Political stability makes Luxembourg a compelling choice
Visitors to Luxembourg are often surprised and pleased to discover that public transport is free. Step onto a tram in Luxembourg city, and there is no conductor to pay, and no machine to stamp tickets.
In a drive to tackle traffic congestion and emissions, last year the Grand Duchy introduced a new policy where no charge exists for using the trains, trams and buses that criss-cross the small country sandwiched between Germany, France and Belgium.
The policy is an attractive perk for its 602,000 residents, 175,000 cross-border workers and 1.2 million annual tourists.
It’s also emblematic of something else: Luxembourg’s runaway economic success and almost unrivalled political stability – which has become a magnet for its booming financial services industry – and generated a tax windfall to boot.
Over the past few decades, Luxembourg has cemented its position as one of the world’s leading international fund domiciles, usually hosting the structures that are used by private equity firms, hedge funds and asset managers based in other centres like the US or UK.
It’s a policy that has been so successful, for so long, that it has fuelled a powerful economic boom that has showered benefits across the entire country – including the nation’s cheerful commuters, says George Ralph of business IT consultancy RFA.
“Luxembourg has very successfully developed its funds industry, but has managed to do this to the benefit of the whole country,” he says. “As such, it has a triple-A rating and political stability.”
He continues: “This political stability is crucial, as it mitigates the risk of subsequent legislative changes that could adversely impact fund complexes over the longer term.”
This reputation serves as a powerful advantage over rival centres. Many financial firms have first-hand experience in other less predictable countries, where the tax treatment of SPV-type legal structures has suddenly changed, often with damaging results.
Ranked as the world’s richest country in terms of GDP per capita, Luxembourg seems uniquely shielded from such volatility. Its administrators and citizens alike seem aligned in their determination not to kill off the golden goose.
“Of course, there is also risk of more centralised-based changes from the OECD or EU, but Luxembourg has a very sound approach, so is less likely to be adversely impacted,” he says.
“For example, its basic corporation tax rate is already 15 per cent, which is the minimum that has been suggested by the OECD in its two-pillar plan to reform international taxation rules versus 12.5 per cent for Ireland.”
For technology vendors like RFA, who specialise in cloud, data and cybersecurity solutions, having a presence in Luxembourg is essential as many banks, advisory firms and other financial groups who rely on RFA to effectively service their business IT solutions.
Founded in 1989 RFA, which has over 800 clients globally divided between hedge funds and private equity, in 2018 launched a new private and public financial cloud in Luxembourg.
The move allowed RFA to offer a range of services to both its existing and new financial clients in Luxembourg, Madrid, Hamburg, Paris, and the wider region.
RFA now operates two secure, tier-one data centres in Luxembourg which meet the required standards for firms regulated by the Commission de Surveillance du Sector Financier (CSSF) and continue to offer Best in Class Azure and AWS solutions for those wanting to leverage public cloud.
The firm offers clients managed private cloud, infrastructure-as-a-service, and secure multi-cloud services, which offer the flexibility and scalability of public cloud services, whilst benefiting from the security and direct control of the private cloud.
It also operates its own dedicated Security Operations Centre (SOC) designed to monitor suspicious activity on all of its clients’ networks 24 hours a day, 365 days per year.
Usually, this kind of service is provided by an outsourced third-party provider but RFA offers its own in-house managed detection and response service for clients.
ESG is a growth area
As for the future, Luxembourg is eager to position itself at the forefront of two emerging trends, says Ralph.
The growing interest globally in funds which comply with environmental and social governance (ESG) objectives, represents a big opportunity for the Grand Duchy, which is pushing hard to become a centre for ESG fund domiciles and build expertise in the field.
“Luxembourg has always been at the forefront of ESG funds,” says Ralph.
“The EU’s Sustainable Finance regime is central to this, and will continue to be so – as it develops, it will create additional distribution opportunities for managers or Article 8 and 9 funds.”
Another profitable area is in financial technology, where again Luxembourg is pulling every lever it can to cultivate a new and thriving industry.
He says: “Luxembourg has a number of centralised initiatives to support the development of fintech, which include incubators and funding. It’s very keen to develop these areas, so this is an area of government focus.”
Ralph believes that Luxembourg is lagging slightly on another potential growth area: cryptocurrencies.
According to a recent PwC report, only 2 per cent of crypto funds are based in Luxembourg.
“We don’t see Luxembourg as a significant crypto domicile; the regulator and legislature aren’t really pushing this.”
The challenge with full-scope Alternative Investment Funds (AIFs) of more than EUR100 million is simply finding a depositary that is willing to accept strict liability for the safe keeping of crypto assets – a common challenge across EU jurisdictions.
However, with its trademark flair for spotting a coming opportunity for its bustling financial sector, Luxembourg has also cottoned onto something else: the boom in non-bank lending activities, and the rise of private debt and real estate as emerging asset classes, says Ralph.
“The legal and regulatory landscape in Luxembourg is perfectly suited to the growth of these strategies, as it has every conceivable corporate and regulatory structure within its toolkit.”
The SCSp (Société en Commandite Spéciale), Luxembourg’s equivalent to a common law tax transparent partnership, has played a critical role in the success of this push, he adds.
While there will be a challenge from the Irish Investment Limited Partnership (ILP), it’s worth recognising how well-developed Luxembourg’s support and service infrastructure is for the SCSp.