Corporate taxation is beset by worldwide complexity and EU legislation, but Luxembourg's fund services business and their clients require openness and certainty – and greater consideration of international competitiveness issues.
Luxembourg's tax environment as it applies to funds, underlying investments, asset acquisition and holding structures and employment is significantly more complex than it was 10 or 15 years ago. The grand duchy has traditionally enjoyed an international reputation for speed and efficiency but in recent years as EU and international initiatives to increase transparency and curb abusive tax minimization strategies multiply, such speed and efficiency is under pressure. The pace of change in the taxation field has never been as fast as during the intervening years, and it appears unlikely to stop now.
The global push to boost transparency and expand exchange of information between countries on tax matters means an increasing burden and responsibility for accurate, timely and updated information on asset servicers, imposed by law but also as a result of outsourcing by clients whose investor bases and portfolios continue to expand and diversify.
The changes include a succession of EU directives on administrative co-operation on tax issues (DAC 2, 6 and 7), two Anti-Tax Avoidance Directives and revised rules on transfer pricing, as well as an initiative to harmonise cross-border multinational tax rates through the Business in Europe: Framework for Taxation (Befit) framework.
Then there's the impact of the green transition. Sustainability claims must be substantiated, particularly if investment products or their underlying assets – from solar and wind electricity generation and hydrogen power systems to energy-efficient buildings – benefit from tax advantages. Whether through funding of green innovators or financing of infrastructure, alternative investment products are closely intertwined with the embrace of sustainability.
All these present challenges to alternative fund service providers, but also opportunities to develop new capabilities and expertise – the sector has had to boost transparency, upgrade monitoring systems, and enhance risk management capabilities and governance and oversight structures.
This has placed new demands on the sector's existing workforce, entailing upskilling and new hiring – in the face of an ongoing recruitment and retention squeeze felt right across the financial sector and beyond in the grand duchy. Enhancing in-house expertise and IT systems has been a factor driving ongoing consolidation as groups look for international scale.
Multi-jurisdiction risk
Marie Sophie Hélier, tax partner at L3A member EY, argues that the asset servicer tax function has become a synonym for complexity across multiple jurisdictions with a variety of reporting regimes. Reputational risk can ultimately be as costly as fines and other penalties, so the added value of efficient and compliant tax service functions has soared. More information does not just mean more hours of work but a requirement for increased expertise is needed in compiling, filing and distributing information.
It's an issue L3A has been seeking to address for the benefit of its members and ultimately their clients, for instance in publishing a position paper encompassing a range of practical information and advice on every aspect of the business from opening bank accounts to the role of boards of directors.
The association is already planning a summer school set for 2025 covering key issues including substance, structuring, transfer pricing and tax treaties. It's part of the DNA of L3A and its members; communications and sharing ideas, innovations and opinions are vital in a fast-evolving environment.
If Luxembourg wants to remain an attractive jurisdiction in which to do business, the country's tax authorities also have a significant responsibility. Lessons could be learned from the likes of the Irish, Swiss and Maltese tax departments, which are working hard on communication with stakeholders with the goal of delivering the fiscal certainty, security and clarity that service providers, asset managers and investors demand. New Direct Taxation Authority head Jean-Paul Olinger has already indicated his intention to modernise and streamline the administration.
Addressing Luxembourg's corporate taxation
Reducing tax is a key competitiveness metric; Luxembourg does not compete favourably with comparable jurisdictions. Corporate taxes average 25% when municipal business tax is added to the national corporate income tax, well above the averages for other EU and OECD countries. The coalition government that took power last autumn has recently reduced the country's overall corporate taxation rate by 1%, but there is still some way to get down to the 21% level that businesses advocate as both fair and competitive.
However, there are opportunities to lower the industry's costs in other areas. There is increasing momentum behind the idea of shared functions and processes, such as anti-money laundering controls and customer due diligence. A centralised, independent and regulated investor compliance platform would make a great deal of sense by lowering the cost burden for each user company, helping to reduce reputational risks, and further enhancing Luxembourg's standing as a servicing leader.
This is yet another digitalisation opportunity, one in which the potential of artificial intelligence would appear to be huge. AI is already starting to be make a difference in the industry, from writing up board meeting minutes to compiling and checking tax reporting. It offers a myriad opportunities to build on the capabilities that already mark the fund and asset servicing world.
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