World University Rankings 2022, the University of Luxembourg (founded in 2003) ranked among the top 300 universities in the world (total of 1662 participants) and third worldwide for its international outlook. It conducts research across multiple fields in its three faculties and three interdisciplinary research centers, as well as in the Luxembourg Learning Center (LLC). It boasts 1,688 academic staff from 94 different countries, 6,783 students originating from 130 various countries and 950 doctoral candidates.
The 2022 state budget allotted €234.9 million for the University of Luxembourg, or an annual increase of only 2% through 2025. Between 2014 and 2017, the government’s contribution to the university increased by 7.6% per year. The Idea Foundation think tank expressed its surprise over this lower level of investment, declaring that “this goes against the stated ambition to focus on the knowledge economy and diversification, particularly in favor of a health ecosystem.”
Citations:
“Creating value for society: The FNR’s strategy and action plan 2022-2025.” FNR (14 January 2022). https://www.fnr.lu/creating-value-for-society-the-fnrs-strategy-and-action-plan-2022-2025/. Accessed 15 January 2022.
“New convention ensures University’s public endowment for next 4 years.” University of Luxembourg (14 January 2022). https://wwwen.uni.lu/university/news/slideshow/new_convention_ensures_university_s_public_endowment_for_next_4_years. Accessed on 15 January 2022.
“De Budget 2022.” Luxembourg’s Stat Budget 2022 official website. The Government of the Grand Duchy of Luxembourg. https://budget.public.lu/lb.html. Accessed 3 January 2022.
Bouchet, Muriel. “Pour un réexamen de la contribution de l’Etat à l’Université du Luxembourg.” Fondation IDEA (27 December 2021). https://www.fondation-idea.lu/2021/12/27/pour-un-reexamen-de-la-contribution-de-letat-a-luniversite-du-luxembourg/. Accessed 3 January 2022.
“Rapport d’activité 2020.” Ministère de l’Enseignement supérieur et de la Recherche. (15 December 2021). https://mesr.gouvernement.lu/fr/le-ministere/rapports-d-activite.html. Accessed 3 January 2022.
The Times Higher Education (THE) World University Ranking 2022. University of Luxembourg (6 November 2021). https://www.timeshighereducation.com/world-university-rankings/university-luxembourg. Accessed 3 January 2022.
“2021 Index of Economic Freedom.” Heritage. https://www.heritage.org/index/ranking. Accessed 3 January 2022.
“National Research Priorities for Luxembourg in 2020 and beyond.” Le Gouvernement du Grand-Duché du Luxembourg. Ministère de l’Enseignement supérieur et de la Recherche. Le Fonds National de la Recherche du Luxembourg (23 January 2020). https://www.fnr.lu/national-research-priorities-for-luxembourg-approved/. Accessed 3 January 2022.
“Tracking Innovation through the COVID-19 Crisis.” Global Innovation Index Report 2021. 14th Ediction (September 2021). https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2021.pdf. Accessed 3 January 2022.
“Gross domestic spending on R&D: Luxembourg.” OECD Data (2000-2020). https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm Accessed on 3 January 2022.
The main funder is the National Research Fund (FNR), which oversees a large number of research and aid programs (focused on areas such as materials science, health, ICT, data science, fintech, space industry, automation and robotics), and promotes activities to strengthen the link between science and society. From 2000 to 2020, the FNR devoted €813 million to 4,170 projects, and in 2021 disbursed €97.06 million to 299 projects. In the 2022 state budget, the FNR will receive €132 million. About 2,709 persons currently work on R&D functions in the public sector. The private sector contributes to the R&D activities with an annual budget of €382 million. (0.6% of GDP), and with more than 3,000 specialized staff (2019). The government encourages the development of public-private partnerships, supported by Luxinnovation, which is in turn supported by the Ministry of the Economy, the Ministry for Higher Education and Research, the Luxembourg Chamber of Commerce, the Luxembourg Chamber of Skilled Crafts, and the Association of Luxembourg’s Industry (FEDIL).
In the World University Rankings 2022, the University of Luxembourg (founded in 2003) ranked among the top 300 universities in the world (total of 1662 participants) and third worldwide for its international outlook. It conducts research across multiple fields in its three faculties and three interdisciplinary research centers, as well as in the Luxembourg Learning Center (LLC). It boasts 1,688 academic staff from 94 different countries, 6,783 students originating from 130 various countries and 950 doctoral candidates.
The 2022 state budget allotted €234.9 million for the University of Luxembourg, or an annual increase of only 2% through 2025. Between 2014 and 2017, the government’s contribution to the university increased by 7.6% per year. The Idea Foundation think tank expressed its surprise over this lower level of investment, declaring that “this goes against the stated ambition to focus on the knowledge economy and diversification, particularly in favor of a health ecosystem.”
Citations:
“Creating value for society: The FNR’s strategy and action plan 2022-2025.” FNR (14 January 2022). https://www.fnr.lu/creating-value-for-society-the-fnrs-strategy-and-action-plan-2022-2025/. Accessed 15 January 2022.
“New convention ensures University’s public endowment for next 4 years.” University of Luxembourg (14 January 2022). https://wwwen.uni.lu/university/news/slideshow/new_convention_ensures_university_s_public_endowment_for_next_4_years. Accessed on 15 January 2022.
“De Budget 2022.” Luxembourg’s Stat Budget 2022 official website. The Government of the Grand Duchy of Luxembourg. https://budget.public.lu/lb.html. Accessed 3 January 2022.
Bouchet, Muriel. “Pour un réexamen de la contribution de l’Etat à l’Université du Luxembourg.” Fondation IDEA (27 December 2021). https://www.fondation-idea.lu/2021/12/27/pour-un-reexamen-de-la-contribution-de-letat-a-luniversite-du-luxembourg/. Accessed 3 January 2022.
“Rapport d’activité 2020.” Ministère de l’Enseignement supérieur et de la Recherche. (15 December 2021). https://mesr.gouvernement.lu/fr/le-ministere/rapports-d-activite.html. Accessed 3 January 2022.
The Times Higher Education (THE) World University Ranking 2022. University of Luxembourg (6 November 2021). https://www.timeshighereducation.com/world-university-rankings/university-luxembourg. Accessed 3 January 2022.
“2021 Index of Economic Freedom.” Heritage. https://www.heritage.org/index/ranking. Accessed 3 January 2022.
“National Research Priorities for Luxembourg in 2020 and beyond.” Le Gouvernement du Grand-Duché du Luxembourg. Ministère de l’Enseignement supérieur et de la Recherche. Le Fonds National de la Recherche du Luxembourg (23 January 2020). https://www.fnr.lu/national-research-priorities-for-luxembourg-approved/. Accessed 3 January 2022.
“Tracking Innovation through the COVID-19 Crisis.” Global Innovation Index Report 2021. 14th Ediction (September 2021). https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2021.pdf. Accessed 3 January 2022.
“Gross domestic spending on R&D: Luxembourg.” OECD Data (2000-2020). https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm Accessed on 3 January 2022.
Graph View
To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
10
9
9
The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
8
7
6
7
6
The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
5
4
3
4
3
The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
2
1
1
The government does not contribute to improving the regulation and supervision of financial markets.
In July 2021, the Global Financial Center Index (GFCI) ranked Luxembourg eighth in its listing of top financial centers worldwide, and ranked it fourth (behind the United States, the United Kingdom and Switzerland) based on the business environment. GFCI assessed Luxembourg as the most international financial center in the world (followed by Singapore, Hong Kong, the UK and Ireland), due to the fact that 60% of its total activity is exclusively international.
Luxembourg is also the top center for private banking in the euro zone, and is the largest reinsurance center in Europe. As of 1 June 2021, it was home to 128 banks from 28 countries (with assets of €851.1 billion. compared with €815.5 billion the previous year, a rise of 4.36%), which employ some 50,000 professionals (81% non-Luxembourgers). Given the considerable number of foreign banks in the country, of which 21 are from Germany, 15 from China, 14 from France, 12 from Switzerland, and only 12 from Luxembourg and Belgium, the degree of internationalization of its financial sector (96.5%) is the highest in Europe.
Luxembourg-domiciled investment funds with funds under management amounting to € 5.05 trillion are distributed across 77 countries (with a particular focus on Europe, Asia, Latin America and the Middle East). Thus, the Grand Duchy is the second-largest investment fund center worldwide and number one in Europe. It is the same in terms of capital markets, Luxembourg being the European leader in international securities listings, with more than 37,000 listed and tradable securities at the Luxembourg Stock Exchange (LuxSE), issued in approximately 60 currencies by more than 100 countries. LuxSE is the international market leader in the listing created by Dim Sum Bonds, and the top Islamic fund center in the EU. In 2020, the labeling agency for sustainable financial projects (LuxFLAG) advanced significantly in sustainable bond issuance. The new issuance amounted to €186 billion, of which 51% were sustainable, social and green securities. Luxembourg and the European Investment Bank (EIB) have launched an innovative climate finance platform dedicated to investments in combating climate change.
The country has made considerable effort to develop its financial technology sector, especially through LoFT (a platform connecting leading international players with fintech innovation and cloud technologies). PayPal, Amazon Payments, Six Payment Services and the Emerging Payment Association have chosen Luxembourg as their hub to serve the entire EU market. In the 2022 state budget, the government allocated €8.2 million over the next 10 years to establishing a co-called Finnovation Hub, jointly with the university and the Luxembourg Institute of Science and Technology (LIST).
Representing some 24.0% of GDP in 2019, and some 11% of employment and 21% of fiscal revenues, the financial industry continues to drive Luxembourg’s economy and to serve as a catalyst for qualitative growth. In 2021 and 2022, Luxembourg received a AAA credit rating by the financial rating agencies. However, the attractiveness of Luxembourg as a financial center is liable to be affected by the process of tax and financial harmonization at EU and OECD level and the new regulatory environment (related to transparency, secrecy and to the three pillars of the Banking Union).
In the wake of the controversies around global tax evasion, Luxembourg has reinforced its capacities for the oversight of financial activities. Luxembourg’s Ministry of Finance has increased its staff, as has the Commission de Surveillance du Secteur Financier, which is in charge of supervising the professionals and products of the Luxembourg financial sector. Luxembourg has also taken a proactive position during the international debates on the fair taxation of multinational companies, and is committed to the exchange of information so as to prevent tax evasion and avoidance. Given the recruiting difficulties faced by the judiciary (due to the fact that public prosecutors and judges need to be of Luxembourg nationality), the public prosecutor’s office and the Luxembourg Financial Intelligence Unit (Cellule de Renseignement Financier) still lack sufficient legal specialists to deal with the complex activities conducted in Luxembourg’s financial sector.
Citations:
Luxembourg for Finance. Facts and Figures. https://www.luxembourgforfinance.com/en/homepage/#. Accessed 14 January 2022.
Association of the Luxembourg Fund Industry. Facts and Figures. https://www.alfi.lu/. Accessed 14 January 2022.
Ahairwe, Pamella Eunice; Miyandazi, Luckystar; Bilal, San. “The EU list of tax havens: progress and challenges.” ECDPM. Finance Discussion Paper no.30. https://ecdpm.org/wp-content/uploads/EU-List-Tax-Havens-Progress-Challenges-ECDPM-Discussion-Paper-310-2021.pdf. Accessed 14 January 2022.
“The Future of the Financial Industry in Luxembourg.” Luxembourg for Finance & Deloitte. (September 2021). https://www2.deloitte.com/lu/en/pages/sustainable-development/articles/future-of-luxembourg-financial-industry.html. Accessed 14 January 2022.
Baruch, Jérémie; Ferrer, Maxime; Vaudano, Maxime; Michel, Anne. “OpenLux : the secrets of Luxembourg, a tax haven at the heart of Europe.” Le Monde (9 February 2021). https://www.lemonde.fr/les-decodeurs/article/2021/02/08/openlux-the-secrets-of-l uxembourg-a-tax-haven-at-the-heart-of-europe_6069140_4355770.html. Accessed 3 January 2022.
“Statement by the Luxembourg Government on recent press articles published about Luxembourg.” https://gouvernement.lu/en/dossiers/2021/openlux.html. Accessed 14 January 2022.
“Inclusive finance in the Luxembourg’s General Development Cooperation Strategy: The Road to 2030.” Inclusive Finance Network Luxembourg (2022). https://www.infine.lu/inclusive-finance-in-the-luxembourgs-general-development-cooperation-strategy-the-road-to-2030/. Accessed 14 January 2022.
“Luxembourg, among the top 10 financial centers in the world.” Luxembourg Trade&Invest (30 July 2021). https://www.tradeandinvest.lu/news/luxembourg-among-the-top-10-financial-centres-in-the-world/. Accessed 14 January 2022.
“Towards Digital Capital Markets with Impact and Purpose.” Luxembourg Stock Exchange (LuxSE). (25 March 2021). https://www.bourse.lu/pr-luxse-sed-2021. Accessed 14 January 2022.
Luxembourg House of Financial Technology (LoFT). https://lhoft.com/en/. Accessed 14 January 2022.
“Revue de stabilité financière 2020.” Banque centrale du Luxembourg. https://www.bcl.lu/fr/publications/revue_stabilite/RSF-2020/224623_BCL_REVUE_STABILITE_FINANCIERE_2020_00_INTRO.pdf. Accessed 14 January 2022.
Luxembourg is also the top center for private banking in the euro zone, and is the largest reinsurance center in Europe. As of 1 June 2021, it was home to 128 banks from 28 countries (with assets of €851.1 billion. compared with €815.5 billion the previous year, a rise of 4.36%), which employ some 50,000 professionals (81% non-Luxembourgers). Given the considerable number of foreign banks in the country, of which 21 are from Germany, 15 from China, 14 from France, 12 from Switzerland, and only 12 from Luxembourg and Belgium, the degree of internationalization of its financial sector (96.5%) is the highest in Europe.
Luxembourg-domiciled investment funds with funds under management amounting to € 5.05 trillion are distributed across 77 countries (with a particular focus on Europe, Asia, Latin America and the Middle East). Thus, the Grand Duchy is the second-largest investment fund center worldwide and number one in Europe. It is the same in terms of capital markets, Luxembourg being the European leader in international securities listings, with more than 37,000 listed and tradable securities at the Luxembourg Stock Exchange (LuxSE), issued in approximately 60 currencies by more than 100 countries. LuxSE is the international market leader in the listing created by Dim Sum Bonds, and the top Islamic fund center in the EU. In 2020, the labeling agency for sustainable financial projects (LuxFLAG) advanced significantly in sustainable bond issuance. The new issuance amounted to €186 billion, of which 51% were sustainable, social and green securities. Luxembourg and the European Investment Bank (EIB) have launched an innovative climate finance platform dedicated to investments in combating climate change.
The country has made considerable effort to develop its financial technology sector, especially through LoFT (a platform connecting leading international players with fintech innovation and cloud technologies). PayPal, Amazon Payments, Six Payment Services and the Emerging Payment Association have chosen Luxembourg as their hub to serve the entire EU market. In the 2022 state budget, the government allocated €8.2 million over the next 10 years to establishing a co-called Finnovation Hub, jointly with the university and the Luxembourg Institute of Science and Technology (LIST).
Representing some 24.0% of GDP in 2019, and some 11% of employment and 21% of fiscal revenues, the financial industry continues to drive Luxembourg’s economy and to serve as a catalyst for qualitative growth. In 2021 and 2022, Luxembourg received a AAA credit rating by the financial rating agencies. However, the attractiveness of Luxembourg as a financial center is liable to be affected by the process of tax and financial harmonization at EU and OECD level and the new regulatory environment (related to transparency, secrecy and to the three pillars of the Banking Union).
In the wake of the controversies around global tax evasion, Luxembourg has reinforced its capacities for the oversight of financial activities. Luxembourg’s Ministry of Finance has increased its staff, as has the Commission de Surveillance du Secteur Financier, which is in charge of supervising the professionals and products of the Luxembourg financial sector. Luxembourg has also taken a proactive position during the international debates on the fair taxation of multinational companies, and is committed to the exchange of information so as to prevent tax evasion and avoidance. Given the recruiting difficulties faced by the judiciary (due to the fact that public prosecutors and judges need to be of Luxembourg nationality), the public prosecutor’s office and the Luxembourg Financial Intelligence Unit (Cellule de Renseignement Financier) still lack sufficient legal specialists to deal with the complex activities conducted in Luxembourg’s financial sector.
Citations:
Luxembourg for Finance. Facts and Figures. https://www.luxembourgforfinance.com/en/homepage/#. Accessed 14 January 2022.
Association of the Luxembourg Fund Industry. Facts and Figures. https://www.alfi.lu/. Accessed 14 January 2022.
Ahairwe, Pamella Eunice; Miyandazi, Luckystar; Bilal, San. “The EU list of tax havens: progress and challenges.” ECDPM. Finance Discussion Paper no.30. https://ecdpm.org/wp-content/uploads/EU-List-Tax-Havens-Progress-Challenges-ECDPM-Discussion-Paper-310-2021.pdf. Accessed 14 January 2022.
“The Future of the Financial Industry in Luxembourg.” Luxembourg for Finance & Deloitte. (September 2021). https://www2.deloitte.com/lu/en/pages/sustainable-development/articles/future-of-luxembourg-financial-industry.html. Accessed 14 January 2022.
Baruch, Jérémie; Ferrer, Maxime; Vaudano, Maxime; Michel, Anne. “OpenLux : the secrets of Luxembourg, a tax haven at the heart of Europe.” Le Monde (9 February 2021). https://www.lemonde.fr/les-decodeurs/article/2021/02/08/openlux-the-secrets-of-l uxembourg-a-tax-haven-at-the-heart-of-europe_6069140_4355770.html. Accessed 3 January 2022.
“Statement by the Luxembourg Government on recent press articles published about Luxembourg.” https://gouvernement.lu/en/dossiers/2021/openlux.html. Accessed 14 January 2022.
“Inclusive finance in the Luxembourg’s General Development Cooperation Strategy: The Road to 2030.” Inclusive Finance Network Luxembourg (2022). https://www.infine.lu/inclusive-finance-in-the-luxembourgs-general-development-cooperation-strategy-the-road-to-2030/. Accessed 14 January 2022.
“Luxembourg, among the top 10 financial centers in the world.” Luxembourg Trade&Invest (30 July 2021). https://www.tradeandinvest.lu/news/luxembourg-among-the-top-10-financial-centres-in-the-world/. Accessed 14 January 2022.
“Towards Digital Capital Markets with Impact and Purpose.” Luxembourg Stock Exchange (LuxSE). (25 March 2021). https://www.bourse.lu/pr-luxse-sed-2021. Accessed 14 January 2022.
Luxembourg House of Financial Technology (LoFT). https://lhoft.com/en/. Accessed 14 January 2022.
“Revue de stabilité financière 2020.” Banque centrale du Luxembourg. https://www.bcl.lu/fr/publications/revue_stabilite/RSF-2020/224623_BCL_REVUE_STABILITE_FINANCIERE_2020_00_INTRO.pdf. Accessed 14 January 2022.