THE GRAND Duchy of Luxembourg may be a small country physically, but it is one of the most prosperous countries in the world measured by GDP to the population. It was a founder member of the European Union and adopted the Euro upon its inception. It is in the mainstream of current EU issues such as monetary union, social policy and immigration, and is politically, economically and socially stable. It has a highly successful financial centre and is considered the private banking capital of the EU, and a premier location for the pan-European cross border life assurance industry.
In terms of assets, Luxembourg is the seventh largest financial centre in the world. More than 175 banks are located there, including 30 of the world’s 50 largest banks. It is home to more than 7,000 funds and sub-funds, and to more than 150 reinsurance companies. It is the leader in Europe for the administration of investment funds in the terms of net assets volume, second in the world only to the US.
It has a long tradition of adopting an outward looking approach to the rest of the world.This distinctly international outlook, enhanced by large-scale immigration (over one-third of the resident population is not of Luxembourg nationality) has contributed to the development of its specific capacity as a financial centre. Close ties between economic operators and political decision-makers permit ongoing consultation and increase the ability to adapt rapidly to changing markets.
One of the most important developments has been the move away from relying on tax and regulatory advantages for the finance industry, to concentrating on the industry’s specialist knowledge and the development of sophisticated tax planning structures that are appropriate throughout the EU. Following the EU’s Third Life Directive in 1994, Luxembourg has emerged as the centre for the fast growing pan-European life assurance industry, and over 60 life companies are now established in the Grand Duchy.
There are many reasons for this. Luxembourg offers a safe onshore regulatory regime; a tax efficient environment (all interest, dividends and capital gains in life assurance funds are reinvested free of taxes) and the strongest investor protection regime in Europe.
It also offers absolute confidentiality, which is ensured though its laws which make it a criminal offence to divulge information to third parties, except in relation to criminal activity. Finally, all life companies are governed by the EU’s strict financial controls. To protect investors in the EU, non-EU companies cannot market their products within the European Union, and most Member States offer beneficial tax treatment to funds issued by an EU provider.
Today Luxembourg has thrown off any reputation it may once have had as a ‘tax haven’, and, thanks to its strict regulatory structures, is instead considered an ‘onshore tax favoured centre’. Banking secrecy may be a fundamental right in Luxembourg, but this is on the proviso that it must not be abused to conceal illegal activities, and strict legislation has been laid down to this effect.
It was one of the first countries to make the laundering of drug money a criminal offence (and to take legal proceeding against launderers), and has since broadened its legislation to extend the notion of money laundering to other crimes such as kidnapping, corruption, arms traffic, organised crime and other criminal activities.
As an EU Member State, Luxembourg has now started applying the new Savings Tax Directive, although, along with Austria, Belgium, the Isle of Man and the Channels Islands, it will, for a transitional period (forecast to be up to 2011) impose a withholding tax instead of automatically exchanging information.
Although not yet required to end privacy, the withholding tax will help eliminate tax evasion in Europe and will enhance Luxembourg’s reputation as a financial centre. The Luxembourg Bankers’ Association had previously said that it was confident that the Directive will help curb tax evasion and fraud.
Life assurance products will not be as affected, as the Savings Tax Directive relates to the taxation of savings income in the form of interest payments of debt claims, and excludes issues relating to pension and insurance benefits.
Luxembourg is also a member of the Organisation for Economic Cooperation and Development (OECD) and therefore subject to its anti tax evasion and anti harmful tax competition initiatives. It has agreed to work towards improving access to bank information for tax purposes. However, again, this only applies to bank interest and not to insurance based investment products.
With increasingly close attention being paid to a number of offshore centres under the microscope of the OECD initiative and the EU’s Savings Tax Directive, it is essential that expatriates, who wish to remain out of the local tax net, address their attention to legitimate means of tax avoidance. The various structures available from Luxembourg are designed to do just that and are well worth looking into.
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