Although the Grand-Duchy has long lobbied for the withholding tax system as an efficient and effective tool to ensure taxation of savings income, after the failure of the Swiss Rubik model, it has acknowledged that governments both within and outside the EU are increasingly favouring the automatic exchange of information. Today, recognising the importance of cooperation with its international partners, Luxembourg has taken the conciliatory step of announcing its commitment to putting into action the automatic exchange of information by 2015.
In the past, a withholding tax was levied by default on all interest payments. There are two instances in which the default tax could be waived: where a customer gave his or her agreement to the automatic exchange of information or where a person’s home authority produced a certificate of exemption. Mr Juncker’s announcement sees a complete overhaul of this system as the automatic exchange of information will provide a single replacement for the current hybrid set-up.
So, what exactly will this mean for you from 2015 onwards? This measure will have no impact on Luxembourg residents, who fall outside the scope outlined by today’s press release. Similarly, non-EU citizens will also see zero change as a direct result of the announcement, although ongoing bilateral negotiations with certain countries such as the US may bring further additions in the future. The effects of the measure will thus only be seen by EU citizens who do not reside in Luxembourg. Yet, even within this targeted demographic, the effects may well be limited.
“With regards to the fund industry, little will alter. Luxembourg funds are often distributed by non-Luxembourgish intermediaries. This means that it is not Luxembourg rules that apply, but rather those of the banks’ home authority. A German bank selling a Luxembourg fund will find that they are subject to German rules, not Luxembourgish ones. This is already the case today”, says Georges Bock, Managing Partner of KPMG in Luxembourg.
Moving on to a second pillar of the finance industry in Luxembourg, Banking, many Wealth Management customers have already had the opportunity to opt for the automatic exchange of information. Many have indeed plumped for this measure, once more indicating that making the automatic exchange of information compulsory is unlikely to make waves.
The scope of the measure will be in line with the European Union Savings Directive. In the short term under the present directive, the scope is rather narrow covering only interest income. A 2008 Amending Proposal, however, outlines plans to include insurance and other similar products in the next update. What’s more, the proposal features a look-through principal which is yet to be imposed.
According to Georges Bock, “Over the past twenty years, it has been the fund industry and the extensive expertise developed in this area that has been the main engine for growth in Luxembourg. The new measure leaves the industry unscathed and ready to continue on its way. For Private Wealth Management, this does nothing to diminish from the skills and knowledge Luxembourg has built up over the years: the government’s announcement should not be the earthquake one would have thought. Nonetheless, with other treaties and directives already in the pipeline, the financial services industry will have to hold its breath and wait to finally find out the full implications of today’s announcement.”