Luxembourg’s private banking sector has long since played an important role in wealth management and financial markets in Europe and across the world. It provides an attractive destination to those working in finance sectors, with more than 67 per cent of the country’s working population being made up of overseas workers, the majority of whom have relocated from other financial centres. Banking in the country enjoys a strong international reputation, built up over many years, with high levels of expertise behind banking institutions in the country.
HISTORY AND MAKEUP
The Grand Duchy of Luxembourg has specialised in financial products since the 1960s when authorities made the proactive decision to diversify from the dominant steel industry and create an environment conductive to high tech development and the banking industry. It has continued to innovate and create a stable platform for foreign financial investment and is now the premier private banking destination in Europe, having grown significantly since the 1980s when it propelled itself to the forefront of Europe’s asset management industry.
Its success was kickstarted when the Grand Duchy became the first European state to implement the 1985 Directive on Undertaking for Collective Investment in Transferable Securities (UCITS) into law, pioneering the concept of fund passports in the process and facilitating cross-border fund transfers. It is now the second largest fund centre in the world, behind only the USA, and has seen its private banking sector grow at a similarly impressive rate.
Remarkably for a country with a population of just over 500,000, Luxembourg is the third largest Private Banking centre in the world and the top ranked within the Eurozone in terms of assets under management (AUM). Private Banking is also a key aspect of Luxembourg’s finance sector bringing in more than €3.4 billion in revenues.
Luxembourg is not just a destination for European banks either, with a fifth of its banks coming from non-EU countries. Unsurprisingly, the economic powerhouse of Germany has the most banks based in Luxembourg with 42 – nearly a third of all credit institutions in the Duchy – being German-owned, compared to eight from the UK and six from the USA.
Since 1998, regulation of the financial industry in Luxembourg has been undertaken by the
Commission de Surveillance du Secteur Financier (CSSF), which took over the responsibilities of the Institut Monétaire Luxembourgeois(IML) when it became the became the Banque centrale du Luxembourg (BcL).
One of Luxembourg’s main advantages for investors has been its strategic position at the heart of Europe and its ease of access from the power bases of the European Union, making it an attractive place for those hoping to access European markets. It is estimated that around 70 per cent of EU wealth is within a 700km radius of Luxembourg. Strong transport links make it easily accessible while a reliable IT network has made digital transactions and communications efficient and effective.
Luxembourg has managed to attract the world’s elite to work in its financial sector meaning private banking customers in the country now have access to a highly skilled workforce. The high levels of foreign workers also mean it is a multilingual finance centre, well placed for dealing across geographical borders. Private banking clients in Luexmbourg can be confident in gaining access to experts in cross-border wealth management, tax optimisation and asset management.
Political and economic stability
Luxembourg enjoys an almost uniquely stable political environment compared to much of Europe, having been governed by a coalition of two political parties since the end of the Second World War.
The authorities have long recognised the advantages of making Luxembourg a welcoming environment for foreign wealth and since actively seeking to diversify the trade opportunities for the country in the 1960s have worked closely with relocating businesses to assist in their set up and ongoing development. Fiscal stability is another key feature, with public debt standing at less than 17 per cent.
It is, of course, the relatively low taxes which are one of the most appealing features about private banking in Luxembourg, with the authorities establishing an environment which is attractive to those looking for an efficient private banking and wealth management.
Some of the low cost benefits include an absence of wealth tax, dividends are subject to a 15 per cent withholding tax, 20 per cent lower than in Switzerland, non-residents are not required to pay inheritance tax nor tax on capital gains. Luxembourg also has double tax treaties in place with 64 major counties around the world and ongoing negotiations to add significantly to this list.
The tax system are also appealing to businesses looking to relocate or invest in Luxembourg, with VAT the lowest in the EU at a standard rate of 15 per cent, while corporate taxes are designed to encourage investment and do not go above 28 per cent, while they can effectively be less than 10 per cent for some investors.
It is Luxembourg’s flexibility that appeals to many financial institutions and its ability to react to the changing economic climate, including responding positively to changes to EU legislation. Authorities are proactive in introduce new legal frameworks for financial products, as demonstrated by becoming the first EU state to implement the first UCITS Directive in the 1980s, a trend followed up in 2010 by becoming the first member state to transpose UCITS IV into law.
This proactive approach is set to reap more benefits for the state and cement its place as Europe’s market leader in fund management. The EU’s Alternative Investment Fund Managers Directive which comes into force in July is expected to drive more foreign fund managers to relocate to domiciles such as Luxembourg and the Grand Duchy has already prepared a draft bill for its parliament on the AIFMD to help the state capitalise on these changes. This approach has led Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry, to confidently predict that Luxembourg could see its funds double to around €500 billion as a result. Impressive figures for country of such relatively small size.