Luxembourg is heading to the polls on Sunday. The outcome is anticipated to reaffirm the Grand Duchy’s status as an international financial centre rooted in political stability. Two issues, however, stand out: talents and taxes.
A recent PolitPro.eu poll suggests the current coalition between social-democrats, liberals and greens would lose its majority, with a collective 48.4 percent of the vote, on the back of fading popularity of the greens. The christian-democrats would remain the biggest party, with 28.3 percent, and would be kingmaker in the coalition talks. The Pirate Party would reach nearly 10 percent of the vote, compared to 3.1 percent in 2018.
Banks and insurance companies have noted that recent round-tables and political debates with representatives of the seven main political groups have made clear that the financial sector continues to feature as a central element in all corners of the political spectrum.
“This is not a great love affair, but rather a marriage of convenience,” said Jerry Grbic, CEO of banking association ABBL, in a written comment provided to Investment Officer. “The image most often put forward is that of a banking centre that is a cash cow, in reference to the tax contributions made by its players.”
ABBL, according to its 2022 annual report, has calculated that the banking sector, with 121 banks, contributes about 35 percent of the Grand Duchy’s tax income, and accounts for about 25 to 30 percent of the country’s GDP. That’s just the banking sector, which - with some 26,000 employees - employs about half of the country’s financial workforce. Fund and asset management, and insurance, also underpin Luxembourg’s financial status and account for the other half.
Competitiveness and attractiveness
The importance of maintaining the competitiveness and attractiveness of the financial sector deserves more attention, Grbic said, especially in the context of major societal challenges such as sustainability and digitalisation.
“Our decision-makers overlook the essential role that banks play in the daily lives of our fellow citizens and their decisive role in financing the ecological and digital transition of our societies,” said Grbic. “The cow is certainly still producing milk, judging by the banks’ recent results. But let’s face it, this milk is losing its nutritional value for society, and there is a palpable risk that the cow’s udders will start to dry up.”
ABBL has defined three priorities voters need to consider. First, businesses in Luxembourg aren’t able to support more measures to reduce working hours at a time of labour shortages. Secondly, Luxembourg needs to continue to attract talent from abroad, not just any talent but specialists able to deal with challenges in regulatory compliance, digitalisation and sustainability, Grbic said. Reskilling efforts need to be made as well.
Is the grass green enough?
Finally, the tax regime needs to remain conducive, ABBL believes.
“We live in a competitive world in which decision-makers also take their decisions by looking at the tax context in the country in which they are established or are going to establish themselves. Luxembourg’s tax framework must therefore remain at least as attractive, if not more so, than that of other EU countries. Otherwise, the cows will go and see if the grass isn’t greener elsewhere.”
One particular aspect triggered debate: the need for more bilateral treaties to prevent double taxation. Ireland, for instance, is eating into Luxembourg’s market share for international equity ETFs because Dublin has such a treaty with the US. As a result, investors see dividends from US companies in such funds taxed at only 15 percent, compared to 30 percent in Luxembourg. Although Luxembourg remains attractive for non-US equity ETFs, particularly credit and fixed income, the grand duchy has witnessed the departure of several major equity ETFs to Dublin in recent months.
The Green party sees a need to keep Luxembourg’s double taxation treaties up to date. “We support the extension and update of this network of double taxation treaties in order to increase competitiveness,” a spokesman said. “In fact, the double taxation treaty with the United States dates back to 1999 and has not been updated in over a decade.”
“Luxembourg has other advantages that make our financial center attractive for ETFs. The subscription tax in Luxembourg has many exceptions for various types of funds and the rates, ranging from 0.01% to 0.25%, are the most attractive in Europe after Dublin,” said a spokesman for the social-democrat LSAP. “In our election program, we commit to a sustainable financial center, which results in tax relief for sustainable funds.”
“Luxembourg generally needs to constantly negotiate double taxation treaties in order to get the best deal for the people and strengthen our competitiveness,” responded a Pirate Party spokesman.
Greenwashing
“The Pirates are aware of the importance of the financial centre,” he said. “We want to make the financial centre ready for the future by aiming it to be a pioneer in terms of green finance. There is a lot of greenwashing going on here. For us, it is clear that only a taxonomy that excludes nuclear and gas can serve as a guide for a green financial centre.”
During Luxembourg’s political campaign, many parties have flagged costly transformations while not offering detailed calculations how such ambitions would affect the country’s budget. Like some other EU member states, Luxembourg ran a budget surplus of 1 billion euro in 2022, or 0.2 percent of GDP, but this turned into a small deficit in 2023. The government has projected a deficit of 1.5 percent of GDP for 2024 and 1 percent for 2025. That’s still well below the average 2022 deficit for 4.7 percent for countries in the eurozone.
(This article was update to add a comment from LSAP in the 13th paragraph.)