The era of creative taxation: how companies minimise taxes in the EU - and why Luxembourg is in the spotlight

Taxes are a necessity for some, an evil for others, and a field for large corporations to optimise. Despite the efforts of regulators, tax planning remains a sophisticated tool to preserve profits. According to Finance Minister Gilles Roth's (CSV) response to a parliamentary enquiry, the most common practice in Europe remains the movement of profits through cross-border schemes.

Companies sell goods or services in countries with high tax burdens but register profits in low-tax jurisdictions - often through artificial internal transactions and inflated licence fees between subsidiaries. This reduces the tax base in one country and increases it where taxes are minimal.

To combat such practices, the European Union introduced the DAC6 directive, which obliges companies and tax advisors to declare cross-border tax constructs if they show signs of aggressive planning.

In Luxembourg, 2,806 cases of such schemes have been reported under DAC6 until the end of 2023. At the same time, there were 9,521 reports from other EU countries involving Luxembourg. A particularly high number of signals came from Belgium, France and Germany, indicating an active movement of profits through the Grand Duchesse jurisdiction.

A commonly used scheme is internal borrowing with inflated interest, where a company borrows from an offshore subsidiary. The payment of interest reduces taxable income in one country, while the other country receives this income under a more lenient tax regime.

Another popular practice is the creation of letterbox companies in countries with low taxation and high anonymity. Jurisdictions such as Luxembourg, Malta and Cyprus often figure in such schemes. The real owners of such structures remain in the shadows, taking advantage of gaps in legislation.

While such schemes are often formally legal, their use undermines tax fairness and increases social inequality. The introduction of DAC6 is just one step in the fight for transparency. The question is whether it is enough to reverse the culture of corporate 'optimisation'.