LUXEMBOURG INVESTMENT CLIMATE STATEMENT 2009

UNCLAS LUXEMBOURG 000011


FOR OFFICE OF INVESTMENT AFFAIRS - EB/IFD/OIA, TREASURY, COMMERCE,
AND USTR
STATE FOR EUR/WE SHARP

E.O. 12958: N/A
TAGS: OPIC KTDB USTR LU
SUBJECT: LUXEMBOURG INVESTMENT CLIMATE STATEMENT 2009

REF: STATE 123907



1. The following is Luxembourg's submission for the 2009 Investment
Climate Statement:


A. Openness to Foreign Investment
--------------

The Grand-Duchy of Luxembourg offers a very favorable and welcoming
attitude toward Foreign Direct Investment (FDI). FDI reflects how
willing foreign entities are to invest in a given country.
Successive Luxembourg governments have effectively attracted new
investment in medium, light and high-tech industries, as well as
services, through the use of incentives, including deferred
corporate tax payment schedules, capital investment subsidies and
financing of equipment and start-up entities through the state
lending agency, SNCI. Despite the current global economic crisis,
Luxembourg remains the most attractive location for business
investment in Europe - along with Switzerland - with the advantage
of being a member of the European Union (EU).

The key points of climate attractiveness for FDI in
Luxembourg are:

Economic and political stability - even in the midst of the
financial crisis, Luxembourg maintains fiscal stability and relative
strength in productivity and growth as compared to other EU
countries.

Openness and accessibility of government officials and
decision-makers; coordination of vision by government leaders for
the country's future development.

Improved fiscal conditions through tax reforms enacted in 2008:

- Lower official basic corporate tax rate (now 21%)
- Abolition of capital duty tax
- Introduction of super-reduced tax rate (6%) on

Intellectual Property (IP) revenue (of particular interest to
scientific/research projects)

Presence of "critical mass" of U.S.-origin companies in diverse
sectors (industry; e-commerce/IT; financial/investment services),
facilitating due diligence and cooperation on common issues.

Leading new sectors of investment opportunity


1. Biotechnology / Health Technologies

In spring 2008, Luxembourg announced a major investment initiative
in biomedical research in collaboration with cutting-edge U.S.
biotech firms (TGen) and research institutions (Institute for
Systems Biology - ISB). The government has committed EUR 140 million
over the next five years to develop a center of expertise in the
area of molecular medicine. Unique opportunities have thus been
created for foreign private investment in technological excellence
and scientific research toward preventive medicine.
This project is open and attractive to highly-skilled workers of all
nationalities and serves as a strong export platform for
incorporating U.S. products and services.

Part of this project is to be located with the expanded University
of Luxembourg at the new campus in Esch/Belval, a redeveloped
industrial area south of the capital city. This new center of
excellence for academia, research and technology offers diverse
opportunities for investment and partnership.


1. E-Commerce

The European Union (EU) directive on services provided
electronically attracted a number of non-EU companies to establish
European headquarters in Luxembourg thanks to its low VAT (sales
tax) rate (lowest in Europe at 15 percent rate as opposed to
Ireland's 21 percent or Germany's 19 percent). Services offered by a
company registered outside the EU are subject to the VAT levy of the
customer's country of residence, whereas if registered in an EU
member state, the VAT of company headquarters' country is applied.
In the past four years, major U.S. electronic service (e-commerce)
providers have chosen Luxembourg as their European base of
operations, including Amazon.com, Apple i-Tunes, Digital River, and
PayPal (eBay).

However, following a challenge by some member states of the EU
directive and intense negotiations, on December 5th, 2007 the EcoFin
(committee of finance ministers of the EU) decided to extend the
current directive for VAT on electronic services but only through

2014. This allows for a continued favorable investment situation
for U.S. e-commerce companies to establish their European
headquarters in Luxembourg and benefit from the lowest VAT rate of
15%. However, starting in 2015, the proposed change to the
directive will be implemented to divide VAT revenue between the
country of supply and the country of consumption of the service, at
a progressively decreasing share for the country of supply - thereby
decreasing the incentive to locate point of supply in Luxembourg
specifically for the VAT rate. Despite the loss of this decision
factor, Luxembourg's attractiveness as a headquarters location will
continue to be driven by a favorable fiscal climate (moderate
consolidated corporate tax rate equivalent to the EU average of
around 29%, no capital gains tax, no tax on dividend income...),a
rapidly-developing technological infrastructure (led by the
government initiative "LuxConnect" to enhance bandwidth availability
and connectivity),a well-educated and multilingual workforce and a
high quality of life as measured yearly by the Mercer Consulting
worldwide survey. Together this enables Luxembourg to present
itself as a "center of excellence" for IT and e-commerce companies,
as well as the innovative and growing internet service sector
(domain name management, etc).


2. Logistics

Since the closing of the USG WSA (Warehouse Services Agency)
facility, the Luxembourg government has been developing the site as
a logistics hub to house international companies performing
logistics operations. The site offers efficient access to cargo
railways and highways connecting through Europe and diverse
investment opportunities.


3. "Eco-Technologies"

The Ministry of Economy has launched a broad "eco-technologies"
initiative to attract new companies and support technology projects
and activities which are ecologically-friendly. This initiative is
in line with the country's environmentally-conscious culture and
policies (high rate of recycling; emissions-controls; subsidy
programs for "green" building and energy conservation),as well as
with the new EU directive to reduce overall CO2 emissions by 20% in
the Union by the year 2020.

U.S. firms are among the most prominent foreign investors in
Luxembourg, producing tires (Goodyear),chemicals (DuPont),glass
(Guardian Industries) and a wide range of industrial equipment.

The major laws affecting incoming foreign investment through
acquisitions, mergers, takeovers, and "greenfield" (starting from
nothing) investments are based on the Luxembourg company laws, which
are regularly updated.

The Luxembourg judicial system upholds sanctity of contracts. There
is no overall economic or industrial strategy that has
discriminatory effects on foreign-owned investors. There are no
limits on foreign ownership or control, only general screening of
foreign investment; screening mechanisms are routine and non-
discriminatory.

Luxembourg generally boasts a liberal investment regime. There are
no officially "closed" sectors; however, a few industries, primarily
utilities, are still dominated by majority state-owned companies,
such as electric power (Cegedel) - although this sector is rapidly
opening up, telecommunications (P&T),and cable television (one
provider per region such as Coditel for the capital city area and
Eltrona for the Moselle region).

That said, there are no major sectors/matters in Luxembourg in which
foreign investors are denied national treatment (equivalent to
domestic firms).

Foreign investors are allowed to participate equally in ongoing
privatization programs, and the bidding process is transparent with
no barriers erected against foreign investors at the time of the
initial investment or after the investment is made. Moreover, there
are no laws or regulations specifically authorizing private firms to
adopt articles of incorporation or association which limit or
prohibit foreign investment, participation, or control, and there
are no other practices by private firms to restrict foreign
investment, participation in, or control of domestic enterprises.

As one of the most competitive countries in the world with favorable
economic conditions, the government's proactive policies in
attracting FDI contribute to consistent investment growth and
continuing positive projections for future investment, despite the
current global economic crisis. Many international firms find it
convenient to locate European headquarters or holding companies in
Luxembourg as a result of the country's openness to foreign cultures
and excellent balance between the high quality of life and high
purchasing power. Approximately 60 percent of Luxembourg residents
and over 60 percent of the workforce are composed of foreigners
(non-Luxembourgers),mainly from EU countries (Portugal; Italy;
France; Germany; Belgium).


B. Conversion and Transfer Policies
--------------

There are no restrictions on converting or transferring funds
associated with an investment (including remittances of investment
capital, earnings, loan repayments, lease payments) into a freely
usable currency and at a legal market-clearing rate. There have also
not been any recent changes to remittance policies with respect to
access to foreign exchange for investment remittances. There is no
difficulty in obtaining foreign exchange.

The average delay period currently in effect for remitting
investment returns such as dividends, return of capital, interest
and principal on private foreign debt, lease payments, royalties and
management fees through normal, legal channels is quite brief,
approximately 24 hours. Investors can remit through a legal parallel
market including one utilizing cash and convertible negotiable
instruments (such as dollar- denominated host government bonds
issued in lieu of immediate payments in dollars). There is no
limitation on the inflow or outflow of funds for remittances of
profits, debt service, capital, capital gains, returns on
intellectual property, or imported inputs.


C. Expropriation and Compensation
--------------

The laws governing expropriation of property are quite complex, and
the process can be arduous and lengthy, depending on the building.
The Ministry of the Interior, along with the Ministry of Justice,
set forth the specific regulations according to each type of case.
There have been no known expropriatory actions in the recent past or
policy shifts which would lead to believe there may be expropriatory
actions in the near future, and there appear to be no tendencies of
the host government to discriminate against U.S. investments,
companies or representatives in expropriation. There are also no
sectors (e.g., mining, banking, telecommunications, large land
holdings, etc.) that are more at risk for expropriatory or similar
actions, and no laws that force local ownership.

Instances of "creeping expropriation" or governmental action
tantamount to expropriation, such as confiscatory tax regimes, that
might warrant special investigation (particularly by OPIC prior to
offering coverage),have not been found.


D. Dispute Settlement
--------------

There are arbitration possibilities available for domestic dispute
settlements with the Luxembourg Chamber of Commerce and, on an
international level with the International Chamber of Commerce.
There have been no known investment disputes over the past few years
involving U.S. or other foreign investors or contractors in
Luxembourg.

The country's legal system is based on the Napoleonic Code.
Luxembourg has assimilated the laws of neighboring countries
according to the nature of the laws: German tax law, French civil
law, and Belgian commercial law (written and consistently applied).
Judgments of foreign courts are accepted and enforced by the local
courts, and Luxembourg does have a written and consistently applied
bankruptcy law, which is based, like other European countries, on
EU-wide legislation. Monetary judgments are usually made in local
currency.

The government accepts binding international arbitration of
investment disputes between foreign investors and the state, and the
courts recognize and enforce foreign arbitral awards. International
arbitration is accepted as a means for settling investment disputes
between private parties, and there is indeed a domestic arbitration
body within the host economy.


E. Performance Requirements and Incentives
--------------

Luxembourg maintains measures that are consistent with WTO trade
related investment measures (TRIMs) requirements, and in general the
country adheres to WTO regulations in conformity with internal EU
market directives. Performance requirements and incentives are
applied uniformly and systematically to both domestic and foreign
investors.

Luxembourg is considered to be a very attractive tax location for
doing business: low effective corporate tax rates (now 21%); the
lowest VAT (value-added tax) rates in Europe at 3 percent, 6
percent, and 15 percent, according to the good or service purchased;
limited and recently lowered personal tax burden for high-income
individuals (among the lowest individual rates in the EU with a
maximum of 38.9 percent); and a variety of tax incentives
(investment tax credits, new business tax credit, audiovisual
certificates for film productions, venture capital investment
certificates, small business incentives, regional and national
incentives, research and development incentives, environmental
incentives).

Luxembourg is one of the world's largest financial centers, with USD
2.2 trillion Luxembourg-domiciled investment fund assets, second
only to the United States of America. These funds are generally
exempt from corporate income tax, municipal business tax, and
withholding tax on dividends and are only subject to the
subscription and capital taxes. For nearly two generations,
Luxembourg has been one of the world's leading financial centers.
Banks, securities depositaries, insurance and reinsurance companies,
as well as other financial service companies, may benefit from
preferential regulations when establishing their taxable basis for
corporate income tax.

Several other available incentives are not given in the context of
taxation but rather as general business or financial incentives,
such as: loans at reduced interest rates; government guarantees on
loans; real estate development assistance in certain industrial
sites and buildings; cash grants (for high-technology investments,
reorganizations of economically justified sectors, research and
development of innovative products, services or manufacturing
processes); and financial incentives for audiovisual productions
using production facilities and locations in Luxembourg.

Performance requirements are imposed on a case-by-case basis, for
example with respect to employment, as a condition for establishing,
maintaining or expanding the investment, or for access to tax and
investment incentives. There is no requirement that investors
purchase from local sources or export a certain percentage of
output, however, or only have access to foreign exchange in relation
to their exports. In the case of foreign investments, there is no
requirement that nationals own shares, that the share of foreign
equity be reduced over time, or that technology be transferred on
certain terms. The government does not impose "offset" requirements,
whereby major procurements are approved only if the foreign supplier
invests in manufacturing, R&D, or service facilities related to the
items being procured.

The government uses incentives to favor investment in certain
locations and specific geographic areas, for example, abandoned or
vacant industrial sites as in Esch-sur-Alzette, where a new concert
hall facility was erected, and the Esch/Belval high-tech zone is
being developed, as said previously. These incentives are dependent
on the size of the operation and nature of the investment. There are
no enforcement procedures for performance requirements; U.S. and
other foreign firms are able to participate in government-financed
and/or subsidized research and development programs on a national
treatment basis, and there are fair procedures to follow for the
application and obtention of visa, residence, or work permits.
Similarly there are few barriers to foreign investors' mobility and
also no discriminatory or preferential export policies or import
policies affecting foreign investors.


F. Right to Private Ownership and Establishment
-------------- ---

According to common laws, there is a right of foreign and domestic
private entities to establish and own business enterprises and
engage in all forms of remunerative activity in Luxembourg. There is
also a right of private entities to freely establish, acquire, and
dispose of interests in business enterprises. In fact, competitive
equality is the standard applied to private enterprises in
competition with public ones with respect to access to markets,
credit, and other business operations, such as licenses and
supplies.


G. Protection of Property Rights
--------------

Secured interests in property in Luxembourg, both movable and real,
are recognized and enforced through intellectual property laws and
community laws. The legal system that protects and facilitates
acquisition and disposition of all property rights, such as land and
buildings is based on a "land register" called "cadastre" in French,
where each parcel of property is documented in terms of ownership
and duration. There is adherence to key international agreements on
intellectual property rights, as well as adequate protection for:
intellectual property, patents, copyrights, trademarks, and trade
secrets.

Adequate steps have also been taken to implement and enforce the WTO
TRIPS agreement (Trade-Related aspects of Intellectual Property
Rights). The regulation stipulating the measures to prohibit the
release for free circulation, export, re-export or entry for a
suspensive procedure of counterfeit and pirated goods states that
the authority competent to receive applications must be a customs
authority. In Luxembourg, this is the Litigation and Research
Department (Division des Contentieux et Recherches) of the

Directorate of Customs and Excise (Direction des Douanes et
Accises). The merits of a case are decided by judicial proceedings,
so the ordinary law courts are responsible for deciding whether
there are grounds for a case. A number of provisions within the
agreement deal with different intellectual property rights and allow
for the possibility of confiscating, or even destroying, counterfeit
goods and the tools or implements used for their production. The
Luxembourg customs authorities may impose measures for a period of
six months, which may be renewed at the request of the right-holder.

The main rules of civil procedure are contained in the Luxembourg
Code of Civil Procedure and in the Administration of Justice Act. In
the absence of specific rules concerning material and local
jurisdiction for certain intellectual property rights, ordinary law
applies.


H. Transparency of Regulatory System
--------------

The Government of Luxembourg (GOL) uses transparent policies and
effective laws to foster competition and establish "clear rules of
the game". The legal system is quite welcoming with respect to FDI.
Tax, labor, environment, health and safety, and other laws and
policies in no way distort or impede investment. Bureaucratic
procedures, including those for licenses and permits, are
sufficiently streamlined and transparent, and there is far less "red
tape" than in larger European countries. There are no informal
regulatory processes managed by nongovernmental organizations or
private sector associations; all procedures are managed by
government entities. Proposed laws and regulations are published in
draft form for public comment. In addition, the legal, regulatory,
and accounting systems are transparent and consistent with
international norms. There are no private sector and/or government
efforts to restrict foreign participation in industry
standards-setting consortia or organizations.


I. Efficient Capital Markets and Portfolio Investment
-------------- --------------

Luxembourg government policies facilitate the free flow of financial
resources to support the product and factor markets. Credit is
allocated on market terms, and foreign investors are easily able to
get credit on the local market, thanks to the sophisticated and
extremely developed international financial sector. The private
sector has access to a variety of credit instruments, and there is
an effective regulatory system established to encourage and
facilitate portfolio investment. The only area with certain
restrictions concerns the financing of small and medium- size
businesses, however somewhat less than in neighboring European
countries.

Luxembourg's banking system is sound and strong. As of September
2008, a total of 154 banks (stable vs. year-ago) were operating,
with total assets of EUR 915 billion (USD 1.26 trillion, a slight
decrease of -5.3% vs. year-ago) and approximately 27,269 employees.
Note: most current figures available which do not reflect impact of
fourth quarter 2008 financial crisis; as of press time, an increase
in layoffs by the banking sector has contributed to rising
unemployment. There are no "cross- shareholding" and "stable
shareholder" arrangements used by private firms to restrict foreign
investment through mergers and acquisitions. Also, measures to
prevent hostile takeovers by foreign investors do not exist, since
the situation is largely non-applicable.


J. Political Violence
--------------

Luxembourg has consistently ranked among the overall safest or
lowest risk countries and most politically stable in the world.
There have been no recent incidents involving politically motivated
damage to projects or installations and the environment is not
growing increasingly politicized such that civil disturbances would
be likely. There are no known nascent insurrections, belligerent
neighbors or other politically motivated activities.

According to World Markets Research Centre of London, Luxembourg is
rated highly as one of the "least risky places to do business" in
the world. The risk ratings were noted all "insignificant" for the
following reasons: political risk (existence of institutional
permanence, internal and external political consensus); economic
risk (existence of forward planning, a diverse and resilient
economy); legal risk (existence of innovative legislation,
transparency, independence and experience); tax risk (coherent and
fair taxation system, low "effective" corporate and personal income
tax rates below EU average); and operational risk (supportive
attitudes toward foreign investment, high quality of infrastructure,
existence of "social peace" with Tripartite system of negotiation
process involving labor, employers and government, low bureaucracy
and corruption).


K. Corruption
--------------

The Grand-Duchy of Luxembourg has laws, regulations, and penalties
to combat corruption effectively and they are enforced impartially
with no disproportionate attention to foreign investors or any other
group. The country ranks very favorably on the World Bank's
corruption index (very low) and Luxembourg placed #11 (one rank
higher than year-ago) in Transparency International's 2008
Corruption Perception Index. In particular, Luxembourg has made
anti-money laundering and suppression of terrorism financing a
priority, given its status as a leading world financial center. The
government has taken the lead in freezing bank accounts suspected to
be connected to terrorist networks, and in November '04 extended the
law against money-laundering and terrorist financing to additional
professional groups (including auditors, accountants, attorneys, and
notaries).

Regulations are enforced by the strong but flexible Financial Sector
Surveillance Commission (CSSF, which is equivalent to the U.S.
Securities and Exchange Commission). U.S. firms have not identified
corruption as an obstacle to FDI in Luxembourg. There are no areas
or sectors where corruption is pervasive, whether in government
procurement, transfers, performance requirements, dispute
settlement, regulatory system, or taxation. Giving or accepting a
bribe is a criminal act subject to the penal code. Senior government
officials take anti-corruption efforts seriously. International,
regional or local nongovernmental "watchdog" organizations do not
operate in the country, given the lack of need.

According to industry advisors, a local company cannot deduct a
bribe to a foreign official from taxes.


L. Bilateral Investment Agreements
--------------

Luxembourg has a bilateral taxation as well as an aviation treaty
with the United States, and there are no taxation issues of concern
to U.S. investors.

Other countries with which Luxembourg has bilateral agreements are:

Austria
Bahrain (aviation)
Barbados (aviation)
Belgium
Brazil
Bulgaria
Canada
Chile (aviation)
China
Costa Rica (aviation)
Croatia (aviation)
Cyprus (aviation)
Czech Republic
Denmark
Finland
France
Gabon (aviation)
Gambia (aviation)
Germany
Greece
Hong Kong (aviation)
Hungary
Iceland
India (aviation)
Indonesia
Iraq (aviation)
Ireland
Israel (aviation)
Italy
Japan
Jordan (aviation)
Kenya (aviation)
Kuwait (aviation)
Lebanon (aviation)
Macau (aviation)
Malaysia
Malta
Mauritius
Mexico
Mongolia
Morocco
Nepal (aviation)
The Netherlands
New Zealand (aviation)
Norway
Philippines (aviation)
Poland
Portugal
Romania
Russia
Singapore
Slovakia
Slovenia
South Africa
South Korea
Spain
Sweden
Switzerland
Syria (aviation)
Thailand
Togo (aviation)
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Kingdom
Uzbekistan
Vietnam


M. OPIC and Other Investment Insurance Programs
-------------- ---

Luxembourg is a member of the Multilateral Investment Guarantee
Agency (MIGA).


N. Labor
--------------

Luxembourg boasts a very stable, diverse, multilingual and qualified
labor market, benefiting from the approximately 144,000 (average
first half 2008) readily available cross-border commuter workers
(both industrial and service employees) who come to work in
Luxembourg on a daily basis from the neighboring countries of
Belgium, France and Germany. Foreign (non-Luxembourger) workers are
treated the same as nationals.

Foreign investors often cite Luxembourg's labor relations as a
primary reason for locating in the Grand- Duchy. Unemployment in
Luxembourg was on the rise at 4.7% at the end of 2008, due to the
impact of the global economic downturn and increased layoffs by
international corporations; however, the projected average
unemployment rate for year 2008, at 4.1%, remains one of the lowest
in the EU, and labor relations have been peaceful since the 1930's.
Most industrial workers are organized by unions, linked to one of
the major political parties; Luxembourg is proud of the system of
representatives of business, unions and government participating in
a "tripartite" process in the conduct of major labor negotiations,
which serve to avoid strikes, common in the neighboring countries of
France and Germany.


O. Foreign-Trade Zones/Free Ports
--------------

There are no foreign trade zones, free trade zones, or free ports in
Luxembourg.


P. Foreign Direct Investment Statistics
--------------

Together with the United Kingdom (UK) and France, Luxembourg is
among the main actors in FDI flows external to the 27 EU member
states. In 2006 (latest available figures for FDI in terms of
stocks),EU stock FDI in Luxembourg amounted to USD 54.4 billion,
with the neighboring countries Germany, Belgium and France providing
70% of the total. With regard to extra-EU, Luxembourg was the main
EU holder of FDI, with stocks of USD 9.1 billion (of which 60% U.S.
origin). The predominant role of Luxembourg in EU FDI is mainly
explained by the importance of its financial intermediation
activity. Luxembourg is the main recipient of investments from
other EU Member States.

For the latest available period (third quarter 2008),total
Luxembourg FDI outflows worldwide amounted to USD 1.42 trillion, and
inflows into Luxembourg from the rest of the world were 1.48
trillion (both of which comprised of 75% of a financial/holding
company nature). Luxembourg's outflows to the USA were USD 1.05
trillion, whereas inflows from the USA to Luxembourg were threefold
at USD 3.82 trillion (financially-driven).

FDI include data on capital invested in or by holding companies
(while the legal structure will change in 2011 as a result of the
revision of the "1929 Holding" law, FDI is not expected to be
strongly affected at this point). This type of company accounts for
a high proportion of the FDI inflows and outflows of Luxembourg.
Although a precise quantification is not possible, it is reasonable
to suppose that a large part of extra-EU FDI inflows going to
Luxembourg are reinvested by holding companies elsewhere in the EU,
and that a large part of extra-EU outflows are channeled through
Luxembourg from other EU member states. Additional FDI data can be
found through Eurostat's "NewCronos" database.

Investments from extra-EU countries were mostly made in one economic
sector but some other sectors also stood out. Financial
intermediation was the first sector in terms of volume (56 %) in
world total inward FDI flows, a slight increase over year-ago.
Luxembourg was again the top destination for extra-EU investments
placed in financial intermediation.

Conversion rate used: EUR .72 (year-end 2008)

WAGNER