BRUSSELS, Feb 8: EU regulators will investigate Luxembourg’s tax exemptions for multinational companies, saying they may offer a disguised subsidy to attract foreign investment.

The rules — in place since 1929 — exempt multinationals’ Luxembourg-based branches from business taxes on earnings such as dividends, interest and royalties as well as on payments, including dividends and royalty fees.

Many companies have holdings in Luxembourg which benefit from the tax rules by carrying out financing, licensing and coordination for the entire group.

The European Commission said the original aim of the scheme to allow multinational groups to distribute profits without being hit by multiple taxations was no longer valid. EU Commissioner NeelieKroes said it might also affect the functioning and competitiveness of the EU’s financial industry.

“The globalization of financial markets and the modern regulatory framework for financial services have rendered the 1929 legislation obsolete,” the EU executive said.

It asked Luxembourg to review the tax scheme last October but the Grand Duchy refused to adopt the measures the EU suggested.

The commission is responsible for making sure countries do not offer unfair subsidies to firms which distort competition across the 25-nation bloc. If its investigation finds the tax exemptions are a form of state aid that breaks EU law, it can demand Luxembourg change the rules.—AP