6. Financial Sector
Capital Markets and Portfolio Investment
Luxembourg government policies, which reflect the European Union’s free movement of capital framework, facilitate the free flow of financial resources to support the product and factor markets. Credit is allocated on market terms, and foreign investors can get credit on the local market, thanks to the sophisticated and extremely developed international financial sector, depending on the banks’ individual lending policies.
Since the financial crisis and tighter regulation through EU central banking authority and stability mechanisms, banks had become more selective in their lending practices pre-COVID. The private sector has access to a variety of credit instruments, including those issued by the National Public Investment Agency (SNCI), and there is an effective regulatory system established to encourage and facilitate portfolio investment.
Luxembourg continues to be recognized as a model for fighting money-laundering activities within its banking system through the enactment of strict regulations and monitoring of fund sources. Indeed, the number of enforcements reflects the degree to which the government remains committed to fighting money-laundering. The country has its own stock market, a sub-set of which was rebranded in 2016 as a “green exchange” to promote securities (primarily bonds in Luxembourg) reflecting ecologically sound investments.
Money and Banking System
Luxembourg’s banking system is sound and strong, having been shored up following the world financial crisis by emergency investments by the Government of Luxembourg in BGL BNP Paribas (formerly Banque Generale du Luxembourg and then Fortis) and in Banque Internationale a Luxembourg (BIL), formerly Dexia, in 2008. Now, in response to COVID, the government has adopted initiatives to assure both liquidity and solvency of banks.
At the end of 2018, 127 credit institutions were operating, with total assets of EUR 900 billion during the first quarter of 2020 (USD 1,060 billion), and approximately 26,000 employees.
Luxembourg has a central bank, Banque Centrale de Luxembourg. Foreign banks can establish operations, subject to the same regulations as Luxembourgish banks.
Due to the U.S. FATCA reporting requirements, local retail bank Raiffeisen refuses U.S. citizens as clients. However, two banks have offered to serve U.S. citizen customers despite the additional reporting requirements: BIL and the State Bank and Savings Bank (Banque et Caisse d’Epargne de l’Etat).
On February 21, 2018, the Luxembourg House of Financial Technology (LHoFT) signed a Memorandum of Understanding (MoU) with the European FinTech platform, B-Hive, based in Brussels, and the Dutch Blockchain Coalition, that will favor collaboration in the field of distributed ledger technology, otherwise known as blockchain. The MoU confirms mutual interest and defines the fields of collaboration, among other things, on how blockchain technology can benefit society and business in general or on how they can help define international and/or European standards for distributed ledger technology.
The Ministry of Finance is tracking developments very closely in the field of virtual currencies and has said it will adapt its legislation in accordance with the results of ongoing European and international studies. Luxembourg places virtual currencies under the legal regime of payment companies. The CSSF continues close supervision and oversight of virtual currencies.
Foreign Exchange and Remittances
There are no restrictions on converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, lease payments) into a freely usable currency and at a legal market-clearing rate. Luxembourg was an original proponent of the euro currency and adopted it immediately at inception as part of the 1999 “Eurozone” that replaced their former domestic currencies. The European Central Bank is the authority in charge of the euro currency. Pre-COVID, Luxembourg had taken steps to move toward a “cashless” economy.
There have not been any recent changes to remittance policies with respect to access to foreign exchange for investment remittances. There is no difficulty in obtaining foreign exchange, which has been freely traded since the 1960s, and the Luxembourg stock market trades in forty different currencies, is truly international and expanding rapidly.
An average 24-hour delay period is currently in effect for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal, legal channels. Investors can remit through a legal parallel market including one utilizing cash and convertible negotiable instruments (such as dollar-denominated host government bonds issued in lieu of immediate payments in dollars). There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.
Sovereign Wealth Funds
Luxembourg created a sovereign wealth fund in 2014. The fund is under the auspices of the Ministry of Finance and operates with 234 million euros of assets. Until the fund reaches 250 million euros of assets, it operates a conservative investment policy, with a portfolio of 57% of bonds, 40% of stocks and 3% of liquidities. The sovereign wealth fund only invests outside of Luxembourg and is audited by an independent audit company.