By: BILL BLEVINS | [email protected]
Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK
The banking crisis in 2008 undermined the financial strength of institutions such as banks and insurance companies, and people are now once again concerned about the safety of their savings. The only certain way for investors to achieve security from institutional failure is through a state controlled investor protection regime.
Luxembourg stands out among EU Member States with its exceptionally strong culture of investor protection. It has a regime which provides maximum security to investors without limit.
The Grand Duchy is in the top 10 financial centres worldwide. It is the second largest investment funds centre after the US and the leading private banking centre in the Eurozone.
Its financial centre is founded on a modern regulatory framework, which is continuously updated. It has attracted banks, insurance companies and investment fund promoters from across the world.
It has a flourishing insurance market with all the principal players having a presence and making use of the freedom to offer cross border services in the EU. Many of its institutions specialise in unit linked life assurance, an increasingly popular vehicle for wealth management.
Luxembourg was one of the six founding members of the European Economic Community (EEC), which became the European Union (EU), and continues to play an important role in EU politics. It houses a number of EU institutions including the European Commission, the European Investment Bank, and the European Court of Justice.
It has built a reputation for investor protection, tax certainty, anti money laundering practice and banking confidentiality.
Historically, many high net worth individuals used offshore financial centres for confidentiality and tax mitigation. However, apart from a lack of regulation and investor protection, they have also been under attack from European and international bodies, with the result that investors who use them are placing their assets at risk for no real or sustainable benefits.
In contrast, Luxembourg’s regulations are governed by EU directives that require strict financial controls and supervision to provide investors with a secure onshore regime that can still offers tax benefits.
Luxembourg’s investor protection is unique within Europe. The cornerstone of this regime is the legal requirement that all clients’ assets must be held by an independent custodian bank approved by the State regulator, the Commissariat aux Assurances (CAA).
This arrangement involving the CAA, custodian bank and insurance company is known as the “Triangle of Security”.
These are the key points:
• The regime ensures the legal separation of clients’ assets from the insurance company’s shareholders and creditors, so investors are protected from exposure to the company’s credit risk.
• The insurance company maintains a register of all assets and how they are invested, which is monitored by the CAA.
• All policyholder assets are deposited with a custodian bank.
• The bank is required to ring-fence clients’ securities (eg investment funds, shares, bonds etc) – i.e. they are off its balance sheet. If the bank fails, these securities remain in segregated client accounts.
• The bank is bound by the regulator’s legal powers to protect the assets on behalf of investors.
• 100% of the policyholder’s securities are protected. Cash deposits are not securities and so are not segregated, but cash held in monetary funds is treated as securities and so are protected.
Most investors take out European investment bonds for tax planning reasons. Luxembourg offers the greatest certainty that these tax breaks will continue.
EU and UK authorities have no jurisdiction over Luxembourg based bonds, nor can they discriminate against them as it is against EU laws to discriminate against the products of another Member State.
Compliant Luxembourg based bonds enjoy the same preferential tax treatment as locally offered bonds. The same cannot be said of non EU locations, such as the Isle of Man.
The tax-free roll-up of investment income and capital gains, which applies to Luxembourg based European Bonds, is the same that applies across most of Europe (excluding the UK), so there is no political pressure to change this system. Withholding tax advantages are available through Luxembourg’s extensive double tax treaty network.
Luxembourg law provides absolute confidentiality. Institutions are legally forbidden from divulging client information to third parties (except in relation to criminal activities). Individual financial privacy remains important for many high net worth individuals.
As part of the EU, Luxembourg participates in the EU Savings Tax Directive on savings income, but it applies a withholding tax rather than automatic exchange of information. This situation will only change if Switzerland ends its banking secrecy.
Over the years Luxembourg has finely tuned its financial services industry into one offering unparalleled investor protection, client confidentiality and legitimate tax planning opportunities. Many British expatriates in countries like Portugal have already taken advantage of Luxembourg’s favourable arrangements. A consultation with an experienced tax and wealth management adviser such as Blevins Franks can help with structures suitable for your individual circumstances.
To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranks.com