Luxembourg's budget for 2009, introduced into parliament on October 1, will reduce the corporate income tax rate and abolish withholding tax on dividends paid to recipients in countries that have a tax treaty with the country.

Luxembourg's budget for 2009, introduced into parliament on October 1, will reduce the corporate income tax rate and abolish withholding tax on dividends paid to recipients in countries that have a tax treaty with the country.

These proposals are among a list of measures designed to further enhance Luxembourg as a preferred jurisdiction for investment.

At the moment the participation exemption is limited to distributions made to Luxembourg permanent establishments of corporations resident in tax treaty countries. For all other companies, Luxembourg's treaties generally provide for a reduced rate of withholding. The proposed change would enhance the attractiveness of Luxembourg and its participation exemption regime, most notably in the context of the repatriation of profits.

"The draft bill is very positive for the international business community," said Georges Deitz, a tax partner at Deloitte in Luxembourg, "even more so in these difficult economic times."

Luxembourg tax professionals lobbied the government for some time to eliminate withholding tax on dividends. "We didn't expect it to go through this year though," Deitz said. "It's a nice surprise."

This move, together with the abolition of capital duty which was announced two months ago, is a very positive one for the country, Deitz added. "These are two very important changes and two very important signs that Luxembourg is doing something to attract multinational firms even in difficult budget times," he said.

The prime minister announced earlier this year that the corporate income tax rate will be gradually reduced from 29.63% to 25.5%.

Parliament is expected to approve the draft reform in the next couple of weeks.