Brexit helps Luxembourg thrive after abandoning Swiss-style secrecy
Jeremy Warner
6 min read
luxembourg banking sector
Nearly 10 years ago, and after years of international pressure, the Grand Duchy of Luxembourg agreed to abandon its strict bank secrecy laws and cooperate with other jurisdictions in rooting out tax evasion.
For a country where finance accounts for more than a quarter of gross domestic product, it seemed a particularly risky thing to do, even if, as a member of the European Union, there may have been little choice in the matter.
Tiny little Luxembourg had made itself rich beyond the dreams of avarice, with the highest per capita income in the world bar Qatar, by acting as banker to wealthy Europeans hiding their money from the avaricious eyes of domestic tax authorities.
From far and wide they came to entrust their money to this picture postcard piece of European hinterland, perilously carved out from the confluence of borders between Germany, France and Belgium.
The principality was also key to a number of elaborate tax avoidance schemes involving profit dumping by major multinationals. This too has been dismantled under pressure from Europe and the United States
It'll be a disaster, a catastrophe, many bankers complained at the time. Luxembourg was losing its USP, and once gone, there would be nothing left to attract business and finance.
How wrong they were. In the event, it turned out to be the very reverse. Luxembourg has continued to grow and prosper regardless, not just as a country, but specifically as a financial centre.
By the end of 2021, private banking deposits had nearly doubled to €600bn (£530bn) from the levels that ruled just before the banking secrecy laws were abandoned.
Undeterred by the new transparency, a growing stream of bankers, insurers and fund managers have been beating a path to Luxembourg's door.
"We have gone", says Nicolas Mackel, chief executive of Luxembourg for Finance, "from tax haven to safe haven in just one decade, and we have done it by somehow transcending the nation state".
There are three official languages in Luxembourg, not including English, which virtually everyone speaks in any case. Some 40pc of the workforce is foreign born, many of them living in neighbouring countries and commuting daily.
Other than international diversity, what's the appeal?
It's not the whole story by any means, but there has been one undeniable windfall which has nothing to do with Luxembourg itself – Brexit.
More than 100 firms – mainly private banking, insurers and fund managers – have either set up from scratch or greatly expanded their operations in Luxembourg since Britain voted to quit the European Union nearly seven years ago.
Denied the direct access to European markets it once enjoyed – and so far at least, also the "equivalence" status that would grant partial access – the City has been forced to shift operations to the Continent to carry on serving many European clients. Along with Frankfurt, Paris, Dublin and Milan, Luxembourg has been a major beneficiary.
The numbers are not huge – no more than 3,000 personnel have relocated from London to the Duchy as a direct result of Brexit. For Britain, this is not a huge loss, but for Luxembourg it's worth a lot, both in terms of immediate bucks and future growth opportunities. Each of those transferred jobs will be multiplied several times over in the local economy.
Not that the Luxembourg government is at all happy about Brexit.
“We always had very good relations with the UK,” says Yuriko Backes, the Grand Duchy's finance minister, “and we miss its presence in the EU.”
To her mind, Luxembourg and the City were never in competition with each other, but instead are complementary financial centres that feed off each other.
“Unlike other countries, we did not go out to proactively find companies that are happy to leave the UK as a result of Brexit. But yes, there were and are companies that have chosen to come either to establish their activities here or to expand already existing operations - mainly private banking and administration, but also a dozen insurers.”
So why choose Luxembourg? It's certainly not for low rates or personal and corporation tax. Luxembourg's overall tax burden is actually quite a bit higher than the UK's at nearly 43pc. Personal and corporate tax rates are broadly comparable, and way above those of Singapore and Hong Kong, where low tax rates are a major draw for top talent.
“To be competitive with low taxes is not really the way forward,” says Backes. “Luxembourg has very much changed in that respect over the last eight to 10 years and is a different country. All credit to my predecessor to get out of that place and to the government in making Luxembourg competitive in other ways.”
Aggressive tax planning and banking secrecy are a thing of the past, she insists. Luxembourg is today one of the keenest and most active advocates on the international stage of a level playing field on matters of taxation. Companies come instead, she says, because of Grand Duchy's relative stability and predictability.
“There are not many countries in the world where you have such a multinational, multilingual workforce,” Backes says. “We are a very international and diverse community.”
It is also self-evidently an exceptionally well governed country, as smaller nations often are, with a debt to GDP ratio of just 25pc even after the interventions of the pandemic and the energy crisis, allowing the almost unique luxury of free public transport as well as ultra-generous state pensions.
Government is conducted on a "tripartite basis", with the interests of both unions and business fully accommodated in all decision making.
At just 4.3pc, Luxembourg has the lowest inflation rate in Europe, helping to limit the cost of living squeeze experienced elsewhere in Europe and enabling a relatively low national wage settlement of just 2.5pc.
Amid such apparent perfection in governance, there must be weaknesses, and one of them is surely the sheer size of the banking industry, further swollen by Brexit, relative to the rest of the economy.
At the last count, total assets of the Grand Duchy's banking sector were 12 times the size of GDP. That's a mighty big potential liability for such a small country to have to underwrite in the event of a banking crisis.
Was she not worried about recent events in Switzerland and the US, where banks have collapsed, I ask Backes.
“Our strength is being part of Europe's single market, this is our history and our future,” she says. “What happened in the US couldn't happen here because our regulatory setup is different. My banking supervisor sleeps well at night, and so do I.”
