Banking in Luxembourg

Transcription

1 Banking in Luxembourg Financial Services Banking February 2015

2 This publication is exclusively designed for the general information of readers and is (i) not intended to address the specific circumstances of any particular individual or entity and (ii) not necessarily comprehensive, complete, accurate or up to date and hence cannot be relied upon to take business decisions. Consequently, PricewaterhouseCoopers, Société coopérative ( PwC Luxembourg ) does not guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. The reader must be aware that the information to which he/she has access is provided as is without any express or implied guarantee by PwC Luxembourg. PwC Luxembourg cannot be held liable for mistakes, omissions, or for the possible effects, results or outcome obtained further to the use of this publication or for any loss which may arise from B reliance PwC on materials Luxembourg contained in it, which is issued for informative purposes only. No reader should act on or refrain from acting on the basis of any matter contained in this publication without considering and, if necessary, taking appropriate advice in respect of his/her own particular circumstances.

3 Introduction Banking in Luxembourg is designed to provide foreign bankers with basic insights into the structure of the banking industry in Luxembourg together with the legal, regulatory, accounting and tax framework. Also summarised are the requirements for setting up a new banking operation and the various audit requirements. This guide has been prepared by auditors, tax and business advisers, who are members of the banking group of PwC Luxembourg. Every effort has been made to make sure that the information provided in this guide is accurate as at 15 January In view of its purpose, the reader will appreciate that PwC Luxembourg is unable to accept any liability for any errors or omissions included therein. Banking in Luxembourg 1

4 Table of contents Introduction 1 Foreword Luxembourg financial centre: key competitive advantages At the heart of Europe A responsive and responsible regulatory environment A highly qualified and multilingual workforce A favourable tax location for doing business Corporate taxes Value Added Tax Taxation on salaries An optimal balance between high labour productivity, low cost of establishment and state-of-the-art infrastructure High labour productivity Low office rental costs Excellent infrastructures and high public investment A politically stable country and sound economic environment Political environment Economic environment 13 The financial marketplace Luxembourg market dynamics The banking industry Structure and size The Private Banking industry Corporate Banking activities Categories of credit institutions Other players of the financial sector The Professionals of the Financial Sector Electronic money institutions and payment institutions The Asset Management industry The insurance sector The Stock Exchange The financial sector associations Establishment of a credit institution in Luxembourg Legal form of the undertaking Banking activity through a branch Banking activity through a subsidiary Undertakings established under public law Raiffeisen cooperative entity Information office Authorisation procedure Banking activity through a branch of a EU head office Banking activity through a Luxembourg legal entity or a branch of a non-eu head office Banking activity from a Luxembourg bank within the EU Central administration and organisational structure Shareholdings Professional standing and experience Capital base External audit Participation in a deposit guarantee scheme and in an investor indemnification system Withdrawal of authorisation 33 Supervision and control of credit institutions The European Banking Union Single Supervisory Mechanism ( SSM ) Single Resolution Mechanism ( SRM ) Commission de Surveillance du Secteur Financier Banque Centrale du Luxembourg (BcL) 37 Laws and regulations Amended Law of 5 April Access to professional activities in the financial sector (Part I) Professional duties, prudential rules and rules of conduct in the financial sector (Part II) Prudential supervision of the financial sector (Part III) Reorganisation and winding up of certain professionals of the financial sector (Part IV) 45 2 PwC Luxembourg

5 Deposit guarantee schemes with credit institutions (Part IV bis) Indemnification system for investors with credit institutions (Part IV ter) Penalties (Part V) Law of 17 June 1992 related to annual accounts, as amended by the Law of 16 March The main EU Regulations applicable to banks SEPA Single Euro Payment Area EMIR European Market Infrastructure Regulation CRR Capital requirements Regulation SSM Regulation SSM Framework Regulation Single Resolution Mechanism The main CSSF Regulations and Circulars applicable to credit institutions Organisation and control environment Prevention of money laundering and financing of terrorism Compliance with limits and ratios Company administration services Supervision on a consolidated basis Reporting and disclosure requirements Circular CSSF 14/587 on the UCITs depositary function 68 Accounting framework Introduction Annual accounts prepared under Luxembourg GAAP Generally accepted accounting principles for credit institutions Presentation of the annual accounts under Luxembourg GAAP Specific Luxembourg banking GAAP accounting principles Filing of the annual accounts Prudential and financial reporting 76 Audit requirements Internal audit External audit Taxation Corporate Income Tax ( Impôt sur le Revenu des Collectivités ) Basic tax rules Tax valuation rules specific to banks Withholding tax Determination of the Corporate Income Tax, Municipal Business Tax and Net Wealth Tax Minimum Corporate Income Tax Investment incentives Branches Municipal Business Tax ( Impôt Commercial Communal ) Net Wealth Tax ( Impôt sur la Fortune ) Value Added Tax Basic VAT rules VAT status of banks Taxable transactions Exempt transactions Transactions out of the VAT scope VAT rates Input VAT deduction Capital contribution duty Foreign source of income Double tax treaties Absence of tax treaties 100 Appendices 101 Appendix 1. Glossary 102 Appendix 2. Useful Luxembourg addresses 103 Appendix 3. Luxembourg contacts 104 Appendix 4. Global PwC contacts 105 Banking in Luxembourg 3

6 Foreword The Luxembourg financial centre has expanded in the last 50 years to become an international hub for Banking and Asset Management activities. Servicing a wide range of private and corporate clients from all over the world, the country s financial sector is recognised globally for its expertise and sophistication. Luxembourg currently ranks 1st on the Micro European Cities with Economic Potential Ranking, 3rd on the KOF Index of Economic Globalisation, and 5th on the European Commission s Innovation Union Scoreboard, among other rankings. Olivier Carré PwC Luxembourg Banking Leader Luxembourg s financial sector developed in several stages, as foreign banks arrived in several waves often following the introduction of new regulatory measures in their home countries or the Grand- Duchy. These foreign banks contributed to the development of a diverse array of activities starting with the establishment of international syndicated loans and eurobond market activities in the 1960s-1970s by American and German banks. In the 1980s, Luxembourg-based banks began offering cash flow services to corporate clients as well as wealth management services to private clients. Many European banks, especially from the mainland, set up operations and the investment fund industry also made its debut here during that period. In the 1990s, the Second EU Banking Directive introduced a single banking license valid throughout the EU, prompting non-eu banks to establish branches in Luxembourg. At that time, the Luxembourg Stock Exchange saw a rapid expansion following its move to full electronic trading. More recently, the 2001 dot-com bubble and the 2008 financial crisis contributed to a global consolidation of the sector, spawning the disappearance of some market players. Concurrently, we have observed a diversification in the activities carried out by Luxembourg-based banks. In particular, they have embraced new activities such as securities services, payment and e-money services, extended their international structuring services aimed at a high net worth clientele, and reinforced their corporate banking capabilities. Today, Luxembourg s financial sector is robust, highly diversified and comprises a wide range of local and international organisations including banks, payment and e-money institutions, insurance undertakings, private equity and real estate players, fund promoters, family offices, and service providers offering technology, accountancy or other specialised services. Adapting to the new regulatory environment As growth is slowly returning in Europe, Luxembourg can rely on its wide range of competencies, financial stability and AAA credit rating to face the numerous challenges that lie ahead for Substantial regulatory changes have already altered the financial landscape, and the train is still in motion. The first major development is a general move towards fiscal transparency. FATCA and the European Savings Directive are two of the most important regulations already in place at the international level, but both are limited in scope mainly to interest and dividend income earned by individuals. However, they are laying the ground for the OECD s Common Reporting Standards that will introduce the principle of a yearly automatic exchange of information between fiscal jurisdictions on a wider range of income earned by individuals and organisations. The second major development is a strengthening of the oversight of banks and the financial sector in general. This increased governance comes in the form of enhanced supervision of systemic banks and organisations (e.g. the creation of a Banking Union at the EU level) and capital adequacy and liquidity ratios introduced by the Basel 4 PwC Luxembourg

7 Committee on Banking Supervision in response to the global financial crisis - a ruling that is enforced by national or regional regulatory bodies (e.g. the CRD IV Directive at the EU level). Looking forward, the next major development in the pipeline is without a doubt the OECD s BEPS 1 action plan. It aims to establish coherence of corporate income taxation at the international level and will most certainly contribute to enhancing fiscal transparency for organisations. Positioning & attracting international players Luxembourg financial players are well positioned to face this growing complexity. With experience in serving international clients and a propensity for reinventing their business models, many have already taken profound measures to offer their corporate and private clients the services they will require in the coming decade such as cross-border investment, tax reporting and cash management assistance. Technology developments are also disrupting the market on a global scale. New entrants, in particular from the high-tech sector, are likely to challenge the established business models in the medium-term. Luxembourg banking players are currently undertaking massive investments to position their services in this new economy, and they are supported by a government initiative to attract newcomers from the Fintech 2 sector. Luxembourg s dynamic corporate environment continues to attract international players seeking to firmly establish their business in Europe while benefiting from the presence of an elaborate network of service providers. These players operate in various areas of the financial sector, from corporate and private banking to payment and electronic transactions as well as specialised thirdparty services. It is not coincidental that five of the six largest Chinese banks have chosen the Grand Duchy as a central location for their European activities. Six new payment and electronic money institutions have established their business here in the past 14 months, while another online payment Chinese mega-player recently announced its intention to come. Finally, the family office license, which came into force in December 2012, is attracting wealth advisors from neighboring countries. In summary, we believe that while the environment and competitive positioning of the Place has fundamentally changed, Luxembourg-based players have successfully started to adapt to the new reality by endorsing new business models and expanding the different areas of the financial center. Olivier Carré, Banking Leader Luxembourg, January Base Erosion and Profit Shifting 2 A contraction of the words Financial and Technology, FinTech has become a ubiquitous term for any technology applied to financial services and innovation in the field. Banking in Luxembourg 5

8 Luxembourg financial centre: 1 key competitive advantages PwC Luxembourg

9 Luxembourg is a truly unique financial services centre. Developing from a European banking market, for which it is still world-renowned, Luxembourg is now a world leader in many areas of the financial services sector. The business friendly environment has been the foundation for Luxembourg s success. The government rapidly sets up key legislation either to develop new and innovative financial products, or to provide a crucial first-mover advantage to firms in the Luxembourg market. The resulting booming of financial services groups locating in Luxembourg, the high value-added interaction between these players and a stream of innovation have strengthened Luxembourg s status as a global financial services hub. Luxembourg s banking sector offers an unparalleled range of financial services to the discerning client, and the firms which are willing to establish a bank in Luxembourg - whether a new entity or a branch of an existing group - find that the sector has an excellent regulatory environment, a world-class financial infrastructure and a deep pool of skilled staff. Micro European Cities with Economic Potential Index of Economic Globalisation Innovation Union Scoreboard International Property Rights Index Logistics Performance Index Global Innovation Index ICT Development Index Networked Readiness Index Enabling Trade Index World Competitiveness Ranking Global Financial Centers Index Index of Economic Freedom Best Countries for Business Global Competitiveness Quality of Living Rank n 1 Luxembourg out of 468 cities and regions n 3 Luxembourg out of 207 countries n 5 Luxembourg out of 28 countries n 7 Luxembourg out of 131 countries n 8 Luxembourg out of 160 countries n 9 Luxembourg out of 143 countries n 10 Luxembourg out of 166 countries n 11 Luxembourg out of 148 countries n 11 Luxembourg out of 138 countries n 11 Luxembourg out of 60 countries n 15 Luxembourg out of 83 centers n 16 Luxembourg out of 186 countries n 16 Luxembourg out of 157 countries n 19 Luxembourg out of 144 countries n 19 Luxembourg out of 223 cities Source European Cities and Regions of the Future 2014/15, fdi Magazine KOF Index of Globalisation 2014, Swiss Federal Institute of Technology Zurich Innovation Union Scoreboard 2014, European Commission The International Property Rights Index 2014, Property Rights Alliance Trade Logistics in the Global Economy 2014, World Bank The Global Innovation Index 2014, Johnson Cornell University, INSEAD and the World Intellectual Property Organization Measuring the Information Society Report 2014, International Telecommunication Union The Global Information Technology Report 2014, Johnson Cornell University, INSEAD and the World Economic Forum The Global Enabling Trade Report 2014, World Economic Forum World Competitiveness Ranking 2014, IMD The Global Financial Centers Index 16 September 2014, Qatar Financial Center Index of Economic Freedom World Rankings 2014, The Heritage Foundation & The Wall Street Journal Best Countries for Business 2014, Bloomberg The Global Competitiveness Report , World Economic Forum Quality of Living Survey 2014, Mercer Banking in Luxembourg 7

10 1.1 At the heart of Europe Luxembourg is at the centre of Europe and enjoys excellent transport connections to other major European cities, including London, Paris, Brussels, Berlin, Frankfurt, Zurich and Milan. In addition to easy access for investors from the most affluent countries within Europe, Luxembourg also hosts a significant number of key European Union (EU) institutions, notably the European Investment Bank, Around 40% of the wealth in European Union is concentrated in a 500 km area around Luxembourg. When extended to 700 km, this figure reaches around 70% of the EU wealth 3. 40% of the EU wealth 70% of the EU wealth 700 km 500 km the European Investment Fund, offices of the European Commission and the European Parliament (secretariat). Luxembourg s capability is also recognised at the international level, with persons such as Ms Viviane Reding, who served as European Commissioner between 1999 and 2014, and Mr Jean-Claude Juncker, who is currently president of the European Commission, having taken the chair in November A responsive and responsible regulatory environment The Commission de Surveillance du Secteur Financier (CSSF) is the supervisory and regulatory authority for Luxembourg s financial sector. The CSSF has received extensive praise for its ability to react quickly and responsively to the needs of the financial industry without diluting the high levels of investor security and protection that exist in Luxembourg. The CSSF aims at: - promoting a considered and prudent business policy in compliance with the regulatory requirements; - protecting the financial stability of the supervised companies and of the financial sector as a whole; - supervising the quality of the organisation and internal control systems; - strengthening the quality of risk management. The CSSF represents Luxembourg at European and global levels in negotiations with regard to the financial sector and is responsible for coordinating the implementation of any international regulation or recommendation at the national level. One of the prime features of Luxembourg s success is its geographical location. Luxembourg has a strategic position at the crossroads of Europe, with direct routes to the most important European cities: Paris ( just 2h15 by train ), London, Amsterdam, Brussels, Berlin, Zurich, Milan and Geneva. 3 Eurostat Sharing borders with Belgium to the west and the north, with Germany to the east and the north, and France to the south, Luxembourg has a high level of cross-border trade, investment and employment. One field in which Luxembourg has been excelling for many years is quick time-tomarket innovation. This was only made possible through a liberal legislation framework and close communication between the financial centre and authorities. Examples of this are the quick adoption by the authorities of innovations in EU law that offered opportunities for the sector, such as the UCITS IV directive or the Payment Services Directive. Further information can be found on the CSSF website: As from November 2014, the European Central Bank (ECB) will assume full 8 PwC Luxembourg

11 responsibility for supervision of around 130 banks in the euro zone, in line with the European Regulation on the Single Supervisory Mechanism (SSM Regulation). Prior to assuming its responsibility, the ECB was required by article 33(4) of the Regulation to carry out a Comprehensive Assessment of the significant Eurozone banks. The results of this exercise, published in October 2014, show that the six Luxembourg institutions that were directly subject to the Comprehensive Assessment pass the reference thresholds set by the ECB, i.e. 8% CET1 ratio 4 for the Asset Quality Review and 5.5% CET1 ratio for the Stress Test (under the adverse scenario). Employment growth in the banking sector Luxembourgers 30,000 25,000 20,000 15,000 10,000 5,000 0 Foreigners 1.3 A highly qualified and multilingual workforce Currently the banking sector represents 60% of the financial centre s direct and indirect workforce. While the Luxembourg financial sector still draws on a large pool of labour from the cross-border regions of Belgium, France and Germany, this has been complemented in growing number by graduates from the best universities in Europe and experienced professionals Source: Banque centrale du Luxembourg from other financial centres. These expatriate and commuting workers provide Luxembourg with a vast array of languages and technical skills drawn from every level of the banking industry. In September 2014, Luxembourg banks employed 26,055 workers, with 77 % of this figure representing foreign workers. Sept In addition to the existing skills of the workforce, Luxembourg also offers an effective training infrastructure which hones the abilities of employees and allows for continuous learning within the sector. Master degrees, an internationally accredited MBA and executive training for professionals of the wealth, asset, and fund management industries are all available. 1.4 A favourable tax location for doing business Corporate income tax rates in the EU for 2014 FY (in %) Corporate taxes 5 The combined income tax rate for Luxembourg City (i.e. both corporate income tax and Municipal Business Tax) is 29.22% as from Common Equity Tier 1 ratio The rate for United Kingdom is 21% for financial year starting 0 1 April The German rate varies from 30.2% (Berlin) to 32% (Frankfurt) and 33% (Munich). In Portugal, an additional taxation of 3% applies on profits in excess of EUR 1.5 million up to EUR 7.5 million, 5% on profits exceeding EUR 7.5 million up to EUR 35m and 7% on profits exceeding EUR 35m. In the Netherlands, taxable amounts up to EUR 200,000 are subject to 20% CIT. In Ireland, the standard rate on income is 12.5% while the rate on passive income is 25% and on capital gains 33%. In Denmark, the tax rate will be lowered to 23.5% in 2015 and 22% in The rate for France is increased by additional social contributions and temporary surcharge applies. Ireland Finland United Kingdom Sweden Portugal Denmark Austria Source: PwC, information as of 1 December 2014 The Netherlands Greece Luxembourg Spain Italy Germany France Belgium Banking in Luxembourg 9

12 1.4.2 Value Added Tax Luxembourg currently applies the lowest standard Value Added Tax (VAT) rates in the EU28. The different rates applicable in Luxembourg are 3%, 8%, 14% and 17%. Domestic supplies are therefore taxed less than in any other EU country. This advantage may also benefit supplies to non-luxembourg customers. Standard and reduced VAT rates in the EU Hungary Croatia Denmark 12 Sweden 20 Romania 9 Finland 6, Greece 9 Ireland 20 Poland 10 Portugal 20 Italy 5 Slovenia Latvia Belgium Lithuania 5 Spain 18 Netherlands 7 Czech Republic 6 5 Austria Bulgaria Estonia Slovakia UK France Germany Cyprus in % Malta Luxembourg 7 Source: Global VAT Online (PwC Network) Last update: 1 January Taxation on salaries The Luxembourg tax regime on salaries is more attractive compared to other EU countries. On a gross salary of EUR 100,000, the cost for the company amounts to approximately EUR 112, % goes directly to the employee as net salary while about 37% is paid in tax and social contributions. Net salary after tax and social security vs. company costs on gross annual salary of EUR 100, , , , , , , , ,000 80,000 60,000 40, % 63.1% 62.8% 57.4% Company cost Net salary Ratio 59.2% 56.4% 56.6% 52.4% 47.6% 49.7% 47.7% 48.3% 48.1% 45.4% 43.9% 35.0% 80% 70% 60% 50% 40% 30% 20% 10% 0% Switzerland Luxembourg Germany Spain United Kingdom Ireland Denmark The Netherlands Portugal Greece Austria France Finland Sweden Belgium Italy 6 A second reduced rate of 10% was introduced as from 1 January An increase of all VAT rates, except the super-reduced rate of 3%, by 2% each was introduced as from 1 January Net salary in euros after tax and social contributions (based on a married couple with two children where one parent earns EUR 100,000 per annum and is the sole earner) using income tax rates and social security rates applicable as at 27 August PwC Luxembourg

13 1.5 An optimal balance between high labour productivity, low cost of establishment and state-ofthe-art infrastructure Labour productivity per person employed (Index: EU27=100) High labour productivity Luxembourg has the highest labour productivity in Europe. Another measure of productivity, GDP per inhabitant, places Luxembourg three times 9 above its European counterparts in large part due to the employment of commuting workers from the cross-border regions of Belgium, France and Germany. Those commuting workers are mainly employed by the financial sector, which accounts for 19% 10 of the country s workforce and directly generates about 24% of Luxembourg s gross added value Luxembourg Norway Ireland Belgium 116 France Switzerland Sweden Austria Spain 111 Denmark Italy Netherlands Finland 107 Germany 99.4 United Kingdom 92.7 Greece 91.8 Cyprus 91.7 Malta 82.6 Slovakia 81.1 Slovenia 80.1 Croatia 76.7 Portugal 74.6 Lithuania 74.3 Poland 71.9 Czech Republic 70.6 Hungary 70 Estonia EU27= Latvia Romania Bulgaria Source: Eurostat, table tec00116 as of December 2014, 2013 figures Low office rental costs As a leading financial hub, Luxembourg office rental costs remain very competitive. Rent (EUR/square meter/year) 1,600 1,400 1,200 1,423 1, London, West End Paris, CBD London, City Luxembourg City, CBD Oslo, CBD Geneva, CBD Zurich, CBD St. Peter Port, CBD Paris, La Défense Stockholm, CBD Milan, Centre Rome, Centre Munich, CBD Frankfurt, CBD Amsterdam, Zuidas Manchester, CBD Helsinki, CBD Edinburgh, CBD Glasgow, CBD Birmingham, CBD Source: Cushman & Wakefield, Office Space Across the World, World Bank, PwC calculation based on ABBL s Facts and figures June 2014 and Statec s Luxembourg in figures Statec, Annual accounts, Data as of end 2013 Banking in Luxembourg 11

14 1.5.3 Excellent infrastructures and high public investment Luxembourg remains a Western European country with high public investment spending. Infrastructure investing is a top priority for the Luxembourg government; examples of recent improvements include a new terminal at the Luxembourg airport, the high-speed train (TGV) route linking Luxembourg to Paris in 2 hours, the enlargement of the European School, and the openings of the Luxembourg Philharmonie and the Museum of Modern Art. Public investment (% of GDP) Furthermore, Luxembourg has transformed itself into one of Europe s top locations for ICT infrastructure (data centres, connectivity, and Internet traffic) following more than five years of targeted public and private investment. 1.6 A politically stable country and sound economic environment Political environment The Luxembourg political system consists of a parliamentary democracy in the form of a constitutional monarchy. The political stability of Luxembourg is marked by a culture of consensus where the political parties coexist within the context of a broad agreement on key issues. Over the past three decades, there has been continuity in important policy initiatives under successive coalition governments, with an emphasis on economic policies. The business-friendly political environment is conducive to welcoming decision-makers and entrepreneurs. Indeed, all successive governments have considered paramount to attract international players in order to build an efficient business framework and economic growth, and allow Luxembourg establish a permanent and innovative business community. 0 Sweden Finland France Netherlands Denmark Luxembourg Greece Malta Austria UK Portugal Germany Italy Belgium Spain Cyprus Ireland Source: European Commission, European Economic Forecast Autumn 2014, forecast figures for 2014 GDP growth (in %) ; ; ; EU (28 countries) Euro area (17 countries) Luxembourg Source: European Commission, European Economic Forecast Autumn 2014, forecast figures for 2014 and PwC Luxembourg

15 1.6.2 Economic environment Prudent macroeconomic policies and stable political environment have helped Luxembourg weather the global financial crisis and recover more quickly. Luxembourg public debt stands at 24.2% of GDP. This is far below the 60% imposed by the criteria of the Maastricht Treaty. Debt to GDP ratio is also low compared to other countries that are competing to attract foreign investment. General government gross debt to GDP ratio (in%) Luxembourg Norway 92.0 Sweden 95.2 Denmark 98.6 Switzerland Finland Netherlands Germany Austria United Kingdom France Spain Belgium Ireland Portugal Italy Greece Source: IMF, World Economic Outlook Database, October 2014, forecast figures for 2014 Banking in Luxembourg 13

16 The financial marketplace 14 PwC Luxembourg

17 Luxembourg is one of the foremost destinations for financial services providers due to its status as a global hub, its constant innovation and business friendly culture. While Private Banking/Wealth Management and Investment Management continue to be the pillars of the sector, the financial marketplace in Luxembourg has a high degree of synergy and diversification, appealing to a wider range of investors, including international entrepreneurs and corporations. 2.1 Luxembourg market dynamics Innovative financial solutions including pension funds, hedge funds, real estate vehicles, securitisation vehicles and private equity structures such as the Société d Investissement à Capital Risque (SICAR), have been added to the already vast array of products and services available in the Luxembourg marketplace. A recent example of innovation is the creation of a regulated status for Family Office services making Luxembourg the first European jurisdiction to offer a legal framework for this activity. Regarding electronic infrastructure, the country is connected to all major European Internet Exchanges, data centres and Points of Presence through redundant optical networks. Many international groups have redomiciled their headquarters in Luxembourg in order to take advantage of a favourable economic environment and stable policy outlook. Non-financial groups have also set up corporate banks in Luxembourg in order to optimise their own financial operations within a dynamic environment. Investment Management Private Banking Wealth management Private Equity Real Estate Corporate Executives Institutional Investors HNWIs and UHNWIs Mass Affluents Corporate Banking Life Insurance Entrepreneurs International & Local Corporations Capital Markets Securitisation Alternative Investments Banking in Luxembourg 15

18 2.2 The Banking industry Structure and size At end 2014, the Luxembourg banking sector comprised 148 credit institutions from 27 different countries. More than 20% of Luxembourg-based banks come from non-european countries. Despite the credit and liquidity crunch that hit global financial markets, and an increasingly complex regulatory context, the Luxembourg banking sector has been resilient. The banking sector s balance sheet reached a total of EUR 763 billion in October 2014, a decrease compared to its 2008 peak, but an increase over the past twelve months. According to the CSSF, this increase resulted, among other factors, from the takeover of activities or the development of new activities. In the latter case, the banks concerned generally originated from non-eu countries. Credit institutions (subsidiaries and branches) established in Luxembourg by country of origin Germany 33 Qatar 3 France 15 Spain 2 Switzerland 12 Andorra 2 Italy 10 Canada 2 United Kingdom 9 Norway 2 Sweden 7 Portugal 2 Belgium 7 Russia 2 China 6 Cyprus 1 USA 6 Denmark 1 Japan 5 Greece 1 Luxembourg 5 Latvia 1 Brazil 5 Liechtenstein 1 Israel 3 Turkey 1 The Netherlands 3 Source: CSSF website, data as of November 2014 Evolution in the total balance sheet of credit institutions (in EUR bn) 12 1, oct.-14 Source: CSSF Annual Reports and Website 12 Figures reported before December 2007 are based on Luxembourg Gaap accounting standards while figures reported after January 2008 are based on IFRS. This change in accounting standards implies technical variations in the figures presented, which mitigate or magnify, as the case may be, the development of banking activities as shown above. 16 PwC Luxembourg

19 2.2.2 The Private Banking industry With more than 40 years of experience, Luxembourg is a centre of excellence in Wealth Management and Private Banking services, ranking number seven in the world for cross border Private Banking s assets under management (AuM) 13. Within the Eurozone, Luxembourg occupies the first place. Private Banking is a key aspect of the Luxembourg financial sector with EUR 1.7 billion in annual revenues; AuM held by banks involved in Private Banking amount to EUR 307 billion 14. Client segments in Private Banking Luxembourg > 20 mn 10 mn - 20 mn 5 mn - 10 mn Clients assets (%) Nb of clients (%) 47% 1% 8% 1% 8% 2% The Private Banking industry contributes to the development of the Luxembourg financial sector not only through its own activity, but it is also an important source of revenues for the Undertakings for Collective Investment (UCI) and insurance industries since it is a distribution platform for investment funds and life insurance products. While it is estimated that 67% of AuM in the Luxembourg s Private Banking sector originates from Europe, the share of clients coming from non-european countries has been increasing since 2009, from 17% to 33% 15. Also, Luxembourg can be considered to have a dynamic Private Banking market, with 57% of clients being professionally active or semi-active, and 44% of the client base being made up of entrepreneurs. This means that Luxembourg clients have specific needs related to their current business activities in terms of multi-jurisdiction financial structuring, wealth transmission, etc mn - 5 mn 500,000-1 mn 100, ,000 Source: The Luxembourg Bankers Association (ABBL), Facts & figures, June 2014 Luxembourg offers a comprehensive range of products and personalised services, from traditional, classic savings products, to sophisticated solutions for creating, maintaining, maximising and transmitting wealth. Luxembourg has developed solid financial engineering capabilities and knowhow in cross-border wealth engineering, asset structuring, fund constitution, and tax structuring. Luxembourg benefits from a competitive fiscal environment for the development of Private Banking activities, including a large Double Taxation Treaty network % 12% 7% 14% 12% 70% 13 Boston Consulting Group, Global Wealth The Luxembourg Bankers Association (ABBL), Facts & figures, June Idem 16 PwC, 2013 Global Private Banking and Wealth Management Survey 17 See section 8.6 Double tax treaties Banking in Luxembourg 17

20 2.2.3 Corporate Banking activities Luxembourg is a recognised international business centre for corporate clients. Luxembourg authorities favour the development of new activities such as e-commerce, health sciences, technologies, private equity, real estate, securitisation, and factoring. Several multinationals have been setting up their European headquarters or their treasury centres in Luxembourg. Therefore the Luxembourg corporate banking market is thriving, providing a broad range of services to the old and new companies established in Luxembourg or having part of their activities run from Luxembourg. Corporate services offered by Luxembourg banks to small, mediumsized, large and multinational companies include: daily business and account services; custody; settlement; cash management; brokerage and advisory services; financing business; capital investments and partnerships; foreign exchange. Some corporate groups also acquire a banking license to operate financing activities out of Luxembourg. Examples include: a specialised platform for electronic payments between professionals and individuals at the European level; a leading producer of agricultural equipment whose primary activity in Luxembourg is the provision of financing to clients who want to purchase its equipment; others are looking to settle in Luxembourg to benefit from the EU passport and for operating activities throughout Europe Categories of credit institutions Credit institutions operating out of Luxembourg are granted an operating licence by the Ministry of Finance. The Luxembourg legislation provides two types of licences: a universal banking licence and a mortgage banking license. Today, Luxembourg banks have established several areas of expertise, which include: private and institutional wealth management; life insurance; retail and corporate banking; and the full range of investment fund services. At the end of 2014, there were 148 credit institutions in Luxembourg that could be grouped together under the following categories, based on their legal status and geographical origin 18 : Banks under Luxembourg law (102 banks as at December 2014); Banks issuing mortgage bonds (5 banks as at December 2014); Branches of banks originating from a member state of the EU (32 branches as at December 2014); Branches of banks originating from a non-member state of the EU (9 branches as at December 2014). 2.3 Other players of the financial sector The Professionals of the Financial Sector The Professionals of the Financial Sector (PFS) may be defined as regulated companies performing non-banking financial services. These services may be offered in the form of a single financial activity as well as in the form of connected and/or complementary activities. The number of players continues to grow at a rapid pace, totalling 314 at end compared to 215 at end 2007 before the financial crisis, thanks to a flexible legal framework which has also paved the way for new forms of servicing the financial sector. PFS have helped the Luxembourg financial sector develop in two ways: leveraging on specialisation and expertise in different financial activities; and adding flexibility and capacity to the Luxembourg financial place to adapt to new market demands coming from Luxembourg and the EU financial sector. PFS are subject to the authorisation and supervision of the CSSF. PFS fall into three main groups: Investment firms - they offer financial services in relation to the investment of financial instruments to private investors and/or conduct financial operations for their own account; they are allowed to operate under the European passport provision. Specialised PFS - they offer other services of a financial nature to private investors and/or professionals of the financial sector; they are not allowed to operate under the European passport provision. 18 CSSF, List of authorised credit institutions as of December CSSF, List of PFS as of December PwC Luxembourg