Luxembourg: Offshore Business Sectors

In this section:

- Luxembourg International Holding Companies
- Luxembourg Licensing, Royalties and Franchising
- Luxembourg Investment Fund Management
- Luxembourg Offshore Banking Units
- Luxembourg Offshore Financial Services Companies
- Luxembourg Ship Management and Maritime Operations
- Luxembourg Insurance
- Luxembourg Stock Exchange

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

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.

The legal structure for an SPF requires that it is founded as a corporate entity such as corporation or limited liability entity and the company name must be suffixed by 'SPF'. Partners in an SPF can be trusts, private foundations, investor groups, familial groups or individuals.

From 2011, an SPF is subject to an annual flat income tax rate of EUR1,500.

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 35% from July, 2011 (20% previously, from 2008, and 15% at the coming into effect of the Directive).

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.

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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 of May 31, 2012, there were 143 banks registered in Luxembourg, with a balance sheet total of EUR784,132bn.

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.

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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.

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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 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 2011, the Luxembourg Stock Exchange admitted 9,045 new securities to trading and to its official list on both of its markets with the following breakdown: 7,982 securities were admitted to trading on the “Bourse de Luxembourg” regulated market and 1,063 on the Euro MTF market. Securities newly admitted to trading were divided as follows: bonds (5,921 lines), investment funds (822), depositary receipts including Global Depositary Receipts (33) and warrants (2,269).

As at 31 December 2011, the Luxembourg Stock Exchange listed 44,369 quotation lines compared to 44,916 in 2010. The largest segments remained bonds with 29,243 lines and investment funds with 8,346 lines.

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 worldwide stock exchanges (behind London and New York) in terms of amount issued and in terms of number of new listings.

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Luxembourg Insurance

See Offshore Business Review – Insurance for a more general treatment of captive insurance companies.

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 75 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 260 captives in 2011 the sector is nowhere near on the scale of, say, Bermuda and the Cayman Islands.

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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.

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