Distributes treats around Luxembourg (5)

I believe the answer is:

doles

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'distributes' is the definition.
(I've seen this in another clue)

'treats around luxembourg' is the wordplay.
'treats' becomes 'does' (I am not sure about this - if you are sure you should believe this answer much more).
'around' means one lot of letters goes inside another.
'luxembourg' becomes 'L' (international vehicle registration code).
'does' placed around 'l' is 'DOLES'.

Can you help me to learn more?

(Another definition for doles that I've seen is " Dishes out".)

I've seen this clue in The Independent.

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