Luxembourg will start exchanging information with the rest of Europe to help fight tax evasion, in a move it hopes will give the country a more transparent financial industry.
The decision follows international pressure on Luxembourg to end its policy of banking secrecy that critics argue helps people hide money in the tiny country of half a million people from tax authorities.
From 2015, the government said it will set up an automatic exchange of information about interest payments made to European Union citizens with bank accounts in Luxembourg in order "to ensure taxation according to the laws" of the customer's home country.
It added that the fiscal regime for US citizens "will be dealt with in a bilateral agreement under negotiation between the governments of Luxembourg and the US."
In contrast, the government said the capital gains taxation of people living in Luxembourg remains unchanged at 10% and that "those residents will enjoy bank secrecy as it exists today."
Luxembourg has the highest level of income per individual in Europe, largely because of its huge financial industry which has more than €3 trillion in assets.
The growth of Luxembourg's financial sector was initially fuelled by lax regulation, banking secrecy and low taxes, a combination that made it a popular tax haven and money-laundering spot. Though the country later changed many of its laws following pressure by its European partners, its critics have continued to argue that the financial industry still lacks the necessary transparency.
The move is likely to increase pressure on Austria, the EU's only other holdout on providing tax information. However, Austria's opposition seems to be fading after Chancellor Werner Faymann indicated this week that the country might be ready to negotiate on the matter.
Switzerland, which is not an EU member, also takes pride in its culture of banking secrecy, but was pressured into negotiating bilateral tax agreements with the US, Germany and others.
The publication of details on wealthy people's offshore bank accounts by several international media last week, some of which included references to shell companies based in Luxembourg, reinforced the calls for change - Finance Minister Luc Frieden first hinted at a change to Luxembourg's refusal on automatic information exchanges on Sunday.
Luxembourg's 141 banks - many of which are subsidiaries of foreign banks - hold assets worth about 22 times the country's annual economic output of €44 billion. The country is also the world's second-largest centre for investment funds, with about 3,800 funds holding assets worth €2.5 trillion.