Special report: Luxembourg – Money plus
14 July 2014 | By Joanne Harris
27 January 2014
16 July 2014
24 January 2014
24 June 2014
The CSSF publishes the article 42 AIFMD information form: non-EU AIFMs can notify CSSF of intention to market in Luxembourg
22 July 2014
As Fiat, Apple and Starbucks earn the Duchy a rap on the knuckles for its tax rules, will the government’s efforts to diversify the economy take firmer root?
Over the years Luxembourg has attracted thousands of fund structures, companies and other financial institutions to its well-kept streets. Its regulatory structures and low tax rates have been the main drivers drawing businesses in, but both are now under attack from the Organisation for Economic Co-operation and Development (OECD) and the European authorities.
Last year the OECD published a peer review report on Luxembourg’s legal and regulatory framework for transparency and exchange of information for tax purposes. While noting the country was quick to negotiate exchange of information mechanisms with a large number of countries, and that its legislation makes information available on banks and companies registered in the jurisdiction, ultimately the OECD found it was not compliant with international standards.
That blow was followed up last month when the European Commission opened an investigation into the transfer pricing arrangements on corporate tax paid by Fiat Finance & Trade in Luxembourg. The commission is also investigating Ireland and the Netherlands over similar issues relating to Apple and Starbucks, but says both have co-operated more with the preliminary investigation. In contrast, Luxembourg has also been hit with infringement proceedings for not supplying the commission with all the information it wanted.
The investigation focuses on the amount of corporate tax paid by Fiat Finance & Trade following a ruling issued by the Luxembourgish tax authorities on the calculation of the taxable basis for the company’s financing activities.
In a statement, the commission said: “[We have] reviewed the calculations used to set the taxable basis in those rulings and, based on a preliminary analysis, have concerns they could underestimate the taxable profit and thereby grant an advantage to the respective companies by allowing them to pay less tax. The commission notes that the three rulings concern only arrangements about the taxable basis; they do not relate to the applicable tax rate itself.”
In other words, Luxembourg’s tax rates, considered moderate by most, are not under attack, but its regulatory system is.
The reports and investigations come at a time when Luxembourg’s business community is feeling pretty positive. Despite the negative coverage, the number of entities setting up a base in the Grand Duchy continues to rise.
This is particularly noticeable in the funds sector. There are 3,900 collective investment schemes registered in Luxembourg, managing a total of €2.8bn (£2.2bn) in assets. Although the number of funds has not risen by much in the past two years, the total assets under management (AUM) figure has increased considerably, by 27 per cent – up from €2.1bn in May 2012.
One driver behind the funds market’s health is the implementation of the EU’s directive on alternative investment funds managers (AIFMD). As reported in previous Luxembourg focuses, the jurisdiction was among the first to implement the directive, which came into force a year ago.
AIFMD provides an extra option for fund managers wanting a regulated structure, but offering investment strategies which do not fit into the existing Undertakings for Collective Investment in Transferable Securities (Ucits) structures, which are more limited in scope.
According to lawyers, AIFMD has been the main topic of conversation in the funds sector in Luxembourg and is creating a significant amount of work. An AIFMD structure meets international requirements for more substance, and is something that can easily be sold to foreign clients.
“It seems to be a normal process to go for AIFMD,” comments Vandenbulke managing partner Denis Van den Bulke.
OPF Partners managing partner Frédéric Feyten agrees, adding that he sees this move towards use of the directive as one of the key trends in the Luxembourg market right now.
Banking paradigm shift
Another shift in the market is in the private banking sector. Arendt & Medernach chairman Guy Harles says this is one of the areas where there has been the greatest “paradigm shift” in recent years.
Harles explains that the market for smaller accounts has almost disappeared, to be replaced by banks offering structures suitable for family offices and ultra-high-net-worth individuals.
However, others think the private banking sector has shrunk rapidly in recent years, driven largely by the demands for more ‘substance’ in structures and the decision of some banks to withdraw from the Luxembourg market.
But this gap is being filled, mainly by an increase in banks from outside the EU – notably China. The Luxembourg business community has been working hard to grow its profile in China and more banks from the country are choosing to set up operations in the Grand Duchy. Most recently, the China Construction Bank (CCB) became the third Chinese bank to set up its European headquarters in Luxembourg. The move was announced in October last year and CCB formally opened its doors in April.
CCB joins the Bank of China and the Industrial & Commercial Bank of China (ICBC) in Luxembourg. Their moves are sparked by a need to access European money.
For Luxembourg, there is a determined effort to grow a renminbi (RMB) business. The most recent statistics show that there are 46 so-called ‘dim sum’ bonds – denominated in RMB – listed on the Luxembourg Stock Exchange with a total value of RMB32.9m (£3.1m). The Bank of China became the first mainland Chinese company to issue an RMB bond in the eurozone in May.
Meanwhile, there was a significant rise in other areas of RMB business between December 2013 and April 2014, with a 24 per cent increase in RMB loan deposits, a 36 per cent uplift in RMB loan portfolios, and a year-on-year 247 per cent rise in RMB securities settlement volumes in Luxembourg.
“China is definitely the one country that is making a serious stake in the economy,” says Molitor founder Michel Molitor.
Elvinger Hoss & Prussen corporate and finance partner Pit Reckinger adds that bodies such as promotional agency Luxembourg For Finance are increasingly setting out to promote Luxembourg to Chinese businesses and investors.
“They’re very bullish about China,” he adds.
Luxembourg arguably needs to grow its banking sector somewhat as other areas may falter. Chief among these is e-commerce, which could be hit by the change in VAT rules next year. Until now, consumers buying goods from an e-commerce company based in Luxembourg have been charged VAT at 12.5 per cent, the rate in the Grand Duchy. As of next year, they will be charged at the rate applicable in their country of residence.
Some think this change will drive e-commerce companies out of Luxembourg. Indeed, Netflix has already announced it is moving its European HQ to the Netherlands as a result. It is estimated that the country could lose up to €700m in tax revenues.
Nevertheless, technology is an area the Luxembourg authorities are looking to develop, along with logistics. This is something Ireland has done well, and Luxembourg faces an uphill struggle in developing its own technology industry. It has already put in place the necessary infrastructure such as super-fast broadband, which Harles believes is appealing.
“The government has been investing so much that we’ve great technology available to these companies,” he points out.
Feyten says a stumbling block could be the lack of a research community to support technology companies moving in.
“Tech companies need a strong academic presence,” he says. “In Luxembourg we have a university, but it’s quite small.”
Others note that Luxembourg is an expensive place to do business, particularly when it comes to hiring people, but the infrastructure available and a multicultural, multilingual workforce could be a draw.
“There are strong signals from Amazon that it would rather increase its presence in Luxembourg than decrease it,” says Molitor, as an example.
The potential for growth in logistics is also interesting, given Luxembourg’s geographical position as a landlocked but fairly central European country. Several logistics and transport companies are already established and the government is trying to attract more.
Finance is still key
Despite these targeted growth areas, there seems little doubt that the financial sector will remain key for Luxembourg in the future. The government will continue to revise legislation in its traditionally rapid way, with an upcoming change being the introduction of a trust-like private law foundation.
The country is also likely to keep working on issues such as tax transparency and information exchange with other countries, conscious of the need to maintain its position.
“People are making efforts to develop new streams,” says Reckinger.
Feyten says an area in which the government has already signalled it wants to develop the law is corporate governance, codifying rules to provide more substance for companies setting up a base.
“When you put a risk into a country it’s normal to put a profit next to that,” Feyten notes. “People will ask questions because they don’t want Luxembourg as a red flag.”
While the financial services aspect may not shrink, it is unlikely to expand dramatically.
“The challenge for Luxembourg will be to keep the financial centre and grow it – the centre has reached a stage where it will be difficult to increase much in importance, in terms of GDP,” concludes Harles.
Key figures: Luxembourg
Life expectancy at birth: 81
Source: World Bank, Grand Duchy of Luxembourg Statistics Portal
The legal market: steady expansion
Luxembourg’s legal market has expanded steadily in the past three years, with several arrivals – all warmly welcomed by incumbents – as proof of the jurisdiction’s attractiveness. The most recent firm to open was Hogan Lovells, in the summer of 2013.
Talk of other international firms wanting to launch is persistent, but so far there have been no more openings.
The market has seen a small amount of movement, most recently with the hire of Arendt & Medernach senior associate Catherine Pogorzelski by DLA Piper as a partner and Loyens & Loeff partner Johan Terblanche by Dechert. And Linklaters partner Jean-Paul Spang joined local firm Kleyr Grasso Associés in January, also as a partner.
By and large, the legal world is pretty stable – something incumbents see as a big plus.
There has been a certain amount of what OPF Partners’ managing partner Frédéric Feyten describes as “splintering”, with boutiques being established by spin-offs from bigger firms.
The biggest two locals remain Arendt & Medernach and Elvinger Hoss & Prussen by some margin. Indeed, Arendt is 2.5 times the size of Elvinger in terms of lawyer numbers, although Elvinger has a completely different model.
One significant move that could herald a shift the like of which was seen a decade ago in the UK is Arendt’s decision on
1 June to convert to a corporate structure. A few firms have already chosen to adopt a corporate structure, but most have plumped for a limited partnership model. In contrast, Arendt has become a société anonyme, or public limited company. This required the firm to rejig its management and means it will have to file public accounts with Luxembourg’s company registry. It provides limited liability to partners.
Chairman Guy Harles says of the move: “The big advantage for us is from the governance and management angle. It makes it much easier to manage the firm.”
Other firms, including Elvinger and OPF, are considering following in Arendt’s wake.
The politics: don’t rock the boat
Luxembourgish politics – or, to be precise, a Luxembourgish politician – have been in the news lately, with the UK-led row over whether former prime minister Jean-Claude Juncker should be enthroned as president of the European Commission.
Juncker’s resignation last October over a spy scandal sparked an early general election. His party, the Christian Social People’s Party, still won the most seats, but lost three.
The government was formed through a coalition of the next three largest parties, the Democratic Party, the Socialist Workers’ Party and the Greens. It is led by former lawyer Xavier Bettel of the Democratic Party.
Despite the apparent 180-degree turn in the government’s composition, in practice little has changed.
“It’s reassuring to see that even with an entirely new team we have the same policies and strategy,” says Molitor’s Michel Molitor.
“The political programme is based on the old government – whether they’ll actually deliver is something else,” adds OPF Partners’ Frédéric Feyten.
Arendt & Medernach chairman Guy Harles notes that Luxembourg has managed to avoid the rise of the far Right or far Left seen in many European countries.
“Luxembourg is not one of those countries in Europe where the extreme parties have gained a vote,” he says, welcoming stability.
The new government appears to have recognised that Luxembourg’s strengths need to be maintained, and it is unwilling to rock the boat just to make political points.