Happy Holding in Luxembourg

As befits a tiny country in the Ardennes hills between France and Belgium, the Grand Duchy of Luxembourg has long been a hospitable tourist center of quiet pastoral charms. Recently the hospitality has been extended to a special group of visitors--executives of U.S. and European blue-chip companies who stay just long enough to enjoy a meal at Au Gourmet and to attend the annual meeting of their new holding companies. Domiciled for the record in a local bank or lawyer's office, such holding companies have hit the European money market for more than $500 million in long-term dollar loans in the past two years.

Luxembourg law allows a foreign company incorporated there to transfer freely any funds under its control to its parent company, without any public disclosure. Dividends, too, can be paid to bondholders anywhere, free of withholding tax. Setting up a holding company in Luxembourg with easy access to the local stock exchange costs a trifle--less than 1% of the initial capital--and takes only a few days. Even with a 0.16% annual tax on their nominal capital, companies find the deal far better than similar arrangements elsewhere in Western Europe.

Taking Up the Slack. After President Johnson set up his program of voluntary restraints on the flow of U.S. investment abroad in 1965, hitting the European capital market through a Luxembourg holding company came into vogue among U.S. companies. Mobil Oil, the first to be enticed, organized Mobil Oil Holdings, S.A., and in June 1965 floated a $28 million bond issue to finance foreign operations. Uniroyal, Bankers Trust, Du Pont, Alcoa, Honeywell, ITT, and Standard Oil (Indiana), among others, followed Mobil's lead.

The influx of U.S. companies has been tapering off since last year, when American Cyanamid discovered it was simpler to raise money through a Delaware holding company, which does not have to withhold tax if 80% of its business is done outside the U.S. But European firms are more than taking up the slack. Germany's AEG, Thyssen, Siemens and Hoechst, for example, have moved in to escape the 25% withholding tax at home on interest paid to foreign holders of German bonds. The roster has grown to 32 companies, almost all in the big leagues.

Luxembourg is delighted. About $10 million in tax revenue has been collected from holding companies so far, and that is insignificant compared to the benefits reaped by Luxembourg's banking community. Local banks often participate in underwriting consortia, manage bond issues and act as paying agents. Says Professor Jean Blondeel, president of Kredietbank Luxembourgeoise, which has trebled its staff since the boom got under way: "We are the Switzerland of the Common Market."

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