The government of Luxembourg has enacted a corporate tax reform package that hopes to create a more favourable tax framework for businesses.

The package was passed by parliament on December 16 after months of deliberation on how best to boost Luxembourg's international tax competitiveness.

The abolition of the 0.5% capital duty tax on capital contributions to Luxembourg companies and the exemption from withholding tax on dividends paid to treaty country corporate shareholders has pleased the country's tax professionals.

"We are convinced that these measures will be able to inject more business into Luxembourg and to make it the number one location for multinationals in the world," said Georges Deitz, country tax leader, Deloitte in Luxembourg.

"Luxembourg was one of the only countries that had capital tax still operating and was really running behind in terms of attractiveness, so this abolition has been a long time coming."

The repeal of the capital duty tax means the general registration duty regime will govern all transactions previously falling within the scope of the capital duty tax.

The expansion of the participation exemption of withholding tax will enhance the attractiveness of Luxembourg as a jurisdiction for the repatriation of profits.

"In Luxembourg we need to be in line with other countries and start competing with our rivals," said Marc Schmitz from Ernst & Young. "Luxembourg had started to be at a disadvantage with other countries and so these rules will hopefully capture some new investors."

Other measures in the package include an amendment to the IP regime which sees the inclusion of domain names and net wealth tax exemptions for qualifying IP.

"Changes to the IP regime is quite an important measure and one more example of Luxembourg's commitment to improving and reducing the national effective tax rate," Schmitz added.

There will also be a decrease in the corporate income tax rate by one percentage point to a new level of 28.59%. Luxembourg's government aims to further reduce this rate to 25.5% over the next three to four years.

Deitz believes the changes will open up Luxembourg to new markets and increase the attractiveness of the country.

"Luxembourg has just signed a double tax treaty with Hong Kong and, twinned with the changes to the withholding tax rules, I anticipate an increase in trade with China.

"I hope that more of these treaties are signed over the next few years as companies will be able to finance these investments with equity rather than debt," Deitz added.

All measures were introduced on December 16 and the abolishment of capital duty tax will be effective as of January 1 2009.