Its size and location have enabled Lumxembourg to stay ahead of the game in turbulent times, and its future looks brighter than ever.
2009, following on from the financial crisis in 2008, is showing some positive signs for Luxembourg.
Unemployment, at around 6 per cent, is relatively low compared to the surrounding countries of Europe.
Bank secrecy has been attacked by the G20, especially in relation to Switzerland, Austria, Liechtenstein, Belgium and Luxembourg, but other smaller countries in Europe have felt their wraith also. As a result, Luxembourg was, for a time, on an Organisation for Economic Cooperation and Development (OECD) ‘grey list’, but after signing at least 12 treaties in record time, Luxembourg was transferred to the ‘white list’ in July this year, with Switzerland following in September (2009).
Will Information Exchange Make a Difference to Luxembourg as a Financial Centre?
Bank secrecy has, to some extent, been helpful to private banking. However, clients have realised for some years now that it would not last and have been making their own arrangements.
Equally, countries have been offering some form of amnesty, which have helped in certain cases. Italy’s amnesty in particular has helped bring money back to Italy, as well as solving some of that country’s private banking dilemmas.
The information exchange rules will mean that undeclared assets will eventually leave the Luxembourg banking system, but both time and reasonable amnesties are needed to sort out any problems associated with this process.
The European Union (EU) has been trying to organise automatic exchange of information agreements especially in relation to Liechtenstein.
Both Luxembourg and Austria vetoed the project in October 2009.
Luxembourg’s investment funds would seem to be relatively healthy. Luxembourg is number one in Europe and the number of funds is still growing. The Central Service for Statistics and Economic Studies (STATEC) figures show 3371 funds at the end of 2008, compared to 3457 funds at the end of September 2009. The net assets of those funds have remained steady at nearly EUR1560 billion at the end of 2008, compared to nearly EUR1557 billion at the end of September 2009.
The Specialised Investment Fund (SIF) is proving to be very popular. The number reported at 30 September 2009 was 938, up from 617 in 2008 and just 222 in 2007.
SIFs can be semi-regulated for private, well-informed investors, or they can be fully regulated. Needless to say, government costs, including taxes, are minimal. The SIF is a flexible vehicle and can take advantage of Luxembourg’s tax treaties.
The number of banks operating in Luxembourg remains steady, at around 146 banks at the time of writing. The sum of the balance sheet totals, however, has gone down from EUR930.857 billion in December 2008, to EUR814.658 billion in September 2009 (according to Commission de Surveillance du Secteur Financier figures). The August and September 2009 figures show signs of stability, rather than a downward trend.
Luxembourg banking has experienced its fair share of excitement. For example, Dexia, Fortis, Iceland, have seen their share of problems, but these seem to be sorting themselves out.
Luxembourg remains an attractive location for captive re-insurance companies, as well as life insurance. Luxembourg’s life insurance sector is the 13th largest in Europe. Life insurance premiums rose 12.5 per cent in the first half of 2009, with classic guaranteed return products up 74 per cent. The single premium insurance policy remains attractive, especially when combined with a securitisation vehicle.
Luxembourg’s ship register had 205 units on its books at 31 October 2009, representing 1.6 million tons. This may well be a record for a landlocked country. The Maritime business is growing. The Mega or Super yacht also has its place in Luxembourg, with the attractive Luxembourg flag.
Philanthropy and Microfinance
Luxembourg has finally been able to enter the philanthropy market. Not only is there an attractive Luxembourg Foundation, but also new laws are being introduced, regarding ASBL, the not-for-profit association.
The Luxembourg Government is proposing to exempt microfinance funds from the Luxembourg subscription tax. Apparently 45 per cent of the worlds microfinance investment vehicles are based in Luxembourg.
Intellectual Property (IP) and Research
Luxembourg, in a forward-thinking move, has moved to actively encourage research and development. This fits in well with the new Luxembourg University, already populated by a few thousand students from around the world. By making Luxembourg fiscally attractive for IP, Luxembourg can cement itself in the international market as a world centre for research.
There are advantages in holding patents and IP rights through Luxembourg entities, with important fiscal exemptions of up to 80 per cent.
Luxembourg is a founder member of the EU. The Luxembourg Government remains in close touch both with EU trends and with its own financial, commercial and industrial industries.
Considering its size, the way Luxembourg keeps in close contact with countries such as China and Russia as well as countries from the EU, the Middle East and North and South America, is all the more impressive. As a result of these relationships, Luxembourg is a real international melting pot.
Luxembourg continues to sign new tax treaties with the world. It has ratified 50 treaties, and has signed, but not yet ratified, 17 more, making a total of 67treaties in play. These tax treaties may have been set up for one purpose, but with financial innovation can be used for any number of purposes and pursuits. When using treaties, ‘substance’ is, in certain circumstances, becoming relevant. In the long term, this is good for Luxembourg, making it an even more attractive country to live in.
When looking ahead to 2010, despite the fragility of the global financial system, Luxembourg at least has the advantage of being a small country able to adapt quickly to new circumstances.
Francis Hoogewerf, FCA, Luxembourg