Luxembourg For Investor Protection And Client Confidentiality

22.06.10

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Luxembourg?s reputation as a leading financial centre is unblemished despite the global financial crisis. Over the last few years when governments worldwide have been in hot pursuit of tax evader

Luxembourg?s reputation as a leading financial centre is unblemished despite the global financial crisis. Over the last few years when governments worldwide have been in hot pursuit of tax evaders and focused on recovering tax revenue undeclared in ?tax havens?, and banking stability has been brought into question, Luxembourg?s unprecedented status as a financial centre of excellent repute has gone from strength to strength.

Luxembourg is the second largest investment fund centre in the world after the US. It is the premier assurance location in the European Union and the private banking centre of the Eurozone. In 1957, Luxembourg was one of the six founding members of the European Economic Community (EEC), which became the European Union (EU) in 1993. It houses a number of EU institutions including the European Commission and the European Investment Bank. Luxembourg has developed from a private banking centre to a leading domicile for investment funds.

As a sovereign state, this tiny landlocked financial centre is not affected or controlled by another country or jurisdiction and is renowned for its social, political and economic stability.

Luxembourg?s financial sector is the largest contributor – more than a fifth – to the country?s economy and its gross domestic product per head is the third largest. In its recent annual report for 2009 the financial regulator, Commission de Surveillance du Secteur Financier (CSSF) ? was satisfied with the way the financial infrastructure had withstood the global financial crisis.

During the year, assets under management amounted to ?1.9 trillion, up from ?1.5 trillion in 2008, an increase of 24%, according to global fund data provider Lipper. Equity fund assets hit ?604 billion, an increase of 54% boosted by the recovery in stockmarkets. Bond funds grew 34% with total net assets amounting to ?420 billion. The economy embraces 12,115 funds and 360 custodian companies.

Director of fiduciary operations at Lipper, Ed Moisson, commented: ?It is difficult to track and quantify the movement of assets from other fund domiciles, but Luxembourg is certainly benefiting. Managers are responding to demands from investors for better transparency and visible regulation in the face of events over the financial crisis.?

Luxembourg?s financial centre excellence has been advanced by its geographical location, multi lingual culture, and small size where regulatory decisions can be taken quickly. It has a modern legal and regulatory framework that is continuously updated, inspired by regular consultation between the government, the legislator and the private sector.

Luxembourg has built a reputation for anti money laundering practice, banking confidentiality and investor protection:

Anti money laundering

Luxembourg was one of the first countries to make it a criminal offence to launder money through drug trafficking and to prosecute launderers. Subsequently money laundering was connected to other organised crimes such as kidnapping, arms trafficking and corruption.

Banking confidentiality

Luxembourg is renowned for its banking confidentiality and will not divulge client information to third parties except where required under regulatory legislation in other jurisdictions or in connection with a crime-related activity.

Under the European Savings Tax Directive, Luxembourg applies the withholding tax option and not the automatic exchange of information. As at 18th March 2010, Luxembourg has 20 double tax treaties with other jurisdictions that provide for the exchange of information as foreseen in the Organisation for Economic Co-Operation and Development?s model treaty. That is, any country requesting client information must have exhausted all usual methods for obtaining information, and provide evidence showing that the information required cannot be obtained by any method other than the exchange of information as foreseen by the treaty.

Investor protection

The financial security is guaranteed by its regulatory bodies: the CSSF and the CAA (Commissariat aux Assurances).

Under Luxembourg law, investment and insurance companies are subject to strict regulation and compliance in addition to the relevant EU Directives. One vitally important aspect is that 100% of assets invested within the framework of any insurance product must be held by a third-party custodian bank approved by the Luxembourg state regulator. The custodian bank is also required to ring-fence clients? assets and is bound by the regulator?s legal powers to protect the assets on behalf of policyholders.

The tripartite system between insurance company, the state regulator and an approved custodian bank is known as the ?triangle of security? and ensures the legal separation of clients? assets from the insurance company, shareholders and creditors.

The protection of 100% of assets compares very favourably with the equivalent in the UK and other offshore centres where generally the policy holder protection provisions normally guarantee only 90% of the value of an investment.

Tax efficiency

Investments based in Luxembourg for non-resident investors are tax-free on all capital gains. Income is accumulated free of all taxes, with the exception of dividends arising from underlying investments (subject to a small withholding tax in those countries that make this deduction). Any assets owned in your own name should be declared in accordance with the tax rules of your country of residence.

As an EU Member State, Luxembourg can benefit from tax advantages on insurance based products like investment bonds issued by another Member State. The Isle of Man, Jersey and Guernsey are not members of the EU.

Over the years Luxembourg has finely tuned its financial services industry into one offering unparalleled protected investment, client confidentiality and a range of legitimate tax planning opportunities. Many British expatriates in countries like Spain, France and Portugal have already taken advantage of Luxembourg?s favourable tax arrangements. A consultation with an experienced adviser in taxation and wealth management such as Blevins Franks can help with structures suitable for your individual circumstances.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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