2021: Doing Business in Luxembourg

Doing Business in Luxembourg

1. What is the current business climate in your jurisdiction including major political, economic and/or legal activities on the horizon in your country that could have a big impact on businesses?

Ideally situated at the crossroads between Belgium, France and Germany, Luxembourg is a country that, although small in geographical size, enjoys unparalleled stability and figures among the world’s wealthiest nations by GDP per capita. In 2020, Luxembourg's real gross domestic product decreased by around 1.31% compared to the previous year because of the COVID-19 pandemic. However, the government hopes to see a robust recovery from this recession, with potential GDP growth of 4% in 2021. This rather encouraging picture must take into account the exceptional volume of state aid and financial support packages most countries, including Luxembourg, have agreed to in the context of the sanitary crisis.

This subsidizing of the economy has greatly influenced how businesses have been run recently. In contrast to smaller and purely domestic companies, the anticipated wave of insolvency proceedings has yet to hit Luxembourg’s internationally connected and widely-scattered clientele with as much weight as feared. However, its impact could become more acutely felt in 2021 as public aid is expected to decrease progressively.

The international business environment in Luxembourg – as in the rest of Europe – is affected by increased regulatory constraints under measures such as the GDPR, AML or Market Abuse Regulation (MAR), substance requirements, DAC 6, ATAD I and II, and OECD Transfer Pricing Guidelines. All of which impact the management and business lifecycle of companies. This has led clients to initiate strategic planning to strengthen their presence in Luxembourg or reorganize their business to improve margins and distinguish between core and non-core activities.

2. From what countries do you see the most inbound investment? What about outbound?

Luxembourg offers a business climate favorable to foreign investment. According to figures from the Organisation for Economic Co-operation and Development OECD, half of Foreign Direct Investments (FDIs) received by Luxembourg come from the European Union, although the largest investment is from Bermuda (13.5%), followed by the UK (13.1%), Ireland (12.1%) and the Netherlands (9.3%).

The Luxembourg government has established some measures in order to make the country attractive to FDI, such as infrastructure, equipment and construction projects, while focusing on key innovative industries like logistics; ICT; health technologies, including biotechnology and biomedical research; clean energy technologies; space technology and financial services technologies.

Regarding outbound investments, despite the remaining uncertainties regarding the global economy, Luxembourg remains one of the leading European investors in countries outside the EU.

3. In what industries/sectors are you seeing the most opportunity for foreign investment?

According to the OECD, financial and insurance activities attract more than eighty percent of all investments while manufacturing accounts for approximately three percent.

Indeed, Luxembourg’s financial center encompasses approximately 130 banks, as well as 88 insurance and 216 reinsurance companies. Originally a private banking center, Luxembourg has now become the second largest investment fund center in the world, supported by a constantly modernizing, business-friendly legal and regulatory framework.

Thanks to its central location in Western Europe, highly skilled international workforce, stable political environment, easy access to government bodies and reputation as a high-calibre gateway to Europe, Luxembourg is also a destination of choice for multinational companies for their European headquarters. Today, 8 out of 10 of Luxembourg’s largest employers are non-financial companies. The country’s globalized economy also attracts emerging sector players active in the high-tech and e-commerce industries.

4. What advantages and pitfalls should others know about doing business in your country?

Luxembourg has many attractive aspects for investors. To name only a few:

• It is one of the most open economies in the world with an undisputed pro-business environment.
• The country is a global finance hub with a strong and broad banking sector and a thriving investment fund industry.
• Luxembourg is one of the most competitive financial centers in Europe and has a thriving investment fund industry. The banking sector is the driving force behind the nation’s economy and accounts for about one-third of the country’s GDP, relaying on its cross-border financial expertise, extensive financial services offering, political stability, skilled staff, and availability of a qualified multilingual workforce.
• It has one of the lowest public debts in the European Union.
• There is an extremely developed transport infrastructure connecting the country to major cities and foreign capitals.
• The outstanding quality of digital infrastructure.

Few obstacles to investment in Luxembourg however exist:

• A weakly diversified economy and extremely dependent on its banking and financial sector.
• An employment market dependent on cross-border workers, resulting from a small and ageing Luxembourg working population.
• Finally, starting and running a business presents some challenges. There are many steps needed to get operations up and running in Luxembourg that can potentially slow down the process, including incorporation (lengthy process, different local regulations for different types of businesses), obtaining a business license or securing credit, etc..

5. What is one cultural fact or custom about your country that others should know when doing business there?

Luxembourg’s business culture can be very formal. Punctuality is valued and lateness is considered very rude. Politeness and respect for hierarchy are appreciated and key to successful business dealings. There is also a strict separation between personal and business life. Small talk is encouraged to build rapport, but it’s not viewed positively when used to ask personal questions.

Finally, let us point out Luxembourg’s exceptional multilingualism, which is also a prominent feature of Luxembourg's economy, and has enabled the country to grow over the decades and is a perfect starting point for foreign entrepreneurs to set up a business. Everyone is able to switch in and out of English, French, German and Luxembourgish. Even Portuguese, Italian & Spanish are heard on a daily basis.

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