... would it actually be possible to achive world domination as Luxemburg without cheating?
In early versions of the game this was indeed possible... by allying with a major power (eg: the Allies), taking military control of them, and then attacking the enemy power THROUGH Luxemburg. All captured territory would go to Luxemburg control, and you could then annex Germany... giving you enough IC and Manpower to boot-strap a World Conquest attempt.
In later versions of the game, you cannot take military control of a larger power... so Luxemburg can no longer ensure that the attack is launched from their own territory.