Brexit - Choosing Luxembourg as an EU foothold
Pierre-Antoine Kléthi, associate and tax adviser, explains why Luxembourg is one of the most chosen Post-Brexit destinations for parties in the financial services industry.
Luxembourg, unlike other member states, does not have an aggressive Brexit policy to lure business out of London. Yet, it is one of the principal options considered by actors in the financial services industry who wish to retain a presence in the EU single market. The country particularly attracts asset managers, insurers and fintech actors. What makes them choose Luxembourg?
An existing favourable ecosystem
Luxembourg has a well-established financial sector, in particular with the presence of numerous banks and its status of the world’s second-largest fund centre. Luxembourg is also a world leader in the sector of digital financial services and a financial technology hub.
The financial services industry is well developed and constantly evolves to meet new demands and regulatory and tax changes. For example, many domiciliation service providers have taken steps to broaden their offer in the context of increased substance requirements and EU financial regulation evolutions. Luxembourg firms can also draw on a large pool of highly educated, multilingual and multicultural talents beyond the borders of the country.
Approachable, reactive and pragmatic regulators
Regulation is a key concern for UK firms and firms wanting to set up a presence in Europe. Luxembourg’s financial regulators (CSSF for the financial sector; CAA for insurances) are already well known to many English and international financial firms and have a reputation for being knowledgeable and approachable. Discussions and filings can take place in English, generally without need for translation in French or German.
The regulators favour dialogue and often offer pragmatic solutions. What makes Luxembourg unique is also the fact that practitioners from the private sector, the regulators and legislator often move in the same direction and for the good of the financial marketplace.
A sound and stable political and economic environment
Luxembourg, a founding member, remains firmly anchored at the core of the EU. It pursues pro-EU policies and is a staunch defender of the global competitiveness of EU businesses.
Luxembourg’s business-friendly policies are not affected by changes in governments and parliamentary majorities, as all main political parties are conscious of the importance of the financial sector for employment and value creation.
Luxembourg also has one of the lowest debt/GDP ratios in the EU and is one of the very few EU member states whose debt is still graded AAA by all major rating agencies. This attracts investors with a strict risk-averse policy (e.g., pension funds) and is also a security against surprise tax hikes to balance budgets.
An offer tailored to the needs of investors
For the asset management industry in particular, there is a wide array of vehicles to suit different profiles of investors, different investment strategies and different types of investments.
Also, due to its small size, Luxembourg has specialised in cross-border business and is therefore particularly conscious of the needs of foreign businesses and investors.
An attractive tax environment
While the nominal corporate tax rate is higher than in most competitor countries, incentives and exemptions are available for various activities – the best-known are the participation exemption and the new IP regime.
Luxembourg, like its competitors, will introduce EU anti-tax avoidance rules; it will not go beyond, so as to preserve a level playing field. Corporate taxpayers also have access to a large, still growing network of tax treaties.
Regulated funds that are not tax-transparent benefit from certain exemptions or deductions aimed at ensuring the tax neutrality of these vehicles.
Maintaining bridges with the UK
Luxembourg does not have the size and infrastructure, nor the ambition to replace London as Europe’s leading financial centre. The government is committed to preserve the close business ties between Luxembourg and London after Brexit. The question for UK firms would thus often not be whether or not to move out of the UK, but rather how much substance to allocate to their Luxembourg-based operations to be run in symbiosis with London-based functions.
Luxembourg and its financial services providers are ready to make the Brexit transition as smooth as possible for UK businesses choosing Luxembourg to keep a foot in the single market.
First published in Paperjam.
Pierre-Antoine KlethiSenior Associate Attorney at law / Avocat / Tax Adviser
Pierre-Antoine Klethi, senior associate, is a member of the Tax and Investment Management Practice Groups in our Luxembourg office. He focuses on corporate taxation (including relevant international developments), fund structuring and EU State Aid investigations.T: +352 466 230 429 E: email@example.com