Island of calm on a storm-lashed continent

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Lawyers gathered in London last week to hear why Luxembourg offers such big potential for investors. In association with Wildgen

Sandwiched between Belgium, France and Germany, Luxembourg has developed a reputation as a leading international financial centre, with its stable political system and strong economy proving fertile ground for financial industries such as investment funds, reinsurance and banking.

However, it has not been attractive to everyone, and Luxembourg has struggled to shake off its reputation as a tax haven.

To discuss the opportunities and issues law firms and their clients face when doing business in Luxembourg The Lawyer, in association with Luxembourg firm Wildgen, hosted its latest Briefings Live event on the subject of Luxembourg at Ironmongers’ Hall in the City last week.


Chaired by The Lawyer’s special reports and Europe editor Joanne Harris, the session kicked off with a simple question – why should investors come to Luxembourg?

Samia Rabia, Wildgen’s head of investment funds and Islamic finance, joked that people should visit Luxembourg for the pleasant climate, clearly referring as much to finance as sunshine.

“I’m sure you will appreciate that in these uncertain times there are lots of investors who would come here because it is a stable country,” Rabia said. “If you can’t show investors a stable environment – that their money won’t be withdrawn from them unduly – there’s no point talking to them.”

Rabia also pointed to the country’s political stability, skilled workforce and strategic location.

“It’s a gateway to the rest of Europe,” she said of the country’s central location and multilingual population. “There’s a skilled workforce with the ability to speak other languages as well as English. In fact, most people speak three or four languages fluently – that’s a big asset for investors.”

And those investors seem pretty pleased with themselves, too.

“We’ve had a positive experience dealing with Luxembourg because they work with English law documents and there are minimal changes to shareholder agreements,” said Graeme Bruce, a corporate partner at Dundas & Wilson who has set up structures in Luxembourg for clients.

He said that a minor inconvenience was the need to have documents signed off by a notary, adding: “If I was reincarnated I’d like to come back as a notary as they don’t seem to do much, but that’s a small price to pay for a pretty flexible location where business is done in English.”

Tax credit

Luxembourg is also well set up from a tax perspective, according to the panellists. The country has signed double tax treaties with 64 countries and is in the process of negotiating, ratifying or signing another 30.

“We’ll see more and more treaties signed by Luxembourg,” added David Maria, head of Wildgen’s tax department.

Maria said Luxembourg has introduced tax exemptions for R&D purposes and has extremely low VAT rates.

Samia Rabia
Samia Rabia

“In today’s difficult global economy most countries are sensitive about taxes and tax collection, and the popular misconception is that Luxembourg is still a tax haven,” admitted Rabia.

“What used to happen 10 years ago, when letterbox companies used to just set up here for the purpose of tax evasion, isn’t done anymore. I’m not saying this doesn’t happen, but I can say, as a business lawyer, that such cases are marginal,” she said.

“That time is over and Luxembourg is fully submitted to EU regulation. You can no longer say ‘I want tax optimisation’, you have to show you are committed to the country and you have a property – a real business.”

“Companies setting up in Luxembourg must now have genuine substance,” said Macquarie Bank’s European corporate and asset finance legal head Peter Farthing. This means having an office and employees in the country, and conducting any management meetings in the jurisdiction – even if managers or directors fly in for the purpose.

Farthing explained that Macquarie has used Luxembourg to set up a holding company for the purpose of lending to operating companies in other European jurisdictions, such as France.

The country is becoming increasingly popular as a domicile for European headquarters for companies, particularly from China and the Middle East. However, Farthing stressed that risk can creep in when an entity has insolvency fee arrangements and companies should ensure they rely on Article 5 of the EU’s insolvency directive.

Funds all round

Luxembourg’s other major strand is investment funds. The parliament is likely to pass legislation implementing the EU’s Alternative Investment Fund Managers Directive (AIFMD) before the end of the year.

The AIFMD will allow the expansion of alternative investment funds in a regulated structure, using existing and popular Luxembourg structures such as the specialised investment fund (SIF), the société d’investissement à capital variable (Sicav, an open-ended structure) or the société d’invest-issement en capital à risque (Sicar, used for venture capital).

Rabia expects the AIFMD to make Luxembourg a more popular jurisdiction for several classes of funds and investments, including Islamic finance, providing these within a tried and tested structure.

“All the regulations are moving towards one thing – protection of the investor,” she said.

Rabia added that Luxembourg also has a long tradition of “being the first” in implementing EU regulations, giving assurance to investors that they are operating in a safe environment.

Paying for quality

While the tone of the discussion was broadly positive, concerns were raised from the audience about the enforcement of investor rights and the cost of the jurisdiction.

Rabia said governance issues would be reinforced in the AIFMD legislation, but stressed that where disputes arise the court system is well able to deal with them.

Peter Farthing
Peter Farthing

Farthing describes the enforcement system in Luxembourg as good, but pointed to uncertainty over non-collateral assets in insolvency proceedings and said the authorities would do well to address these.

On the issue of cost, Rabia acknowledged that Luxembourg is expensive, particularly compared with jurisdictions such as Malta or the Cayman Islands.

“It is true that Luxembourg is expensive,” she said. “While making your choice you should ask – what am I looking for? A cheap jurisdiction where I can set up my fund quickly or experience and expertise? The latter has a price.”

She pointed out that, especially for investment funds, Luxembourg’s rules on the custody of assets, for example, and the number of its service providers could make it cheaper in the long run.

“It may be that the Luxembourg price is too high, but you can’t expect to drive a Porsche for the same price as a Citroën,” Rabia argued. “If you want good service you have to pay for it.”

Pretty good

Overall, panellists were optimistic about Luxembourg’s future. Bruce clearly thinks the country has stolen a march on the UK in financial services, while Maria said the financial crisis has served Luxembourg well.

Rabia admitted that the jurisdiction needs to stay on its toes if it wants to consolidate and enhance its reputation.

“Even though it is not perfect the global environment is hard and Luxembourg is looking like an island of calm on the Continent, but the country needs to renew itself if it wants to remain the prettiest girl in Europe,” she concluded.