Strength Through Weakness

Surrounded by Belgium, Germany and France, the thousand-year-old Grand Duchy of Luxembourg has long been a popular parade ground for foreign armies. In the past two centuries there have been 14 invasions, mostly swift and successful. But most invaders find the Rhode Island-sized polity a nice place to visit and too insignificant to bother annexing. If the Luxembourgeois have a national characteristic, it is the ability to profit from their defenselessness.

So it goes with the latest invasion. Foreign capital and companies have been pouring into Luxembourg ever since the Nazis left. By now almost all the country's major industries are foreign-owned. One-fifth of its residents are aliens. Only a fraction of the $6 billion on deposit in Luxembourg's 41 banks belongs to its citizens, and only one of the banks belongs principally to Luxembourgeois. Yet the country claims the Common Market's highest per capita G.N.P.: $2,900, up 10% from last year. Its residents own proportionately more cars, radios and phones than any of their Common Market trading partners. Social security benefits are among the most generous in the world, and sal- ary differentials are so minor that the doorman at the National Tax Ministry makes only 40% less than the Tax Minister himself.

How has Luxembourg been able to win while appearing to lose? By be- coming, as a U.S. Department of Commerce report has said, what "may be the fastest-growing financial center of the world." While Bermuda, the Bahamas and The Netherlands Antilles loudly proclaim themselves tax havens, Luxembourg has quietly become a veritable tax heaven. Unlike any other Common Market country, it imposes practically no taxes on holding companies. Luxembourg now has more such enterprises (2,300) than it has soldiers (550). Du Pont, Uniroyal, Olivetti, Amo- co and other multinational giants have set up holding companies there and pay dividends and interest to them, taxfree. The holding companies then use the money to finance parent-company operations in other countries. Luxembourg is also a favorite neutral meeting ground for partners in joint ventures. "It's quite a problem finding names for all the holding companies," says Edmond Israel, a Luxembourg banker. "Sometimes we resort to the poets."

Bank Paradise. The banking gnomes of Luxembourg have made their country into the world capital for a new kind of capital: the Eurobond. Issued abroad by both U.S. and foreign companies and usually payable in dollars, Eurobonds are used to tap the $60 billion in American money that is sloshing around Europe. The Luxembourgeois have turned their tiny, one-room stock exchange--manned by four callers who quote prices to a dozen brokers seated around a single table--into a marketplace for no fewer than 409 different issues of Eurobonds. Last year it handled a volume of $1.6 billion.

Luxembourg is a paradise of permissiveness for bankers. Not only can they set up holding companies, but they can also underwrite and sell Eurobonds, manage their own mutual funds, be custodians of other mutual funds, export and import capital in unlimited amounts, and perform just about any other commercial, investment or savings-bank operation--all in strict secrecy. Said one American banker in Luxembourg: "We can do anything here."

Along with Luxembourg's reputation as an all-purpose commercial center goes status as the second capital of the Common Market, after Brussels. New headquarters for the European Court and the Secretariat of the European Parliament are under construction, right alongside the EEC's statistical and publications office. The European Investment Bank has taken up residence, and the EEC recently declared that three Council of Ministers meetings a year will be in Luxembourg.

Folksy Touch. While Luxembourgeois do not object to foreigners owning much of their country, they insist on keeping their reputation for integrity unspotted. Regulatory procedures are being tightened. So far this year, the Eurobonds of six U.S. companies have been removed from trading on the stock exchange. "We are not like other tax paradises," Prime Minister Pierre Werner told TIME'S Charles Eisendrath. "We are not just somewhere to drop a piece of paper in a box. We find that when our Banking Commission gives a ruling to the Germans or the Americans, they take us seriously. Of course we are liberal-minded, but we try to maintain a certain standing."

Though it may aspire to be the Rolls-Royce of tax havens, Luxembourg is hardly in danger of becoming stuffy about it. With a population of 337,000 --smaller than Louisville--it is a place where businessmen and bureaucrats are constantly bumping into one another, giving the conduct of their affairs an intimate, folksy touch. Says Werner: "If a businessman wants to know something, he calls me." With Luxembourg becoming as popular with foreign enterprises as it once was with foreign armies, Werner will find himself spending ever longer hours on the phone.

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