The theme of taxation as a tool for economic growth is high on the agenda of the Government. The Ministry of Finance is currently contemplating targeted incentives to R&D, start-ups and corporate investments. These were presented by Minister Gramegna in the course of a dedicated conference on 28 June 2017 and were eventually translated into the draft budget law 2018 submitted on 11 October 2017.
The proposals at hand denote a willingness on the part of the Government to retain the initiative in the field of corporate taxation after the implementation of the tax reform 2017. This constitutes a sensible move. Indeed, despite a reduction of the corporate tax rate to 26%, Luxembourg’s corporate tax rate remains above the OECD average. In order to provide a decisive impulse to the national economy, the proposals at hand would need to benefit to all relevant sectors of the national economy, including the banking sector.
“Banks in Luxembourg invest heavily in order to carry out the digitalization of their business model and to implement and to sustain applicable regulatory requirements.”
Banks in Luxembourg invest heavily in order to carry out the digitalization of their business model and to implement and to sustain regulatory requirements. These investments translate essentially into the hiring of additional staff, the use of consultants and IT developments. The said investments are an essential condition to a modern and forward-looking financial center, generate employment and nurture a sophisticated eco-system of service providers in Luxembourg.
Regarding regulatory evolutions alone, according to our latest survey on the cost of regulation, banks in Luxembourg have spent in 2015 up to 458 million EUR in regulatory compliance. This figure reflects an increase of 20% compared to 2013 figures and represents close to 1% of the national GDP.
Banks in Luxembourg, as businesses and employers, generate a substantial portion of the public revenues. According to recent estimates, approximately one quarter of the corporate income tax and the municipal business tax collected in Luxembourg is directly attributable to the banking sector and several ABBL members feature among Luxembourg’s top taxpayers. Meanwhile, the value added tax (VAT) is a factor of distortion as VAT incurred by financial institutions is essentially non refundable. The result is a higher cost of sourcing services and goods for banks than for non-financial actors of the economy. This situation may be quite critical in case of establishment of new operations.
“Banks do represent a sustainable source of revenues in the long term for Luxembourg as they do not trigger issues of tax substance.”
Perhaps most crucially, banks do represent a sustainable source of revenues in the long term for Luxembourg as they do not trigger issues of tax substance. A combination of regulatory requirements and business needs indeed result in taxable profits essentially arising where the real economic activity is undertaken, facts which obviate many of the critical points of attention identified in the context of the OECD’s BEPS action plan.
The foregoing elements have led the ABBL to submit to Minister Gramegna targeted proposals aimed at extending the scope of investment tax credits available to corporate taxpayers in Luxembourg. Current provisions focus on tangible assets and require serious adaptations to the new digital economy. Banks should be able to benefit from tax credits in relation to the investments made in their IT-systems. A relevant incentive would not only relate to software proper but should also cover related developments and maintenance costs to the extent these have been sourced in Luxembourg. Also, there should be an extension of the scope of investment tax credits applicable to leasing transactions so as to include those where the lessee is established in another country of the European Economic Area (EEA). This proposal would not only resolve a possible conflict between current domestic provisions and EU law but would also provide commercial banks in Luxembourg with additional financing opportunities within the Internal Market.
A swift consideration and implementation of the proposals at hand, as part of a steady and predictable tax environment in Luxembourg, would undoubtedly constitute a positive response to the legitimate expectations of the banking sector. Banks are an important driver of prosperity in Luxembourg and will certainly continue to make a sizeable contribution to our economic growth in the future. At a time when Luxembourg is positioning itself to host the European Banking Authority (EBA), we would like to think that the Government shares this vision.
By Camille Seillès, Secretary General – ABBL