In 2009, G20 leaders initiated action to end bank secrecy, leading to Luxembourg relaxing its banking secrecy laws in 2013. This shift was prompted by global financial instability stemming from the 2008 recession. The economic downturn triggered measures like fiscal stimulus packages, straining government budgets. To stabilise financial markets, global reforms aimed to combat tax evasion and enhance financial system regulation, emphasising transparency. Luxembourg's banking secrecy, enshrined in laws dating back to the 19th century, was long-established, providing broad data protection beyond just shielding from foreign tax authorities.
Efforts towards tax transparency within the EU, like the EU Savings Directive, aimed to tax interest payments across Member States. Automatic exchange of information became a pivotal tool, requiring administrative readiness for tax information sharing among countries.
The Financial Action Task Force pushed for enhanced anti-money laundering measures, ultimately leading to the 4th AML Directive at the EU level.
The US enforced the Foreign Account Tax Compliance Act (FATCA), requiring entities to identify and report US clients, shaping Luxembourg's compliance framework. Several European countries, including Luxembourg, signed "Rubik" agreements, allowing tax evaders to regularise undeclared assets.
In response, Luxembourg banks underwent a transformative phase, shifting their focus to high-net-worth individuals and improving the service offering for banking clients. The industry's long-term and medium-term effects included a shift towards fee-based advice models and a transition from a transaction-based revenue system to offerings like discretionary portfolio management and advisory mandates.
The industry today witnesses sustained asset growth, successful transformation, and a client-centric approach, emphasizing wealth structuring and succession planning services. The sector expanded its global client base, and significantly increased the assets under management. Luxembourg's banking sector has evolved into a center for wealth structuring and asset management, leveraging its double tax treaties and expert service providers.
Despite challenges, tax and regulatory shifts, Luxembourg's private banking industry has adapted, grown, and flourished, exhibiting a robust and dynamic landscape with a client base reshaped to cater to high net worth individuals, marking a successful transformation post-banking secrecy era.
Luxembourg's private banking business has been growing during the past ten years despite the disruptive changes the industry had been facing after the end of banking secrecy. It is to be expected that this growth path will also be pursued going forward considering the need for and the growing complexity of international wealth structuring, which is at the heart of Luxembourg's value proposition in Private Wealth Management. Tax compliance of the underlying business is essential in this.
The tax and regulatory changes which we have been observing for the last ten years are irreversible. The complexity of international tax and transparency laws is constantly increasing; and so is the scrutiny of the tax authorities. Considering the looming economic downturn in Europe, we do not only expect the number of tax audits in Luxembourg to increase, but also the initiations for tax offence proceedings, leading to soaring liability risks for corporate bodies and executives, which also result in additional reputational risks. These evolutions require a strong governance and control framework. Banks are advised to establish their own tax strategy, assign clear responsibilities within their organisations and to thoroughly document their governance. These elements will be a first line of defence in the event of tax audits and mitigate the risks for both the organisations as well as their executives.
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