Luxembourg has the highest gross domestic product (GDP) per capita in the world, according to the International Monetary Fund (IMF). Its economy is largely driven by the financial sector, while other key industries include steel, chemicals and rubber. Its centralised location in Europe gives Luxembourg access to more than 500 million consumers, countering its own small domestic market.
Finance remains the largest economic driver, contributing around one third of the GDP, with the country specialising in cross-border fund administration business. An internationalised banking sector, skilled labour force and access to other European centres have further propelled Luxembourg's financial sector.
Business-friendly regulatory frameworks, competitive tax rates, and research and development (R&D) incentives have driven foreign investment and innovation within the country. The government has offered subsidies to small to medium-sized enterprises (SMEs) and tax exemptions for start-ups to increase entrepreneurship in the country. Moreover, due to the small size of the country, public institutions have less bureaucratic structures, which enhances the efficiency of administrative procedures.
Luxembourg is one of the biggest financial centres in Europe, with more than 120 banks and USD5 trillion in assets in the custody of financial institutions.
Corporate Treasury in Luxembourg
Luxembourg is one of the wealthiest countries in Europe and is a founding member of the European Union (EU). It has a highly developed financial services sector. In this section, we highlight some of the key factors relevant to treasury and cash management in Luxembourg.
Financial Market Development
- Luxembourg is ranked 17th in the 2021 Global Financial Centres Index by Z/Yen Group.
- Luxembourg has excellent business infrastructure, an international and highly skilled labour force, an attractive legal framework and a stable macroeconomic environment.
- There are no foreign-exchange controls in Luxembourg.
- Luxembourg has a dedicated national financial technology (fintech) platform called the Luxembourg House of Financial Technology (LHoFT) Foundation. This public-private sector initiative brings together financial institutions, fintech innovators, academia and public authorities to drive fintech development and connect with other fintech centres globally.
Sophistication of Banking Systems
- The vast majority of the more than 120 banks operating in Luxembourg are foreign-owned, with only five having their head office in the country.
- Luxembourg is a key private banking centre in the eurozone and one of the largest fund management centres in the world.
- Luxembourg has a well-developed debt market with both government and corporate bonds available. The government issued its first sovereign sustainability bond in 2020. Outstanding debt securities stood at USD890 billion at the end of 2020.
- The banking industry is regulated by the Commission de Surveillance du Secteur Financier (CSSF). As a eurozone country, it is also covered by the Single Supervisory Mechanism (SSM). Luxembourg’s central bank is the Banque Centrale du Luxembourg (BCL).
- For businesses with taxable income of less than EUR175,000, the corporate tax rate is 15%. For businesses with taxable income between EUR175,000 to EUR200,001, the corporate tax will be computed as EUR26,250 plus 31% of the taxable income over EUR175,000. For companies with taxable income above EUR200,001, the corporate tax rate is 17%.
- In addition to the corporate tax above, companies also pay a solidarity surtax of 7% on the corporate income tax rate and a municipal business tax, which varies according to location.
- Companies are subject to a net wealth tax of 0.5% on their net wealth up to EUR500 million and 0.05% on the component above this amount.
- Resident companies are subject to tax on their worldwide income whilst non-resident companies are taxed on Luxembourg-sourced income.
- The standard Value Added Tax (VAT) is 17% with certain goods and services qualifying for lower rates of 14%, 8%, 3%, or are VAT-exempt.
- Interest income is taxed as corporate income. Interest expenses are generally tax-deductible. Whilst there are no thin capitalisation rules in Luxembourg, in practice the tax authorities apply an 85:15 debt-to-equity ratio on intra-group financing participation. The interest in excess of the prescribed ratio will be disallowed for corporate tax purpose and may be subject to 15% withholding tax.
- There is no stamp duty in Luxembourg.
- 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. Withholding tax of 0% or 15% is charged on dividends paid or payable to non-resident companies, where no tax treaty is in place. Rates range from 0% to 15% where a tax treaty is in place and the non-resident can provide a Certificate of Residence.
- Luxembourg has tax treaties with more than 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 centres.
- 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.
- 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 eurozone country with trading hours that overlap with Asia, Europe and North America.
- 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
- BCL is an autonomous institution and a member of the European System of Central Banks (ESCB).
- The European Central Bank (ECB) supervises banks within the eurozone that are regarded as ‘significant’ through the SSM, and other ‘less significant’ banks are supervised by the national central bank. In the case of Luxembourg, it is the banking regulator, CSSF.
- A company is resident if it has its head office in Luxembourg.
- 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 EUR10,000 to customs.
The Payment Services Directive (PSD2), which is law across all EU Member States, provides enhanced consumer security in the developing fintech environment i.e., for electronic payments such as mobile payments, credit transfers, online payments and direct debits.
- Prohibition of surcharges on credit/debit card payments.
- Imposition of strict security requirements, including the protection of financial data.
- Increased competition between European payment service providers.
- Greater consumer rights, such as ‘no questions asked’ refunds on direct debits in euros.
|TARGET2-LU||The eurozone's Real-time Gross Settlement (RTGS) system|| |
|EURO1||Pan-European RTGS-equivalent net settlement system|| |
|STEP1||Pan-European net settlement system|| |
|STEP2||Pan-European Automated Clearing House (ACH)|| |
Single Euro Payments Area
|Pan-European payment infrastructure|| |
|SCT Inst |
SEPA Instant Credit Transfers
|Pan-European instant payments system|| |
SEPA Direct Debits
|Pan-European direct debit system|| |
|RT1||Pan-European real-time EUR credit transfer system|| |
- All credit transfers are automated. They accounted for only 1.5% of payment transactions in terms of volume, but 90.1% in terms of value, in 2020.
- 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 within the same day.
- Credit transfers are used for payroll, supplier and third-party transactions.
- The SCT Inst 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)
- Used for low-value, regular payments such as utility bills.
- Direct debits made up 0.4% of payment transactions in terms of volume in 2020, and only 0.5% in terms of value.
- The 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 are cleared within the same day through STEP2.
- Bank debit/credit cards are most commonly used for low-value, point of sale (POS) transactions.
- The main credit 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 mainly processed through SIX Payment Services (a card-processing company with major operations in Switzerland, Austria and Luxembourg), except American Express and Diners Club, which use their international card schemes.
- Credit card penetration is high with 3.05 cards per capita, in comparison with 1.3 per capita for debit cards.
- Digital Lëtzebuerg (digital Luxembourg) executes the government’s digitalisation strategy, which focuses on five key areas—skills, policy, infrastructure, ecosystem and government—to advance Luxembourg as a digital nation.
- ABBL has launched a ‘fintech ecosystem map’, which provides essential information for fintech companies, such as listings of all fintech companies, relevant government institutions and regulators, R&D facilities, and financing bodies.
- Regulation around fintech is still in its early stages, with start-ups and fintech companies falling under the scope of existing laws and regulations, and all applications being made to the CSSF.
- E-commerce in Luxembourg is worth EUR740 million, of which 18.5% is mobile commerce.
- All the major banks as well as online e-payment providers (such as PayPal, Cashcloud and Saferpay) offer online and mobile payment services.
- There is an active market in cryptocurrencies, with one in ten people owning a cryptocurrency. The CSSF has adopted a cautious approach to virtual currency and does not have any specific regulations in place, despite growing interest in initial coin offerings (ICOs).
- The EU’s overall view of bitcoin is that “no member state can introduce its own currency”. Cryptocurrency exchanges are legal, depending on the country, and should be operated under the Anti-Money Laundering Directive, according to the European Commission.
Cash, Cheques and Money Orders
- Cash is still a common form of payment, especially for low-value retail transactions.
- Cheques, an increasingly rare form of payment in Luxembourg, are settled bilaterally by banks.
- Western Union is the main service provider for international remittances.
Sources (Intro & Corporate Treasury):
World Economic Forum, Bank of International Settlements, OECD, PwC, Trading Economies, CIA World Factbook, IMF, DBS, Luxembourg for Finance, Commission de Surveillance du Secteur Financier, Association of the Luxembourg Fund Industry, European Central Bank, Luxembourg House of Financial Technology (LHoFT) Foundation, Banque centrale du Luxembourg (BCL), J.P. Morgan.
Sources (Banking & Payments):
Bank of International Settlements, DBS, Luxembourg for Finance, Commission de Surveillance du Secteur Financier, European Central Bank, TheBanks.EU, Banque centrale du Luxembourg (BCL), The Government of Luxembourg (gouvernement.lu).