A Fresh Look at Luxembourg

By Francis N Hoogewerf, FCA, Hoogewerf & Cie, Luxembourg (01/01/2013)

Luxembourg has a long-established reputation as an elite financial services centre.

Not only does it have a significant concentration of experienced and professional service providers it also benefits from a flexible legal, regulatory and tax regime, with a multi-lingual work force.

In the last 12 months the jurisdiction’s funds industry has published record figures, despite the continued slowdown in the global and more specifically European economy. Unemployment remains around 6.4 per cent and the effect of the global financial malaise has been slower in reaching and impacting upon Luxembourg.

The Grand Duchy has been quick to adapt the country’s financial sector to international developments and to strengthen and improve the financial services sector to ensure it remains competitive at a global level. With one third of the country’s GDP and fiscal revenues flowing from the financial sector it is vital that the industry remains relevant in a more competitive and changing international environment.


As with financial centres the world over, Luxembourg has had to keep apace with global regulatory developments. 

Luxembourg’s Finance Minister, Luc Frieden recently made a statement underlining the need for Luxembourg to ‘redefine the principle of banking confidentiality’ in light of growing international developments with regard to combating tax evasion and encouraging information sharing.

To this end, the Luxembourg Government has confirmed it is to initiate discussions with the US regarding the implementation of the Foreign Account Tax Compliance Act (FATCA).

In further regulatory developments and in anticipation of the Alternative Investment Funds Managers (AIFM) Directive, which will take effect in July, the Luxembourg Parliament has adopted legislation to amend the law on Specialised Investment Funds (SIF), ensuring that the highly successful SIF regime now meets EU and international regulatory standards with regard to alternative investments. The legislation not only incorporates requirements from the AIFMD but also the UCITS IV Directive on cross-border distribution of retail funds with the EU and other changes affecting non-UCITS funds.


Luxembourg currently has 64 Tax Information Exchange Agreements (TIEAs) in force, with 33 agreements and 13 protocols pending. The Government maintains that it is essential to guarantee efficient co-operation with other tax administrations through the exchange of information in its fight against tax evasion.

Investment Funds

The Investment Funds sector in Luxembourg accounts for eight per cent of GDP and 10 per cent of the tax revenue so is an essential pillar within the financial services structure.

At the end of 2012 Luxembourg domiciled funds reached €2.383 trillion, an increase of 13.7 per cent over the figures for 2011, with over 3,841 investment funds domiciled in Luxembourg, with 43,836 share classes.

The funds industry is about to be hit with a significant amount of regulatory challenges in the coming months. Of immediate concern is the AIFMD, but there is also UCITS V and FATCA to contend with. According to the Association of the Luxembourg Fund Industry (ALFI), the industry feels there is a sufficient amount of new regulation in place. The concern obviously arises over the amount of time being spent by managers on regulation and compliance issues as opposed to their operations.

A developing sector of Luxembourg’s financial services is Islamic Finance and Luxembourg now ranks fifth worldwide by number of Shari’ah-compliant funds and the number of Middle East-based managers launching investment funds in Luxembourg has increased constantly.

There are 41 regulated Shari’ah-compliant investment funds domiciled in Luxembourg and total assets under management in Shari’ah-compliant funds are estimated at US$5.3 billion.

The Gateway to the European Union

Emerging economies and in particular the BRIC nations of Brazil, Russia, India and China are beginning to see the advantages of routing their investments into Europe via Luxembourg.

China especially has a relatively big presence in Luxembourg while Russia investment through Luxembourg into Europe amounts to approximately €30billion per year. Brazil is still closely connected to Luxembourg, because of its steel industry. India has been trying hard to enter Europe through Luxembourg, while Qatar has invested in two banks in Luxemburg.

The Luxembourg SICAV has proved an interesting model for investing in emerging economies, as reported in The Telegraph recently Goldman Sachs and Jim O’Neil – famous for coining the acronym BRIC and now looking to the new wave of emerging markets labelled the ‘N-11’ – have been using the SICAV to access markets such as Mexico, Nigeria and Turkey, proving that Luxembourg is still at the cutting edge of investment strategies.


The main reason Luxembourg is perceived as a natural gateway into Europe is because it is an economically efficient country within the EU, however, the second most important reason that neutral Luxembourg is a natural gateway to Europe is its tax legislation.  As with countries across Europe, though, Luxembourg has had to make some tax changes in recent time to shore up its economy.

Tax changes in 2013 include the introduction of a new 40 per cent tax rate to apply to income in excess of €100,000 for class 1 contributions and to income above €200,000 for class 2 contributions.  These so-called tax ‘classes’ apply to family and residential status.

From 1 January 2013, the solidarity tax is to rise to nine per cent from seven per cent for households and from five to seven per cent for corporations.

A small change that may have a significant impact is the minimum tax on financial holding companies (SOPARFIs), which is now €5,210.

While existing SOPARFIs and funds have a tendency to remain loyal to Luxembourg, some investors may be tempted to go to places like Malta and Cyprus to the detriment of Luxembourg.

Overall, with intergovernmental tax crusades, an ever increasing amount of regulatory pressure, and the general uncertainties surrounding the state of the industry, there is no doubt that the world, and the industry with it, is changing. European financial centres will have to adapt to maintain their positions as premier destinations for wealth management. Luxembourg, however, seems more than capable of moving with the changing tide as evidenced by its rapid adaption of international regulatory standards and its reputation for innovation. All these factors will see the jurisdiction remain at the top of its game for many years to come.