The truth about Luxembourg

Views about Luxembourg vary. But what many don’t realise is that Luxembourg is increasingly attracting people for sound economic reasons rather than as a planned offshore tax strategy. Wim Piot, Partner and Tax Leader at PricewaterhouseCoopers Luxembourg says growing diversification from the non-financial services sector – witness recent investment moves by Amazon, Paypal and Cargolux – can only help Luxembourg’s long-term investment case.

The perception of Luxembourg as merely another offshore centre can be hard to shake off. But these perceptions are changing says Wim Piot, PwC’s tax partner based in Luxembourg. “These misconceptions still exist because people often misinterpret what an offshore financial centre is,” he says. “They also fail to take into account the changes that the private banking sector has being going through. Luxembourg remains an offshore fi nancial centre in the sense that it attracts wealthy nonresidents. However, these cross-border investments are no longer based on a default strategy; they are motivated by choice. In other words, private clients no longer choose Luxembourg because of the tax issues in their home country, but because of sound economic reasons.”
Other reasons too. Luxembourg offers a highly strategic position, politically stable environment, a financially healthy economy and a skilled, multilingual workforce. Add to this mix excellent basic infrastructure, flexible and welcoming authorities and an attractive lifestyle and you can make a convincing case for Luxembourg.
The historic weakness of Luxembourg, linked to the predominance of the financial sector, has been overcome in the past few years due to a more open attitude, better flexibility and generally better outward communication Mr Piot says. “The Luxembourg Government has constantly taken initiatives to follow international trends and position Luxembourg for new business developments. At the beginning of June, the government announced a major new investment in the biomedical research sector. The country’s small size means it can react quickly and be fl exible enough to cope with new demands.”

Information is power
But needs to be used responsibly Luxembourg – and Switzerland too – support the European Union’s efforts to ensure investment income is taxed under the new Savings Tax Directive. But Luxembourg insists it will not be persuaded by Brussels to adopt the exchange of information legislation with other member states for tax purposes, says Mr Piot. “Luxembourg is not opposed to exchanging information with other Member States for tax purposes. Luxembourg just wants to ensure there is a level playing field and avoid adverse business consequences,” says Mr Piot. That is why the move towards an exchange of information is dependent upon the position of different jurisdictions he says. “Disclosure of information has an impact that goes far beyond pure tax considerations. In any event, the increasing withholding tax rate meets the goal of the EU savings directive: ensuring a minimum level of effective taxation of cross-border interest income and encouraging taxpayers to report their interest income in their home country.” Banking secrecy can also be about professional privilege. Data confi dentiality issues can reach far beyond tax questions, and cannot be envisaged from a pure tax perspective without misrepresenting the issue, says Mr Piot. “In addition, to nip another misconception in the bud, we would like to stress that rules have been implemented to make sure that unscrupulous taxpayers do not take advantage of confi dentiality rules to commit certain offences, such as tax fraud. The Luxembourg anti-money laundering legislation is one of the most stringent in the world, and Luxembourg actively works with other governments to fight international financial crime.”

Retaining human capital
One of the most difficult areas for foreign companies when relocating is human capital. This issue is not specific to Luxembourg, of course. It is easy to forget though that Luxembourg is a country where English is widely spoken. It’s also located in the very heart of Europe, close to France, Belgium and Germany, providing a genuinely multicultural environment. “This opens up recruitment opportunities,” says Mr Piot. “I believe Luxembourg is reacting adequately to cope with its perceived weaknesses. There have been major enhancements in the working permit policy and the international school has increased its capacity, to name just two recent improvements which have already started paying off.” PwC Luxembourg recently commissioned study work around the issue of attracting more international companies. The differentiating factors for Luxembourg says Mr Piot, became rapidly obvious, as mentioned above: a highly strategic position, a politically stable place, a welcoming and safe environment, a financially healthy economy and excellent basic infrastructure. In other words, a very attractive lifestyle.

Anticipating client trends
But what of client trends? What issues does PwC increasingly think will come to dominate in the near to medium future end that clients should plan for, particularly in the areas of tax restructuring and compliance? “Although tax considerations often play a major role in effective company structuring,” Mr Piot acknowledges, “we have an integrated approach and look for an overall optimisation of global group structures. Tax aspects cannot be assessed on a stand-alone basis but should be part of wider considerations.”
Luxembourg also has major non-tax advantages in a number of areas, he adds. “But it is certainly clear that tax structuring should be supported by operational changes in terms of location, of people and business. Letterbox companies are clearly on their way out. The European Court of Justice has ruled that tax planning is allowed for companies if it is supported by genuine economic activities which can be easily developed in Luxembourg.”

Take advantage of PwC strengths
What strengths, then, does PwC Luxembourg offer compared to its competitors? Besides PwC’s obvious specialisation and investment capacity, Mr Piot says PwC offers clients a multi-competencies approach, integrating all issues in an all-in-one business solution. “In addition, we have developed an industry approach enabling us to identify our clients’ needs and, due to our size, we can rapidly adapt our services to face new demands.”
What about advantages that the Pricewaterhouse/Coopers & Lybrand merger bought to Pricewaterhouse/Coopers & Lybrand and their clients? “The merger provides PwC with the advantage of size and leadership. Due to our size, our people are able to specialise in specifi c industries. We have a larger investment capacity, and as a result we are thought as leaders in the market, like in investment management for instance. We are also conducting a major study on the distribution of non-UCITS in Europe for the European Commission.”

Key points:

• Luxembourg remains an offshore financial centre attracting wealthy nonresidents. However, these cross-border investments are no longer based on a default strategy – they are motivated by choice.
• Luxembourg remains the leading private banking centre in the Eurozone. Its skills, proven track record, reputation and a knack for innovation, all account for the success of its private banking sector.
• Estate planning services increasingly offer added-value to wealthy investors who wish to remain in Europe, while taking advantage of a global market and making sure that risk is properly diversified.
• The growth of Luxembourg’s private banking sector has also been sustained by the development of the investment fund sector – now the predominant business of the financial sector. The impact of this industry, changes in the marketplace and the diversification of our economy weighs positively on Luxembourg’s international image.