Luxembourg Budget 2013 - Tax Measures Impacting The Private Equity Industry

Introduction

Today the Luxembourg Parliament approved the bill n° 6497 modifying the Luxembourg Income Tax Act ("LIR") in certain areas, some of which will impact the private equity industry. This legal alert will focus on certain specific points impacting this industry.

Avoiding the retirement cliff

Public deficit or surplus is the difference between government receipts and government spending in a single year. Running a country with a constant public deficit is almost universal in the 21st century. The 2007-2009 financial crisis led to a dramatic increase in the public deficits of many advanced economies, with many of them experiencing their highest levels of debt since World War II. Presented as a percent of gross domestic product (GDP), total deficit for OECD countries went from -1.2% of total OECD GDP in 2006 to -6.6% in 2011. Some countries have had rather severe deficits over the last few years, including, for 2011, a -10% deficit in the United States and -9.4% in the UK. Economic powerhouses such as the United States and the UK may well be able to deal with the additional government debt resulting from those deficits. Even so, the recent ongoing discussions regarding the risks of the U.S. economy tumbling off the fiscal cliff - with $600 billion in tax increases and spending cuts - show that even the largest economies may not continuously run public deficits without getting punished at some moment in time.

Luxembourg, as a tiny country, though seen as punching above its weight, has always considered it necessary to avoid putting itself into positions similar to those of competitors such as Ireland and Cyprus who run a -10.3% deficit and -6.3% respectively, seemingly without really attempting to address the state of their public finances. With an expected public deficit of -1.5% for 2013, and an expected public debt of broadly 20% of GDP (compared to the Irish public debt of 120% and the Cyprus debt of 60.8%), Luxembourg appears to be top of the class. Nonetheless, the government has decided to cut back on expenses by some €538 million and to increase the tax receipts by €414 million approximately, in order to reduce the public deficit to approximately 0.8% of GDP.

The reason for these policy measures has nothing to do with concerns such as those encountered in Ireland where the cost of servicing public debt is moving towards 20% of tax revenues. That cost in Luxembourg is well below 1%. However, as is the case for any other country...