Luxembourg should take a page from Ireland’s playbook and deepen its relationship with the United States. The European Union is gradually eroding the regulatory flexibility and pragmatism that once enabled Luxembourg to attract international investors and dominate the fund industry.
Early adoption of the Ucits framework, combined with favourable tax policies and a pro-business environment, laid the foundations for Europe’s largest fund industry. However, the days of frictionless interaction with regulators and the government are long gone.
Where Jean-Claude Schmit, your contact at the regulator, was once a phone call away and could expedite decision making, he has now retired, and his role has been replaced by a slower, more bureaucratic process. Recent governments have offered no solution to this issue.
Losing control
While the adoption of the Ucits framework has been a long-standing success, it also requires Luxembourg to align closely with EU directives and policies. This alignment has increasingly restricted Luxembourg’s ability to make independent regulatory decisions.
The EU has been pushing for stricter regulations and greater harmonization across the union, which has weakened Luxembourg’s competitive edge over other jurisdictions. The CSSF’s role in the industry’s success is no longer what it once was.
Regaining control
If regulatory arbitrage is no longer a viable advantage, Luxembourg should focus on areas within its control. A key opportunity lies in tax and bilateral agreements, which can be (re)negotiated to complement existing EU regulations—a strategy Ireland has already adopted.
This approach would aim to strengthen Luxembourg’s fund industry by addressing issues like corporate taxes and double taxation, while fostering investment opportunities with non-EU countries, especially the US, which leads in global securities markets and foreign direct investment.
While this shift is challenging, it’s essential for Luxembourg to attract greenbacks and other forms of foreign capital to maintain its status as a leading financial hub.
Ireland’s experience
Low corporate tax rates in Ireland have been a major draw for US companies looking to establish a presence in the EU. With a corporate tax rate of just 12.5 percent, along with tax incentives for R&D and grants, Ireland has successfully attracted companies like Google, Facebook, and Pfizer.
More recently, Ireland’s double taxation treaty with the US has made it a more attractive domicile for ETFs than Luxembourg. Irish ETFs are subject to only a 15 percent withholding tax on income from US securities, compared to 30 percent in Luxembourg.
Since passive ETF providers compete over basis points, Luxembourg must strive to negotiate a similar agreement with the US.
Ultimately, Luxembourg needs to reinforce the foundations of its fund industry by returning to what made it successful: a strong alignment between the financial sector and government, along with strategic bilateral tax agreements. The last tax agreement with the US was signed in 1996.
It’s time for an update.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at Finsoft Luxembourg.