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EU tax havens

Bernd Riegert / gswApril 9, 2013

Switzerland is a well-known hideaway for assets from around the world, but the country does not belong to the European Union. Within the EU, Luxembourg is the largest tax haven - and operates fully within the law.

A view of the city of Luxembourg (c) picture-alliance/Bildarchiv
Image: picture-alliance/Bildarchiv

What do investors want? Plenty of security for their money, high returns and the lowest tax rates possible. These conditions aren't just found along the white beaches of the Caribbean. Tax havens are also thriving in Europe, says Reinhard Kilmer, a German tax fraud investigator.

"We don't have to look to the Caribbean. We can also step outside our own front door," Kilmer said in a television interview, adding that Great Britain protects the Channel Islands and the Isle of Man, France has Monaco, and Europe still has issues with Luxembourg, Switzerland and Austria.

The yields are perhaps not as high in such places as on the Virgin Islands, but the security cannot be beat, Kilmer concluded.

The leading haven within the European Union is the tiny Grand Duchy of Luxembourg, a founding member of the EU. But the country's finance minister, Luc Frieden, rejects the notion of it being a tax haven. "We are a European center of finance, and we don't encourage anyone to engage in tax evasion," Frieden has said repeatedly, most recently over the weekend in an interview with the Sunday edition of the Frankfurter Allgemeine daily.

Luxembourg's government says that 141 banks from 26 countries have settled there.

More transparency?

For decades, Luxembourg has cultivated its reputation as an investor's safe haven. Around 2.1 trillion euros ($2.73 trillion) are held by Luxembourg's investment funds, according to an estimate by the financial consulting firm Ogier. Taxes are very low on these funds, leading many international companies to open subsidiaries in Luxembourg in order to have their profits taxed cheaply by the miniature country. That is entirely legal in Europe. Money from abroad provides Luxembourgers with the highest per capita income in the EU, so it's no wonder that residents defend their business model.

Finance Minister Luc Frieden also does not want to shake things up by threatening the sense of security felt among companies and investors there.

Sven Giegold, a member of the European Parliament and a finance expert within the Green Party, has called for more transparency when it comes to companies' tax models.

"A company should have to make clear in its balance sheets how many subsidiaries it has, how much in profits it is earning and where as well as how much it's paying in taxes," Giegold said, arguing that such a move would allow journalists and voters to determine whether the relationship between earnings and taxes paid is appropriate.

"Then this whole tax shuffle would be transparent," the parliamentarian said. Luc Frieden told the Frankfurter Allgemeine that he is prepared to think about whether records of interest earned by private investors should in the future be automatically forwarded to the tax authorities in the investors' home countries. He was sharply criticized in Luxembourg for saying so, and the youth wing of center-right Democratic Party in Luxembourg issued a statement demanding that bank secrecy be maintained.

Until now, Luxembourg and Austria, the tax haven in the Alps, have blocked automatic sharing of data on investment returns and taxes in the European Union. European Commissioner for Taxation Algirdas Semeta described that practice last year as "completely unfair."

Small states need 'large capital reserves'

The EU is not really responsible for taxation policy, which is largely left to the member states. The idea is that it's desirable for there to be competition among the various tax models. Malta, for example, does not tax companies at all, while Cyprus taxes them at ten percent and Ireland at 12.5 percent. For years, finance ministers have sought to agree to a shared basis model when it comes to what types of wealth and income should be subject to taxation. In terms of financial politics, it's not necessary for tax models to be uniform, said Guntram Wolff, an economist with the think tank Bruegel in Brussels. What's essential, he said, is that the rules are clear: "I think tax transparency is crucial. Tax havens in the European bloc are in no way desirable. That cannot be the case because then one country is really operating its tax policy and banks at the cost of the others."

When a storm emerges over a tax haven, as recently happened in Cyprus, then other European countries may get called in to foot the bill. Government spokespeople in Luxembourg and Malta reject comparisons with Cyprus. But the banks - even in Luxembourg or Malta - could one day fall into trouble, believes Thomas Meyer, chief economist at Deutsche Bank. In an interview with online portal EU Observer, he said: "Even with the best oversight, banks can get into trouble. And when a state is too small in comparison with its banking sector, then it will go bankrupt."

In the case of Cyprus, however, EU members are rescuing it with ten billion euros. In Cyprus, the banks were worth seven times as much as the country's GDP. In Luxembourg, they're worth 22 times more. Meyer believes small states should maintain larger reserves of their own capital, citing Switzerland as an example that is paving the way here. In Luxembourg, Austria and other financial tax havens, Meyer says, there's a preference for using the EU as a form of insurance.

Guntram Wolff Copyright: private
Guntram Wolff supports policies of tax transparencyImage: privat
Luc Frieden Photo: Wolfgang Kumm dpa +++(c) dpa - Bildfunk+++
Luc Frieden - finance minister in tax paradise?Image: picture-alliance/dpa
Deutsche Bank in Luxembourg Copyright: imago/imagebroker
Deutsche Bank is one of 141 banks in the tiny countryImage: imago/imagebroker

Defining tax havens
A speaker for the EU Commission has noted that the member states have until now been unable to agree as to what constitutes a tax haven. If one applies the standards of the Organization for Economic Cooperation and Development (OECD) in Paris, then no European country can be called a tax haven. Low tax rates in one country that can lead to avoiding higher taxes elsewhere is not an illegal practice - at most just an affront to some people's sense of justice.

Finance ministers from Luxembourg, Latvia or Slovakia, where rates are lower for companies than they are in Germany or France, argue in response that high tax countries could always lower their rates in order to attract investors and new companies.

The British NGO Tax Justice Network publishes a list of tax havens that weights the size of the financial marketplace as well as the level of bank secrecy. Using this index, Switzerland is tax haven number one, followed by the Cayman Islands and Luxembourg. Germany comes in at number nine. Billions owned by foreign investors are housed in Germany, as well, and the reticence of German banks toward tax authorities in Russia or Arabic states makes the country attractive to many, notes the Tax Justice Network.

A shot of a beach in the Cayman Islands Photo: Daniel Gammert
Tax havens can be found well beyond the CaribbeanImage: picture-alliance/dpa