Luxembourg has become a favorite destination for many companies as a headquarters location. Already, the country serves as the host for firms in diverse industrial and service sectors, including global steel giant ArcelorMittal. Among the many benefits on offer include Luxembourg’s favorable tax regime as well as its stability, international focus and thriving global financial and business hubs.

Luxembourg’s overall corporate tax rate, estimated by the World Bank at 20.9%, is frequently cited as a main attraction. Its open economy — along with a multicultural and multilingual population — also facilitates doing business on a regional or global basis. In addition, the government allows for an 80% tax exemption for net income or capital gains made from intellectual property.

Furthermore, Luxembourg’s reputation and strength as a global financial center offers companies access to first-class financial, legal and tax services. Indeed, the financial services sector represents a key driver behind the Luxembourg economy. The sector has, however, come under greater international scrutiny and pressure to amend banking secrecy laws. In response, the Luxembourg government, a centre-left coalition, has modified its banking secrecy regulations and signed various agreements in order to remove itself from the OECD’s “grey list” of countries that have not fully implemented international standards on the exchange of tax information.

Plus, in an effort to reduce its independency on the financial services sector, the government has made a concerted effort to diversify and expand its manufacturing and services industries through various tax and spending initiatives.

One of the factors weighing against Luxembourg in the World Bank ranking concerns labor, with the country ranking 170th in the category of employing workers. Both the OECD and the IMF in their May 2010 economic surveys pointed out how Luxembourg’s labor costs are not aligned with those of neighboring countries.

Much of the problem stems from an inflationary salary indexation system, which tends to push up wages. The Finance Minster, Luc Frieden, is lobbying to modify the mechanism. However, he faces opposition to these reforms. A compromise among the different stakeholders — government, unions and employers — is likely, with a decision expected in the fourth quarter of 2010.

Luxembourg, however, offers other advantages as a headquarters site. The country’s quality of life and liveability is certainly an attraction. In the 2010 liveability rankings from the Economist Intelligence Unit, the city of Luxembourg scored 93.3 points out of total of 100, placing it in the top quintile of the 140 cities surveyed.

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