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Luxembourg offer both offshore tax benefits and the security of an international finance center in the heart of the European Union.

As part of the EC, Luxem- bourg does not like to refer to itself as an 'offshore' centre, but as international financial services centre. However, for the purposes of this guide its low-tax regulations places it in the same category as other offshore centers. There are a wide range of Investment Funds based in Luxembourg because of its regime of low taxes. These funds are marketed to investors in European countries, and increasingly to other continents. There is no withholding tax on bank or bond interest and certain holding compa- nies are exempt from tax on profits.

Tax-free holding

Luxembourg offers several legal business entities, but the holding company is the most popular for offshore purposes because of its tax- free benefits.

There are two types of holding companies in Luxembourg and although the difference is subtle, the tax results are not.

Holding companies are those companies whose sole object is to participate in other domestic or foreign companies through majority shareholdings.

They may finance the companies in their group by investment or loan funds and may collect income from them through dividends, loan interest, licensing fees or patent royalties.

These companies are exempt from corporation tax on profits, dividend and royalty income, and from capital gains and withholding tax on dividends payments. They may issue bearer shares and bonds.

The tax benefits and strategies available to Luxembourg holding companies are numerous and can be quite intricate. A knowledgeable international tax advisor should be consulted to reap the full potential of these investment vehicles.

Holding companies that also engage in direct com- mercial or industrial activity cannot benefit from the above tax advantages. They are generally excluded from the benefits of the Grand Duchy tax treaty network. So while there is no Luxem- bourg withholding tax on certain outflows, dividend and interest income which is received by such companies are subject to maximum rates of withholding tax in the foreign source country.

Financial secrecy

Luxembourg has banking secrecy laws as tough as those of Switzerland. It has been under some pressure recently from the OECD to relax its secrecy laws, but no pressure has been forthcoming from the European Community.

In 1989, when the EC pro- posed to introduce with- holding tax on all interest earned by EC residents or to increase the co-operation between EC tax authorities, Luxembourg strengthened its banking laws. Well aware of the potential economic downfall with less stringent secrecy laws, the Luxembourg prime minister stated at the time that banking secrecy was not negotiable.

Luxembourg banking ser- vices are relatively inexpensive. The tax regime is lenient, no tax is withheld at source and numbered bank accounts are widely available.

They will not, however, take in large quantities of cash from unknown cus- tomers. Luxembourg legislation obliges a bank to know its customers, even if the account is numbered. Secrecy protection is strongest for holding companies.

The legal system of the Grand Duchy seems to hinder rather than assist anyone who seeks to uncover information about the source or destination of assets. There is no administrative route and a court must apply under the 'letter rogatory' system.

Obtaining a court order in Luxembourg to freeze stolen assets is very difficult, unless full details of the account in question - including the names of its signatories - are provided.

Onlt way fro Russian to avoid inflation, devaluation, foreign exchange rate losses for their pension plan is to have their investments off-shore. More than $400 billion is managed in Luxembourg.