Francis Hoogewerf provides an outline of Luxembourg’s financial services sector.
Luxembourg remains number one in Europe and number two in the world after the United States when it comes to its investment funds. As an example, institutional investment into Russia through Luxembourg is estimated at US$22 billion in 2004/5 and US$26 billion for 2005/06 making Luxembourg one of the biggest investors into Russia.
There is new legislation on hedge funds in the pipeline and it is hoped the new law will take effect on 1 January 2007.
Luxembourg’s international banking centre also remains strong with 155 banking groups employing a record number of staff at nearly 24,000.
Private Banking services continue to grow.
With net premium income growing 20 per cent in the first half of this year, international life insurance continues to show strong growth especially in the form of single premiums and is complementary with both private banking and trust services. Luxembourg is now the 12th largest life insurance centre in Europe.
Capital market environment
Luxembourg continues to invent new investment vehicles for the capital markets.
The SICAR law of 15 June 2004: This venture capital vehicle is proving very popular with its tax advantages and in view of its venture capital status has the approval of the European Commission. It is a “light touch” regulated vehicle and good for listing.
Securitisation vehicles law of 22 March 2004: This vehicle can be both regulated or unregulated. It has tax advantages to go with its risk status when assuming securitisation undertakings, such as coownership of funds, and other financial instruments.
This vehicle is regulated when shares are offered on a continuous basis, ie, more than four times per year and amounts invested are less than €125,000.
New ‘SPF’ holding
The 1929 Holding was attacked by the European Commission as a form of state aid.
The Luxembourg government rather than take the European Commission to court with the uncertainly that would have entailed, decided with the agreement of the European Commission not to allow further formations of 1929 Holdings as from 20 July 2006. The existing 1929 Holdings can continue in their present form until 31 December 2010 subject to certain conditions.
On 20 November 2006 Luxembourg published a draft Family Holding Company Law No. 5624 dated 7 November 2006. This draft law will be amended before it is finally published. It is likely to take effect as of 1 January 2007. The letters ‘SPF’ stand for Société de Patrimoine Familiale. There will be no capital gains tax, no taxes on dividends and no dividend withholding taxes. The only tax will be 0.25 per cent on an adjusted capital base, subject to a maximum of €125,000. Only a small group of individuals not corporations will be allowed as shareholders. The new ‘SPF Holding’ will be more passive than its 1929 counterpart. It appears to be a satisfactory outcome for 80 per cent of the existing 1929 Holdings.
The Soparfi of Holding fits in well with the European Directives for the advantages that can be obtained on capital gains, dividends, interest and royalties. Depending on individual country tax treaties this Luxembourg holding company generally comes out comparatively well in EU terms. There are no withholding taxes on interest and royalty payments.
In 2006 Mittal merged with Arcelor and created the biggest steel company in the world with its headquarters in Luxembourg which ensures Luxembourg’s top position in the steel industry.
Pension Funds Law 2005
Luxembourg has conformed to the EU 2003/41/CE Directive on Pension Funds. Europe still has some way to go before companies can in practice accumulate pension funds anywhere in the EU.
However, certain big multinationals such as Unilever, with €3 billion, and Suez Tractobel with € 3.6 billion, have set up pension pooling arrangements in Luxembourg, a useful form of hybrid pension fund. More multinationals are expected to follow.
Luxembourg’s basic rate of VAT at 15 per cent is among the lowest in the EU. What is also interesting are the reduced rates such as the intermediate rate of 12 per cent applying to professional services (there is discussion to increase this rate to 15 per cent) the reduced rate of 6 per cent applying to works of art and the super reduced rate of 3 per cent applicable to internet and e-communication services charged for and rendered in Luxembourg. The is one of the reasons that companies such as Skype and Amazon are established in Luxembourg.
One of Luxembourg’s big advantages is that its government has its fingers on the pulse of business whether it be financial, banking, commercial or industrial, and as a result can adapt quickly to keep Luxembourg competitive.
Francis N. Hoogewerf FCA, Hoogewerf & Cie, Luxembourg