In this section:
International Holding Companies
- Luxembourg Licensing, Royalties
- Luxembourg Investment Fund Management
- Luxembourg Offshore Banking
- Luxembourg Offshore
Financial Services Companies
- Luxembourg Ship Management
and Maritime Operations
- Luxembourg Insurance
- Luxembourg Stock Exchange
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.
section of the
site describes the most important types of offshore
business activity carried out from the country.
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
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.
2011, an SPF is subject to an annual flat income
tax rate of EUR1,500 (increased to EUR3,000 from
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Royalties and Franchising
Holding companies 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.
2008, 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, applies.
This partial exemption leads to an effective
tax rate of 5.9% on the net IP income.
worth noting that the 80% deduction also applies
to taxpayers that have created a patent and
used it for their own business purposes.
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.
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There has been a significant volume of investment
fund management activity in Luxembourg for twenty
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.
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.
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
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).
fund assets rose by 13.7% to EUR2,383 billion
by the end of 2012, reversing a fall of 7.6%
(EUR2,097 billion) recorded for 2011. In its
annual report for 2012-13, the Association of
Luxembourg Fund Industry (ALFI) reported continued
growth throughout the first quarter of 2013,
with assets reaching EUR2,528 billion) by the
end of March 2013.
the end of 2012, Luxembourg net assets under
management funds were occupying the top rank
in Europe with a market share of 26.7%. France
was second with 16.8% and Germany third with
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:
- A mutual fund
(unit trust) or fond commun de placement,
which does not have separate legal identity,
but which has a set of legally-defined relationships
between fund, manager and custodian;
- SICAV (Societe
d'investissement a capital variable), an open-ended
vehicle having a variable capital which is
always equal to the net asset value of the
- SICAF (Societe
d'investissement a capital fixte), which is
a closed-end fund normally used for private
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.
legislation in the law of 19th July 1991 created
'dedicated' funds, which take advantage of UCI
legislation but for the management of institutional
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
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).
Luxembourg has increasingly been the choice of
US mutual funds looking for a European base.
regards venture capital and private equity funds,
in 2004 the Luxembourg Parliament passed the final
text of legislation on SICARs (Sociétés
dInvestissement 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
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.
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”
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
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
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
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
lending and loan syndication;
- issuance and
listing of securities, particularly Eurobonds
- custodial and
business which is the local equivalent of
- project and
international financing vehicles
- equity and
financial derivatives issuance and trading
- foreign exchange
- trade finance
- gold trading
(settled through CEDEL)
of June, 2013, there were 143 banks registered
in Luxembourg, with a balance sheet total of EUR738,441bn.
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
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
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.
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
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.
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 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
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.
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.
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.
EU's Directive 2003/71/EC relating to securities
prospectuses was transposed into Luxembourg law
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.
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.
2012, the Luxembourg Stock Exchange admitted 8,121
new securities to trading and to its official
list on both of its markets with the following
breakdown: 6,954 securities were admitted to trading
on the “Bourse de Luxembourg” regulated
market and 1,167 on the Euro MTF market. Securities
newly admitted to trading were divided as follows:
bonds (5,274 lines), investment funds (640), depositary
receipts including Global Depositary Receipts
(16) and warrants (2,191).
at 31 December 2012, the Luxembourg Stock Exchange
listed 42,061 quotation lines compared to 44,369
in 2011. The largest segments remained bonds with
two-thirds of the total, followed by warrants
(18%), investment funds (15%) and shares (1%)
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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Offshore Business Review
Insurance for a more general treatment
of captive insurance companies.
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.
are about 330 insurance companies registered in
Luxembourg according to the latest statistics
from the Commissariat aux Assurances.
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
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).
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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