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Luxembourg's Bank Secrecy Laws Lure Investors Seeking a Tax Haven


LUXEMBOURG — Every morning, a train filled with mostly middle-class passengers pulls out of Brussels bound for Luxembourg. Belgians jokingly call it Le Train des Fraudeurs --"The Cheaters' Train."

The nickname stems from the financial business assumed to be carried on by the train's passengers in Luxembourg, which has long lured investors because of its strict bank secrecy laws and tax breaks.

But Luxembourg has been honing other financial skills to compete in the single market that will be created in late 1992, when the 12 nations of the European Community take down old trade barriers that restrict the free movement of people, money, goods and services.

Local officials appear to want to shed Luxembourg's image as a savings and tax haven. Several interviewed played down the importance of the country's secrecy and tax provisions.

Whatever, the Grand Duchy of Luxembourg, a country of just 372,000 people (about the same as Cincinnati), which is smaller than Rhode Island and overshadowed by neighboring Belgium, France and West Germany, clearly has appeal.

Luxembourg now has 156 banks--only a handful American--many of which are on Boulevard Royal, known as Luxembourg's Wall Street.

About 650 investment funds and some 100 reinsurance companies also operate from here. The stock market trades some 8,400 issues, about 75% of which are bonds denominated in dollars or major European currencies.

In an interview, Prime Minister Jacques Santer expressed satisfaction with the financial center.

"(It) has not only grown but has also . . . developed its own specificity and is now competitive with all other, bigger centers," he said.

The center was hurt by the banking crisis in the early 1980s when major developing countries were unable to meet their foreign debt payments. But it has since rebounded, and the outlook remains bright, according to analysts.

Among the advantages they cite are the country's social and political stability, central location in the European Community, strong government support and multilingual population. It also has no central bank to apply credit controls or reserve requirements on banks as a means of shaping monetary policy.

Moreover, a recent report from the Organization for Economic Cooperation and Development, a group of 24 industrialized nations, remarked on the country's pluses:

"One of the special attractions of the Luxembourg financial market from a tax standpoint is that there is no withholding tax on dividend or interest payments for non-residents and that stock market transactions are not taxed.

"Here too, changes in the taxation system--corporation tax reduced from 40% to 34% between 1987 and 1989, the abolition of stamp duty on securities issues--mean that the Grand Duchy now ranks as one of the world's most attractive financial markets."

Still another advantage, it said, was a decision this year to spell out the right to banking secrecy in relation to tax authorities. Disclosure of information about customers' bank accounts is prohibited, except in criminal cases.

Moves to strengthen the financial center will no doubt help Luxembourg compete in the 1992 market that will be formed when the Common Market lifts the trade barriers. The EC already has approved measures requiring the lifting of controls on the movement of capital--or money--by July 1.

France and Italy, which still have some restrictions on foreign bank accounts held by their citizens, intend to comply, possibly before that date. Less-advanced member nations--Portugal, Spain, Ireland and Greece--have more time to do so.

The OECD report cautions that the single-market drive "means that Luxembourg will almost certainly have to adjust again to changes in the international financial environment."

It warns about moves to impose a European-wide withholding tax on interest income.

The European Commission, the EC's executive body, unveiled a plan earlier this year for a minimum withholding rate of 15% throughout the trading bloc. It was later scaled down to 10%.

The proposal, requiring unanimous approval, was fought by Luxembourg and other countries.

"I think at this point it is a dead issue," said Santer.

In pushing the measure, the commission argued it was needed to halt tax evasion once capital controls are lifted.

"There is thus a risk that, once investors are free to open bank accounts in other member states, they will not declare their interest income to their national tax authorities and will thus illegally evade payment of tax," it said.

That might lead, it added, to a substantial loss of revenue in many countries.

West German authorities introduced a 10% withholding tax at the start of the year, only to repeal it in the summer. Analysts believe a substantial amount of money flowed out of the country, some into Luxembourg.

Most analysts do not expect much to happen on July 1, since many capital controls already have been lifted.

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