Luxembourg's FM Outlines Financial Centre Challenges

by Ulrika Lomas, Tax-News.com, Brussels

24 May 2011

During a recent interview, Luxembourg’s Finance Minister Luc Frieden alluded to the new challenges currently facing the country’s financial centre in the wake of the global economic crisis, and to government efforts designed to strengthen Luxembourg as a location.

While confirming that Luxembourg’s financial centre weathered the crisis relatively well, Finance Minister Frieden acknowledged that the country’s banking results are more modest than before the crisis. Noting that bank balance sums declined in 2009 and 2010, Frieden highlighted the fact that some institutions have, however, shown positive development and pointed out that around 500 new jobs were created in the financial sector last year.

According to the minister, fund-managed wealth in Luxembourg is continuing to increase, and Luxembourg has been able to extend its leading position in the funds sector since the crisis, even as regards new business.

Underlining the need to draw lessons from the crisis, Finance Minister Frieden explained that regulations were rightly created in Europe, in areas where there was a clear need for action. Indeed, Frieden maintained that certain new provisions act in the interest of “the new financial world”, opening up new business opportunities for Luxembourg. Here, Frieden cited new private equity and hedge funds rules within the European Union (EU). Frieden also emphasized that efficient, robust and pragmatic supervision of the financial sector is a key location factor.

Confident that the new regulations will not serve to hinder the country’s banks, Frieden stated that in general the banks are well stocked with capital and noted that the majority of institutions already fulfil the Basel III capital requirements.

Alluding to plans to increase the withholding tax rate for non-residents to 35% from July 1 under the European Savings Tax Directive, Frieden insisted that the new higher rate would not pose a competitive disadvantage for the country, emphasizing the fact that the banks and their clients are well prepared for the change, given that the provision was adopted eight years ago.

Referring to ongoing negotiations on interest taxation within Europe as “difficult” but “constructive”, Frieden underscored the need to find a solution which guarantees tax compliance, cross border trade, banking data protection and jobs in wealth management in EU member states.

All too aware that Luxembourg faces keen competition with other financial centres, the minister emphasized the need to strengthen the cornerstones of the Luxembourg financial centre, namely wealth management, investment funds, structuring of international transactions, international lending and insurance, by constantly observing new trends. Luxembourg’s regulations must be international, he added, and noted that the government is currently drafting new texts designed to offer investors both legal certainty and new products.

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