Luxembourg has the second highest GDP per capita in the world and its economy is largely dependent on banking, steel and industrial sectors. Given its centralised location in Europe, Luxembourg has leveraged on its connectivity to several other international markets and access to the European market to counter its small domestic market.
Finance remains the largest Luxembourgish economy driver, with the country specialising in cross-border fund administration business. An internationalised banking sector, a skilled labour force and accessibility to other European centres have further propelled Luxembourg's financial sector.
Business-friendly regulatory frameworks, competitive tax rates and RDI incentives have further incentivised foreign investment and innovation within the country. The government has offered subsidies to small-to-medium enterprises (SMEs) and tax exemptions for start-ups to increase entrepreneurship in the country. Moreover, due to the size of the country, public institutions have less bureaucratic structures which enhance the efficiency of administrative procedures.
Luxembourg is also one of the biggest financial centres in Europe, with 155 banking establishments. Capital markets remain relatively free, with minimal exchange controls.
What solutions are available in Luxembourg?
|Treasury Centres||A centralised treasury is one way to reduce the tax burden, centralise risk management, improve liquidity and enhance yield on cash.|
|Interest Optimisation||Maximise your interest yield from for your balances held with the bank.|
|Notional Pooling||Cash balances in different accounts are notionally offset to derive the net balance, which is then used to calculate interest.|
|Sweeping/ Zero Balance Account (ZBA)||ZBA are checking accounts with zero balances where funds are physically swept to eliminate excess balances and maintain greater control over disbursements.|
|In-house Banks (IHB)||In-house banks provide corporate treasurers with another method of centralising and consolidating their business.|
|Intercompany loans||Similar to bank loans, intercompany loans refer to lending between entities within the same group.|
Corporate Treasury in Luxembourg
Luxembourg is one of the wealthiest countries in Europe and is a founding member of the European Union. It has a highly developed financial services sector. Here, we highlight some of the key benefits relevant to treasury and cash management in Luxembourg.
Financial Market Development
- The World Economic Forum ranks Luxembourg 11th in the world for financial market development in The Global Competitiveness Report 2015-2016.
- It ranks Luxembourg 12th in the world for the soundness of its banks, while it comes second for both the availability and affordability of financial services. It rates it sixth for the ease of access to loans, eighth for venture capital and 16th for financing through local equity markets.
- Luxembourg has excellent business infrastructure, an international and highly skilled labor force, an attractive legal framework and a stable macroeconomic environment.
- There are no foreign-exchange controls in Luxembourg.
Sophistication of Banking Systems:
- There are more than 150 banks operating in Luxembourg, of which 90% are foreign-owned. Among these, 111 are incorporated under Luxembourg law and 43 are branches of foreign banks.
- Luxembourg is a key private banking centre in the Eurozone and the second-largest fund management center in the world.
- Luxembourg's foreign-exchange market has an average daily turnover of USD 37 billion (Bank for International Settlements triennial global survey 2016).
- Luxembourg has a well-developed debt market with both government and corporate bonds available. The government recently issued new bonds for the first time since 2013.
- The banking industry is regulated by the Financial Sector Supervisory Authority. As a Eurozone country it is also covered by the Single Supervisory Mechanism. Luxembourg’s central bank is the Banque Centrale du Luxembourg.
- The corporate income tax (CIT) rate was reduced to 19% for companies with a net taxable base of EUR 30,000 in 2017. It will be reduced to 18% in 2018.
- Companies also pay a solidarity surtax on CIT of 7% and municipal business tax, which varies according to location and is charged at 6.75% in Luxembourg City, giving an overall tax rate of 27.08% for companies in Luxembourg City in 2017, falling to 26.01% in 2018.
- Companies are subject to a net wealth tax of 0.5% on their net wealth on a taxable base of up to EUR 500 million and 0.05% on the component above this amount.
- Resident companies pay tax on their worldwide income. Non-resident companies are taxed on income deriving from Luxembourg.
- VAT is charged at a standard rate of 17%. Certain goods and services qualify for lower rates of 14%, 8% and 3% or are zero-rated. Banking and financial transactions are generally exempt.
- There is no stamp duty in Luxembourg.
- Dividend income is tax-exempt if the conditions of the 'participation exemption' regime are met.
- Interest income is taxed as corporate income. Interest expenses are tax-deductible.
- Tax incentives, usually in the form of investment tax credits, are available for companies in the areas of risk capital, audio-visual activities, environmental protection, R&D, professional training and the recruitment of unemployed people.
- There is no withholding tax (WHT) on interest in Luxembourg. WHT on dividends is either 0% or 15% for resident companies. Non-resident companies pay a rate of 15%, unless a tax treaty is in place, then rates range from 0% to 25%.
- Luxembourg has tax treaties with around 80 countries and territories.
- Luxembourg is a signatory to the Organisation for Economic Co-operation and Development's Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises.
Benefits for Regional Treasury Centres
- Luxembourg's stable tax, legal and regulatory regimes make it a highly popular location for companies to base their regional and worldwide treasury operations and shared service centers.
- It offers access to a wide range of banking services and flexible structuring solutions, as well as an attractive tax regime, including the lowest VAT rate in Europe.
- Cash concentration is available in Luxembourg. Different legal entities can participate in a notional cash-pooling structure in Luxembourg. There are no regulatory restrictions on cross-border sweeping, but there are central bank reporting requirements.
- Notional pooling is available in Luxembourg on a domestic and cross-border basis. Multiple legal entities can participate in a notional cash-pooling structure.
- Luxembourg is a member of the pan-European TARGET2 real-time gross settlement system.
- It has an extensive tax treaty network.
- Luxembourg is a Eurozone country with trading hours that overlap with Asia, Europe and North America.
- There are 146 authorised banks, of which 20 are domestic banks, 80 are foreign banks and 46 are branches of foreign banks.
- Seven of Luxembourg's largest banks take up 35% of total banking assets. The largest bank in terms of assets is Deutsche Bank, followed by foreign and foreign private banks and two domestic banks, Banque et Caisse d'Épargne de L'État (BCEE) and Banque Internationale à Luxembourg (BIL).
- Luxembourg provides a diverse range of banking services, particularly in private, asset-servicing, corporate and retail banking, and although it serves its domestic market, the vast majority of services are geared towards the international market through its foreign banks. It also provides services for country segments, such as asset servicing for US and UK banks, and asset servicing and private banking for Swiss banks.
- Luxembourg operates a universal banking system, and three of its largest banks are universal banks.
- Residents may hold foreign-exchange and domestic-currency accounts both domestically and overseas, whereby domestic-currency accounts are freely convertible to foreign currency.
- Non-residents may hold foreign- and domestic-currency accounts, whereby domestic-currency accounts may be held overseas and are freely convertible to foreign currency.
- Interest is available on current accounts.
Legal and Regulatory
- Banque Centrale du Luxembourg (BCL) is an autonomous institution and a member of the European System of Central Banks (ESCB).
- Commission de Surveillance du Secteur Financier (CSSF) regulates the banking sector.
- The European Central Bank (ECB) supervises banks within the Eurozone that are regarded as 'significant' through the Single Supervisory Mechanism (SSM), and other 'less significant' banks are supervised by the national central bank. In the case of Luxembourg it is the banking regulator, CSSF.
- There are no foreign-exchange controls in place.
- Luxembourg is one of the founding members of the European Union (EU).
- A company is resident if it has its head office in Luxembourg.
- Luxembourg has anti-money laundering and counterterrorism financing legislation in place, and follows EU anti-money laundering directives.
- Luxembourg has set up a financial intelligence unit, the Financial Cellule de Renseignement Financier (FIU-LUX), which is a member of the Egmont Group.
- Individuals entering or leaving the EU are required to declare currency of EUR 10,000 to customs.
The Eurozone's Real-time Gross Settlement (RTGS) system
Pan-European RTGS-equivalent net settlement system
Pan-European net settlement system
Pan-European Automated Clearing House (ACH)
(Single Euro Payments Area)
EU-integrated payment infrastructure
- All credit transfers are automated.
- High-value and urgent credit transfers are settled through TARGET2 in real time.
- Low-value and non-urgent SEPA credit transfers are cleared through STEP2 same day.
- Credit transfers used for payroll, supplier and third-party transactions.
- The SEPA Credit Transfers (SCT) scheme is used for retail transactions and is available for urgent and high-priority payments (no maximum threshold) within the SEPA.
Direct Debits (auto-debits)
- Direct debits used for low-value, regular payments such as utility bills.
- The SEPA Direct Debit (SDD) scheme is used for urgent and high-priority retail payments (no maximum threshold) within the SEPA. It is mandatory for all banks in the Eurozone to offer SDD facilities and banks outside of the Eurozone are required to accept SDD transactions.
- SEPA SDD transactions cleared same day through STEP2.
- Payment cards are becoming increasingly popular. Payment cards transactions accounted for 59% of the volume of cashless payments (excluding electronic money payments).
- The main payment card brands are Visa and MasterCard, although American Express and Diners Club credit cards also have a presence. All payment cards are SEPA- and Europay, MasterCard and Visa (EMV)-compliant.
- Card payments are mostly processed through SIX Payment Services (card-processing company with major presence in Switzerland, Austria and Luxembourg), except American Express and Diners Club, which use their international card schemes.
- Electronic payments (e-payments) are a common form of cashless payment in Luxembourg, accounting for EUR 75,093 billion worth of payments in 2015.
- All the major banks as well as online e-payment providers (such as Paypal, Cashcloud and Saferpay) offer online and mobile payment services.
- There are also reloadable prepaid cards available such as Easy card offered by Visa and Neteller.
- MultiLine is the electronic banking application used to settle payments before they are processed through SIX Payment Services. It supports EBICS (Electronic Banking Internet Communication Standard) which is a SEPA-compliant transfer protocol.
Other Payment Schemes
- Cheques are only issued as bank drafts and cheque books are no longer issued by the banks. Cheques are cleared between banks.
- Mobile payments: The use of mobile payments is on the rise, with 52% of mobile owners using mobile banking, and the ING International Survey on Mobile Banking 2016 noting that Luxembourg has the third-highest use of mobile banking in Europe.
New FinTech Acceleration Platform
Luxembourg-based RegTech startup Finologee is joining forces with Deutsche Borse, its post-trade services provider Clearsteam and figo to create a FinTech accelerator platform. The platform will help both established players and startups in the sector to distribute services to each other, as well as giving them access to Deutsche Borse’s market and reference data and other services through web-based application programming interfaces (APIs). The platform aims to launch in the fourth quarter of 2018.
Read more about the development here.
Calls for Better Digital Single Market
Luxembourg’s Prime Minister has called for the European Union to improve the digital single market to help startups and ensure it retains sovereignty over digitisation on the continent. Xavier Bettel said under the current strategy, which was put in place in 2015 to enable businesses to engage in online activities under common conditions irrespective of residence, startups who wanted to be active across Europe still needed 28 lawyers in 28 different countries. He likened the initiative to the Loch Ness Monster, saying everyone was talking about it but no-one had seen it.
Read more about the development here.
CSSF Warns Against Cryptocurrencies
The Luxembourg regulator Commission de Surveillance du Secteur Financier (CSSF) has issued an official warning against investing in cryptocurrencies and initial coin offerings (ICOs). The regulator pointed out that cryptocurrencies are not backed by any central bank, adding that they are volatile and deals are not always transparent. It also said there was an absence of consumer protection and a risk of theft as the exchanges on which they are traded can be hacked.
Read more about the development here.
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Sources: IMF World Economic Outlook database, October 2016; CIA World Factbook; Trading Economics; PwC
Please note that the information contained in this document, assembled based on information available and accurate as at July 2017, is of a general nature only and is subject to change whether for economic, political, social or other reasons.