Grand Duchy shrugs off lingering tax haven image, to reinvent itself for modern investors

In September, the world’s first “green stock exchange” opened in Luxembourg.

The so-called Luxembourg Green Exchange was hailed as an example of how the financial services world is increasingly looking to accommodate the growing numbers of socially-conscientious investors, which lately have included prominent pension funds alongside tree-hugging, meat-shunning Millennials.

The new exchange was also seen as the latest example of how adept tiny, land-locked Luxembourg is at accommodating changes in the marketplace, and adapting its regulatory and product offerings.

“We set the bar high, and will be strict [about maintaining high standards], because the credibility of our platform depends on it,” Julie Becker, a member of the Executive Committee of the Luxembourg Stock Exchange, said, as the new exchange was unveiled.

The Grand Duchy was already home to some 114 “green bonds”, which invest on behalf of investors in such things as climate-boosting measures and environmental developments, and which, at the time the new “green bond” platform in Luxembourg was unveiled, already had a collective value of around US$45bn, more than half the global total.

A global centre for investment funds

Other examples of the Luxembourg funds industry’s entrepreneurial spirit include the way it efficient packages its investment products, such as its ever-popular UCITS funds, and distributes them, not only to its EU neighbours, but around the world.

This, Luxembourgers and those familiar with it say, is how the 2,585sq km (1,000sq mi) country has been able to transform itself from being, the tax haven – of legend if not exactly fact – for “Belgian dentists” into the world’s No. 2 investment fund centre after the US, as ranked by PwC Global Fund Distribution.

The Grand Duchy accounted for 65% of registrations of global cross-border funds in 2015, almost three times that of Ireland (22%), and way ahead of France (4%) and tiny Jersey (3%).

As of May, Luxembourg was home to some 3,882 funds with net assets of €3,488trn, according to the Commission de Surveillance du Secteur Financier for customers in more than 70 countries.

Then there’s Luxembourg’s regulatory regime for insurance companies, including its “Triangle of Security” (see below), which accommodates its €20bn in annual premiums “wealth insurance” – or “privatbancassurance” as some call it – industry.

The Triangle of Security structure was designed to ensure that a policyholder’s deposits are segregated from those of the life insurer itself, and are kept legally separate from the company’s shareholders and creditors. (See box, below.)












Luxembourg also accommodates the captive insurance industry, with the result that 223 captive and reinsurance companies are based there, making it Europe’s No. 1 captive insurance centre.

And while Belgian dentists may be more the stuff of legend than a market segment actively pursued and nurtured by Luxembourg’s private banking industry, it nevertheless is home to around 143 private banking institutions which in June were looking after assets of €769bn, according to the regulator, the CSSF.

Move away from banking secrecy

That said, any Belgian dentists who might have been looking for a place to hide their wealth would probably have left Luxembourg some time ago. The country was one of the six founding members of the European Economic Community 65 years ago, and as part of this, it’s moved steadily away from traditional ideas of bank secrecy and tax avoidance.

As part of this, for example, it removed from its statue book in 2010 its much-loved (by some) tax exempt holding company structure, and ever since, has embraced, if not always enthusiastically, the block’s steady drive to improve tax transparency and consequently, raise international financial standards.

Of course, Luxembourg’s reputation did take a major hit in the wake of the 2008 financial crisis, when it emerged that a number of its fund managers had invested in New York financier Bernie Madoff’s Ponzi scheme.

Officials in Luxembourg insist, though, that such incidents are in the past, and that any loopholes that may have existed have been or are being closed.

And while there are still tensions, the Grand Duchy has successfully steered its hugely important financial services industry – which accounts for more than a third, or 36%, of its GDP – in the direction of those new standards.

If Luxembourg has any area where reputational risks might now still lie, it would most likely be in the corporate arena, where data revealed in the Panama Papers and an earlier International Consortium of Investigative Journalists’ investigation, dubbed “Lux Leaks”, shone a spotlight on tax-avoidance strategies engaged in routinely by some of the world’s largest multi-national companies.

All told some 350 international corporates are alleged to have received preferential tax treatment in Luxembourg, and in the case of at least one European energy firm, was said to have involved treating financial transfers as debt as well as equity, thus lowering taxable profits.

But the technical arguments which centre around what constitutes illicit state aid are still pending. Pessimists say that Luxemburg could lose some business because of it, while optimists say that it will benefit from international groups making their presence in the country more substantial.

As far as tax rules are concerned, information practices are still not fully in line with OECD standards, according to the Paris-based organisation, but the organisation’s latest assessment held that Luxembourg’s legal and regulatory framework “provides for the availability of ownership, accounting and bank information, and Luxembourg exchanges a considerable amount of information in a timely manner”.

That Luxembourg is not just maintaining its place as a financial centre but may actually be gaining ground was confirmed in the latest London-based Global Finance Centres Index, which ranked it 12th in the world (up two places in six months) out of 87 financial centres.

Although the results were compiled before the result of the Brexit referendum, researchers said that decision-makers had given Luxembourg (and Dublin) a higher rating as potential locations for them if they have to leave the UK. The Grand Duchy was also the third highest ranking Western European centre, behind London (which topped the global index again) and Zurich, but ahead of Frankfurt and Geneva. It was also one of the 15 global finance centres said to be “likely to become more significant”.


Meanwhile, although photographs of Luxembourg still typically show an old-fashioned European town of low-built, traditional buildings of steep slate roofs interspersed with trees, church spires,stone walls, turrets and ruins (see above), it is in fact embracing financial technology as fast as it can, just like all the world’s other major financial centres.


Population: 520,672 (July 2014)

Area: 2,586 sq km


GDP per capita: €91,266


Origin of
private banking assets:
           EU 58% non-EU 42%
Fund promoters origin:
US 20.8% UK 16.5%
Germany 14.8% Switzerland 14%
Origin of life premiums:
France 33% Italy 16%
Other EEA 14% Belgium 9%

(Source: Luxembourg
for Finance)

Micro-finance is seen as another new growth area, as investors turn to the capital markets to help promote economic growth in developing countries. Luxembourg offers both a regulated UCITS fund and a more lightly regulated Specialised Investment Fund for Microfinance Investment Vehicles, which now have total assets of $3.5bn in Luxembourg, more than half the global total.

The Grand Duchy is also finding new ways of applying standards while simplifying the bureaucracy involved. Its newly-launched Reserved Alternative Investment Fund, or RAIF, does away with the need for fund approval by the regulator, the Commission de Surveillance du Secteur Financier, by shifting the burden of compliance onto the fund manager. The aim is to avoid double scrutiny while improving speed and flexibility.

As Camille Thommes, director-general of the Association of the Luxembourg Fund Industry, pointed out, Luxembourg has no choice but to be flexible; concentrating on just one product or service could make a country as small as Luxembourg in particular extremely vulnerable.

Thus the efforts Luxembourg is making to embrace everything from fintech to blockchains, data mining, KYC e-identification initiatives and other initiatives.

“Other centres are also very active,  but we have a very broad ecosystem here, and we hope that we can leverage off of our expertise,” Thommes said.

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