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LUXEMBOURG-Taxation is decreasing slightly in Luxembourg for captive reinsurance companies that are domiciled in the Grand Duchy.

As of this year the municipal business tax of 0.5% on the net worth of a company above 1.8 million Luxembourg francs ($51,840) has been abolished.

This will give "a substantial savings" to captive reinsurers, said Claude Weber, vp and general manager of Marsh & McLennan Management Services (Luxembourg) S.A.

In addition, Luxembourg plans to reduce its corporate income tax over the next three years, ultimately falling to about 37.5% by 1999. The tax already was reduced this year by 1%, to about 39.3%.

This has very little effect on captive reinsurers, however, as most set up tax-deductible equalization reserves and only pay income tax when profits are released.

Luxembourg is a domicile used mainly by continental European companies looking to set up a reinsurance captive under the country's 1991 Insurance Law and Grand Ducal Regulation.

The attraction of Luxembourg is the ability to set up so-called equalization, or catastrophe, reserves that are tax deductible because they are for future liabilities. These reserves are set as multiples-varying between 12.5 and 20 times the annual average net premium volume over the last five years, depending on the type of risks written.

Captives also are subject to other taxes, including:

Net worth tax, at a rate of 0.5% of the net worth of the company at the start of the year.

Municipal business tax of 9.09% on income over 700,000 Luxembourg francs ($21,868).

Subscription tax of 1% on incorporation or introducing new capital.

Captives must have paid-in capital of at least 50 million Luxembourg francs ($1.6 million). However, captives with capital of 200 million Luxembourg francs ($6.3 million) or more need only pay in 25% of the share capital.

The solvency margin for non-life business is unencumbered assets representing 10% of net premiums, and 50% of unpaid share capital can be used for solvency margin calculations. Life reinsurance business requires a solvency margin of 2%.

Captives in the domicile must have at least two shareholders and three directors. None need be in the country, but the company must have a locally licensed captive manager and undergo an audit by a local auditor approved by the Commissaire aux Assurances.

Accounts are filed annually with the Commissariat aux Assurances.

New captives must pay an initial license application fee of 150,000 Luxembourg francs ($469) and from then on established captives must pay an annual business fee of 100,000 Luxembourg francs ($312).

For further information, contact Victor Rod, Commissariat aux Assurances, 7 Boulevard Royal, B.P. 669, Luxembourg L-2016; 011-352-226911-1; fax: 011-352-226910.