Luxembourg Offshore Business Sectors

The development of the Euromarkets in the 1970s saw the emergence of Luxembourg as a successful international financial centre, and the country is now the world's seventh largest such centre. Workers in the financial services sector make up around 11% of the total population, and the sector accounts for about 28% of GDP, as well as generating a sizeable proportion of the government's tax receipts.

Apart from the Stock Exchange, on which most Eurobonds are listed, there is a well-developed commercial and private banking sector, and Europe's biggest investment fund industry.

Much of this growth has been due to the availability of suitable 'low tax' or 'offshore' forms and structures alongside the normal economy. These are described in Offshore Legal and Tax Regimes. In 2007, however, some of these forms were abolished as a result of pressure from the European Commission.

This section of the

site describes the most important types of offshore business activity carried out from the country.

Luxembourg International Holding Companies

The structure of Luxembourg company and tax legislation, along with its membership of the EU and its double taxation treaties, makes it a very suitable place in which to base various types of holding company. See Offshore Legal and Tax Regimes for a more detailed description of tax and legal aspects of holding companies, and Types of Company for a description of the moves made against them by the European Commission.

Under the Law of 31st July, 1929, Luxembourg holding companies do not have a separate legal form; they can be formed as SAs or SARLs (see Types of Company). They are limited to holding and financing operations and may not undertake commercial operations themselves. They have traditionally been exempt from normal corporate taxes. More recently, a Grand-Ducal decree of 24th December 1990 created a further type of holding company, the SOPARFI or Societe de participation financiere, which is within the normal Luxembourg corporate tax net but can receive dividends which are exempt from tax, and which can take advantage of the country's double tax treaties (which the 1929 holding companies cannot).

In 2004, the Luxembourg authorities passed legislation creating a new form, the Societe d’Investissement en Capital A Risque (SICAR) which was intended to offer an alternative to the traditional limited partnership structure which works well for fund managers and investors in countries such as the United Kingdom, but can pose problems for fund managers in continental Europe. See below.

In June 2005, under pressure from the European Union, Luxembourg amended the 1929 law by abolishing the exempt status for holdings receiving more than 5% of their yearly dividend income from participating companies which have not been subject to a tax comparable to the one applied in Luxembourg. While this narrowed the scope of the law, the EC argued that the regime still constituted state aid, as the tax advantages remain unchanged.

Luxembourg finally abolished the holding company regimes as of 1st January 2007, allowing existing companies to retain their tax benefits until 2010.

As from 2007, the replacement for the 1929 holding company is the Family Private Assets Management Company, or SPF. These new vehicles are prohibited from commercial activity, and are designed to be limited to private wealth management activity, for example the holding of financial instruments such as shares, bonds and other debt instruments, in addition to cash and other types of bankable asset. If the SPF is used to hold voting rights in other companies, it must ensure that it does not involve itself in the running of those companies, and it is prohibited from providing any kind of service.

Luxembourg Licensing, Royalties and Franchising

Holding companies (although see above for general changes to the holding company regime) are also permitted to hold patents, and may acquire copyright or know-how in relation to patents already held. The patent holding company (either as part of a management holding company or as a separate operation) owns patents and exploits them among its subsidiaries or elsewhere; it receives royalties or license fees in a tax-efficient way, and can pay them on without deduction of withholding tax. Because it was drafted in terms of patents, the legislation is not easily extended to a wider class of intellectual property licensing or franchising.

A draft bill submitted 6 November 2007 (and which came into force the following year) foresaw an 80% tax exemption on the net positive income received as consideration for the use of, or the right to use, any copyright on software, any patent, trade mark, design or model. This partial exemption was designed to lead to an effective tax rate of 5.9% on the net IP income.

It’s worth noting that the 80% deduction also applies to taxpayers that have created a patent and used it for their own business purposes.

The 80% exemption also applies to the capital gain realized on the disposal of the considered IP. A recapture system was, however, foreseen to avoid exempting a gain, where the concerned IP has generated negative net income.

Luxembourg Investment Fund Management

There has been a significant volume of investment fund management activity in Luxembourg for twenty years.

Luxembourg's decision in July 2004 to allow the listing of offshore hedge funds has made it possible for the jurisdiction to attract offshore funds and to compete on a level basis with Dublin, removing a barrier that has acted as a handicap to the growth of the hedge fund sector in the Duchy in the past.

One major advantage of this decision is that offshore fund promoters often choose their administrator and service providers in the country where they have their listing for the convenience of having the stock exchange, the administrator and the custodian in the same place.

It has become common practice for hedge funds to domicile offshore in places like the Cayman Islands, the British Virgin Islands and Bermuda but be administered in Dublin and listed on the Irish Stock Exchange. However, the emergence of Luxembourg as a hedge fund centre, particularly for funds targeting the continental European market, is beginning to challenge this status quo.

The 13th annual Luxembourg Fund Encyclopaedia in 2007 showed that ever greater diversification of asset classes within the Luxembourg funds industry contributed to the latest record in total net assets for that year. Popularity of hedge funds and real estate funds helped the Grand Duchy to a fourth year of double digit growth (in both Euro and USD terms).

Domiciled fund assets rose by 35.9% to USD2,442.2 billion (EUR1,856.0 billion) at year end 2006, up from USD1,797.2 billion (EUR1,527.6 billion) in 2005. Within this total, assets in equity funds approached the USD1 trillion mark.

By the end of 2010, net assets under management in Luxembourg funds had reached EUR1,840bn. Most of these assets were concentrated in fixed income and equity funds. Funds originating from the US accounted for 21% of this total, followed by Germany (19%), Switzerland (15.9%) and the UK (11.9%).

Various legislative regimes were brought together by the law of 30th March 1988 which codified Luxembourg legislation for Undertakings for Collective Investment (UCIs). The legislation provided for three types of fund:

This legislation included provision for funds of funds, and for UCITS, ie UCIs under EU legislation which invest in Transferable Securities and can be marketed in EU Member States. Several thousand UCIs have been formed in Luxembourg, which is the leading European jurisdiction for investment fund management.

Further legislation in the law of 19th July 1991 created 'dedicated' funds, which take advantage of UCI legislation but for the management of institutional assets.

Taxation of UCIs is traditionally very low, and no withholding tax is levied on distributions to investors. See Offshore Legal and Tax Regimes for further details. Funds are supervised by the Luxembourg Monetary Institute which authorises them and looks after investor protection. There is a Luxembourg Investment Fund Association (ALFI).

The EU's Savings Tax Directive, which came into effect in July, 2005, applies to certain Luxembourg UCIs, requiring the imposition of a withholding tax of initially 15% (which rose in 2008 to 20%, and will increase again in 2011 to 35%).

However Luxembourg has increasingly been the choice of US mutual funds looking for a European base.

As regards venture capital and private equity funds, in 2004 the Luxembourg Parliament passed the final text of legislation on SICARs (Sociétés d’Investissement en Capital à Risque), which were designed to offer an alternative to the traditional limited partnership structure which works well for fund managers and investors in countries such as the United Kingdom, but can pose problems for fund managers in continental Europe. The new law defined venture capital as direct or indirect investment in an entity to finance the launch, further development or flotation of the entity. This definition covers a wide variety of investment forms in addition to straight equity, such as corporate bonds, mezzanine finance and convertible bonds).

Investors seeking tax transparency will opt for a SICAR in the form of a limited partnership (SeCS). An SeCS is not liable to corporate income tax or net wealth tax. SeCS are exempt from the municipal business tax; income from the partnership and capital gains realized on units by non-resident partners will not be taxed in Luxembourg.

In February 2007 the Luxembourg Parliament adopted a law on Specialised Investment Funds (SIF), which offered a number of new features, including a broader definition of “eligible investors” to include both professional and private “well-informed” investors.

The new law replaced the law of 19 July, 1991 which concerned collective investment schemes reserved for institutional investors. According to the Association of the Luxembourg Fund Industry (ALFI) in November 2006, the 1991 law had been a success, with 207 institutional funds then in existence, with combined assets under management at that time of EUR76 billion (USD100 billion).

ALFI explained that all the provisions of the 1991 law were to be found in the new law, so existing institutional investment funds would not find that their legal base had disappeared. However, the SIF law offered a number of interesting new features. The new law likewise offered greater flexibility in terms of investment policy. The principle of risk spreading was maintained, but there were no quantitative investment restrictions, given that such vehicles would be reserved for sophisticated investors.

The law required that the directors (dirigeants) of a Specialised Investment Fund, as well as the directors of the custodian bank and the auditor, be approved by the CSSF. However, the promoter is not subject to CSSF approval. Furthermore, since the investors in funds targeted by this law are deemed to be sufficiently experienced to make their own decision with regard to the fund manager, there is no need for the CSSF to verify the status and financial standing of a company to which asset allocation has been subcontracted.

Luxembourg Offshore Banking Unit

A substantial international banking sector has developed in Luxembourg due to a combination of factors, including a relatively relaxed regulatory regime, the 'holding' company legislation, the growth of the Euromarkets, and the existence of the Luxembourg Stock Exchange on which most Eurobonds are listed. It is also significant that CEDEL is based in Luxembourg.

Broadly speaking, the needs of domestic companies are handled by local Luxembourg banks, while the international banks provide cross-border services. A very wide range of capital markets and commercial banking products are on offer; some of the key services are:

As at January 7, 2010, there were 152 banks registered in Luxembourg, with a balance sheet total of EUR789,206bn.

Private banking services are particularly strong in Luxembourg, due to the absence of withholding tax on interest payments, and tight banking secrecy, alongside the very wide range of financial products that is available.

Banking secrecy has a statutory basis in Luxembourg, under articles 458 and 459 of the Penal Code, the Grand-Ducal Regulation of 1989 which prevents disclosure to the tax authorities, and most recently the law of 5th April 1993 which prevents bank staff from passing information on deposit accounts to parent banks. It is a criminal offence for bank staff to break secrecy laws except in clearly defined and very limited circumstances. The Luxembourg courts are likely to permit disclosure of information only when there is clear evidence of tax fraud or money-laundering activity.

In February 2009, however, in the light of recent proposals by the European Commission to tighten its rules on banking secrecy, Luxembourg’s Prime Minister Jean-Claude Juncker revealed that he was prepared to negotiate.

Frequently challenged about its lack of transparency, Luxembourg’s Prime Minister stated that the country was prepared to discuss the abolition of banking secrecy with the European Commission, but, given that Luxembourg has its own particular position on the issue, Juncker also made clear that these discussions would need to form part of a two-way dialogue.

Luxembourg Offshore Financial Services Company

As a civil law jurisdiction, Luxembourg's laws do not accommodate the anglo-saxon trust concept. In fact local institutions, particularly banks, have developed some expertise in setting up foreign trusts for their clients.

A local equivalent of the trust was established by the law of 19th July 1983 which permitted banks to offer 'fiduciary' services which have many of the characteristics of the trust. The ownership of fiduciary assets does not pass to the bank managing them; and there is a contract under the 1983 law which resembles a trust deed. Such arrangements have been used for a variety of asset management and participation arrangements.

Luxembourg Stock Exchange

The Luxembourg Stock Exchange was founded in 1929 and lists equities, investment fund shares and, especially, Eurobonds. Current issuance and listing procedures were laid down in a Grand-Ducal regulation of 28th December 1990, with some subsequent amendments. Luxembourg listing regulations conform to the EU Listings Directive. Supervision of the Stock Exchange and trading markets is in the hands of the Commission for the Supervision of the Financial Sector under the law of 23rd December 1998. The Exchange lists both Luxembourg and foreign stocks and bonds.

The Exchange launched its quote-driven 'On-Demand Continuous Market' (MCD) in 1997, and in 1998 began a dialogue and cross-exchange membership programme with the Amsterdam and Brussels exchanges. These discussions culminated in an agreement between the three exchanges and Euronext to create a pan-European ecn, signed in November 2000.

Trading is fully electronic and decentralized. Since 2 January 1996 all the Luxembourg-listed securities have been traded on the Multi-Fixing (MFX) segment of the Automated Trading System SAM. The securities are distributed over a number of fixing groups called in sequence within a fixed time schedule. On completion of the call the prices are validated and the generated trades are confirmed immediately to the market participants.

The Luxembourg Stock Exchange announced in 2004 that it was finalizing the implementation of a regulatory framework which would allow for the admission of non-EU undertakings for collective investment.

The EU's Directive 2003/71/EC relating to securities prospectuses was transposed into Luxembourg law in 2005.

In 2002 and 2003 the Luxembourg Stock Exchange implemented a programme aimed at modernizing its technical infrastructure and offering investors a wide range of services. The objective of the programme was to enhance the transparency and visibility of the markets organized by the Luxembourg Stock Exchange.

In January 2008, the Luxembourg Stock Exchange announced that there had been continued growth in new securities listings in 2007.

According to the bourse's statistical report for 2007, 13,352 new securities were admitted to the official list, compared with 10,544 in 2006.

As at 31 December 2007, the Luxembourg Stock Exchange held 45,572 quotation lines (against 39,860 in 2006) on the two markets that it operates; the regulated market in accordance with European regulations and the Euro MTF market.

"These figures testify to the attractiveness of the Luxembourg financial centre for admissions to trading of international securities," the report stated. "In fact, the Luxembourg Stock Exchange has strengthened its leading position in terms of the number of domestic and international bonds listed by a European exchange. On an international level, the Exchange remains the primary listing centre for Global Depositary Receipts."

In addition, the bourse promoted the use of its “e-file” application, which makes it possible to carry out virtually the various steps and procedures linked to the launch of an investment fund or the listing of a security.

Then in July of that year, the Exchange published its half-year report for 2008, which detailed the trading activity for the previous six months.

Listing activities, the core business of the Luxembourg Stock Exchange continued to grow at a steady pace throughout the first six months of 2008, it revealed.

The number of quotation lines at the Luxembourg Stock Exchange reached 48,067 on 30 June 2008.

This represented an increase of 5.47% over six months and 11.58% over 12 months.

In 2009, the Luxembourg Stock Exchange maintained its dominant position for the listing of international securities, compared to its main competitors.

However, in general, listing activity in 2009 experienced a significant slowdown as a result of the situation on the international capital markets since September 2008. 2009 was marked by a sharp decline in the admission of securities representing securitized assets or structured products. In contrast, bond issues from non-financial enterprises rose sharply. In this regard, the amount of capital raised and listed during 2009 increased by about 8.17% compared to 2008 to breach the symbolic barrier of EUR1 trillion, while the number of new quotation lines was lower by almost 35% over the previous year.

During 2009, the Luxembourg Stock Exchange admitted to trading and its official list 7,738 new securities on both of its markets, with the following breakdown: 6,737 securities were admitted to trading on the “Bourse de Luxembourg” regulated market and 1,001 on the Euro MTF market. Securities newly admitted to trading were divided as follows: bonds (5,225 lines), investment funds (802), depositary receipts including Global Depositary Receipts (26) and warrants (1,683).

As at 31 December 2009, the Luxembourg Stock Exchange listed 45,660 quotation lines compared to 49,097 in 2008. The largest segments remained bonds with 30,805 lines and investment funds with 7,285 lines. Growth in the share segment was greatly assisted by listing activity for depositary receipts, an area of excellence of the Luxembourg Stock Exchange with a total of 232 quotation lines. By way of illustration, Tata Motors chose the Luxembourg Stock Exchange for its GDS (Global Depositary Shares) public offering, raising capital of about USD 375 million.

Several studies on IPO activity carried out by consultants have highlighted the expertise of the Luxembourg Stock Exchange in the field of international IPOs. The Luxembourg Stock Exchange figures in the top three European stock exchanges in terms of amount issued and in terms of number of new listings.

Luxembourg Insurance

Insurance business is regulated by the Commissariat aux Assurances under the Insurance Supervisory Law 1991. Captives do not receive special regulatory or fiscal treatment in Luxembourg. Insurance companies registered in Luxembourg pay an annual fee of up to EUR15,000 at the time of writing (depending on premium volume); companies domiciled elsewhere pay an annual fee of EUR3,000.

There are about 77 insurance companies registered in Luxembourg according to the latest statistics from the Commissariat aux Assurances), mostly quite small, and mostly relating to life assurance companies.

There is also an active captive insurance industry in Luxembourg, although with an estimated 270 captives in 2006 the sector at that time was nowhere near on the scale of, say, Bermuda and the Cayman Islands.

Luxembourg Ship Management and Maritime Operations

Luxembourg introduced its maritime registry in 1990, although it is a land-locked country, under the Commissariat des Affaires Maritimes. Shipping companies have to be managed from Luxembourg, or at any rate on behalf of a Luxembourg owner or manager. Non-resident crew members are taxed at a 10% flat rate (at the time of writing).

Shipping companies are subject to the normal corporate income tax (see Direct Corporate Taxation) but are exempt from Municipal Business Tax, and receive worthwhile investment tax credits and accelerated depreciation allowances. Capital gains on the sale of vessels can be rolled over within two years into the purchase of new vessels, to avoid taxation.

LUXEMBOURG: OFFSHORE BUSINESS SECTORS

On this Page:

Luxembourg International Holding Companies

Luxembourg Licensing, Royalties and Franchising

Luxembourg Investment Fund Management

Luxembourg Offshore Banking Unit

Luxembourg Offshore Financial Services Company

Luxembourg Stock Exchange

Luxembourg Insurance

Luxembourg Ship Management and Maritime Operations