Luxembourg is not only a well-known fund hub but it is also a very attractive jurisdiction for holding or financing unregulated vehicle, so-called special purpose vehicles – SPVs. SPVs are used in PE, real estate, LBO, debt issuance or listings and these thousands of Luxembourg vehicles are also generating work for thousands of private sector employees in Luxembourg. We sometimes forget that our very finance driven economy in Luxembourg is not only based on regulated funds or banks but also materially on the use of Luxembourg based in SPVs in all types of company structures. While the use of these SPVs used to be very much tax driven, it is nowadays as much or even more so based on other attractive features of the Luxembourg legislation such as the ability to integrate certain hybrid features such as compartments as well as our financial collateral law of 2005 which has since attracted a great number of LBOs and other types of financings to Luxembourg. We are a small jurisdiction that has traditionally been very competitive in the finance market thanks to a smart and quick legislator capable of putting in place products quickly to adapt to an ever changing market and to new competition as well as an approachable regulator. Lately it however is clear that many of our successful products are under threat and that we might slowly lose our much-needed competitiveness.

  • Irish SPVs, UK QHAC and the harmonization of tax regimes

Ireland has always been a great competitor Luxemburg, mostly on capital markets and attracting corporate structures via the setting up of SPVs. We see lately that more and more Luxembourg structures are moving to Ireland because of pricing (set up and maintenance) and favourable implementation of certain EU tax directives. The Luxembourg SPV service providers have become so pricey that corporates find it more attractive to move their financing structures to Ireland, where management fees, auditor and service provider costs as well as taxes are generally lower.

The UK is now also being considered a real alternative when setting up SPVs, with the 2022 introduced QHAC (Qualifying Asset Holding Company) providing for a very beneficial tax regime (though subject to certain eligibility requirements making it sometimes less flexible than Luxembourg SPVs).

Our once incredibly competitive tax legislation is no longer the main driver. This is no way surprising given the global harmonization of international tax rules (with BEPS and ATAD II) but Brexit is also giving UK a freedom and hunger to be more competitive in finance items. The latest example is the new tax treaty with the UK that enters into force in 2024 and which will, for Luxembourg SPVs holding UK properties, now allocate taxation rights to the UK for share deals. We would thus expect Luxembourg to lose its attractiveness as a jurisdiction for certain SPVs holding UK real estate structures.

In a different spectrum, the legislator’s efforts into providing innovative and very business oriented options for legal entities (SVs, SCS, SCSps etc) sometimes allowing very welcomed hybrid features and the possibility to create segregated compartments, has proven successful to attract substantial business into Luxembourg. Unfortunately, such success is now being dampened due to such segregation not always being recognised by our tax authorities.

  • Limited services in key finance infrastructures

Despite being a major banking hub, Luxembourg is still very far from being full service for the finance sector and means some potential missed opportunities for our market and its growth. The use of tokenization and DLT is mostly limited to major infrastructure. Our tax and regulatory authorities have become comparatively more conservative than some of our competing jurisdictions and it is still really difficult to find certain key finance services in Luxembourg that would help the advancement of our financial sector such as agency services related to listed securities, placement agent for funds, (syndicated) lending and agency services by banks or other actors etc. Similarly, it has also become a major obstacle to our SPV market that it remains extremely challenging for SPVs to have bank accounts opened in Luxembourg and when they do manage to hold Luxembourg bank accounts, some banks just close them without much warning or reason. This type of operational uncertainty is starting to have a negative impact on the investor friendly reputation of our market and is this being looked into by expert industry groups.

Many European courts also have moved to a digitalized system (which we do not have yet in Luxembourg) and certain European regulators are become faster than ours - though it seems we retain the benefit of having more approachable regulators even if this does not necessarily mean a more market friendly approach. In the last few years, we have also been seeing other jurisdictions become more attractive to investors and becoming a preferred alternative for certain specific items: The Netherlands for IPOs or SPACs, Austria (Vienna stock exchange) for debt listings, the UK for SPVs holding real estate assets, France for Fintech and crypto asset investment or structures, Ireland for its cheaper SPVs etc.

The post Covid wake-up calls have made other jurisdictions becoming more appealing. Changes are happening fast and the dialogue between public authorities and the private finance sector should be kept open and more active than ever before to ensure Luxembourg remains competitive and relevant in the International SPV and finance market. It may have been curiosity that killed the cat but it is complacency that could kill the lion.

This article was first published by Paperjam.