Luxembourg is hoping to repeat its success as an EU centre for investment funds in the pensions sector.
After setting up fund-friendly legislation in the 1980s, Luxembourg lobbied hard for an EU investment fund regime, and was rewarded with the UCITS directive (Undertakings for Collective Investment in Transferable Securities) which allowed EU-wide marketing for any fund that conformed with the rules. Luxembourg's investment fund sector is now home to funds with $750 bn of assets under management, putting in the top 10 of world investment fund centres.
L:uxembourg is now targetting corporate pension provision, and last year passed legislation which established special purpose vehicles for the two main types of corporate pension scheme: defined contribution and defined benefit models.
The SEPCAV, for defined contribution schemes, is an open-ended pension fund which pays out benefits according to fund performance and the level of individual contributions. In form it is analogous to the SICAV (Societe d'investissement a capital variable), which is the usual entity chosen for investment fund formation, and is an open-ended vehicle having a variable capital which is always equal to the net asset value of the fund. In Luxembourg the SICAV pays no tax other than a capital duty on formation, and a small annual levy on asset value. There are no withholding taxes on distributions.
The ASSEP is a fund in the form of an association which defines benefits and sets contributions accordingly; this would be the form chosen by a typical 'final salary' type pension scheme as used by many UK companies. The taxation structure is similar to that for the SICAV and SEPCAV.
As with investment (mutual) funds, Luxembourg has also the advantage of a good network of double tax treaties with most of the countries into which investments are likely to be made and from which dividend flows will be received. Thus the overall level of taxation of benefits before they pass into the hands of the recipient can be quite low, even approaching zero in some cases.
Harmonisation of pensions is high up the EU's agenda, and Luxembourg is confident of seeing a cross-EU pensions investment regime comparable to the UCITS directive in fund management; when this happens, Luxembourg is ready and waiting to harvest a bumper crop of pension funds. Already some large European companies have chosen to place their funds in Luxembourg under the new legislation, with Unilever being a recent example.
The EU's proposed withholding tax casts a shadow across the Duchy's future in fund management and pensions provision; but the British insistence on global information-sharing instead of a tax seems to have side-lined the issue for the time being - and the Luxembourgers must be hoping it stays that way, although they are of course far too communautaire to say so!
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