Magazine du Trésorier, April 2013

Luxembourg, a prime location for your Treasury and Financing operations

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Aside from its expertise in the fund administration and private banking sectors, Luxembourg has competence in other industries and many firms have opted for this location to set up their regional or worldwide Treasury and/or Financing operations. Through its business-friendly and favorable tax environment and high living standards, the country has acquired a knowledgeable and multicultural workforce that constitutes a significant talent pool to support the daily operations of worldwide groups with 42% of all residents coming from abroad, without taking into account the 150,000 daily commuters from Belgium, France and Germany.

 

General competitiveness aspects of Luxembourg

As a central European hub, Luxembourg offers an ideal location with excellent air, rail and road networks that make European capitals within easy reach and even allow people to travel to these destinations within a day if necessary. For instance, there are more than 10 flights a day to London and 20 daily connections to NYC via Amsterdam, Frankfurt, Munich, London, Paris and Zurich. While being fast paced, the country still provides a high quality of life with the world’s highest gross domestic product per capita at USD 105,720 per year (according to IMF 2012 figures) ahead of Qatar and Norway. This is remarkable considering the fact that Luxembourg does not even rank in the top 50 cities in terms of living costs according to Mercer Consulting 2012 ranking (Zurich ranks 6th, London 25th and Paris 33rd) and average living costs are actually 18% cheaper than Paris, 27% cheaper than London and 30% cheaper than Zurich (source: www.expatistan.com). The major role played by the country in international trade, especially in the Finance industry, has led to the development of a vast network of double tax treaties, 64 to date. This mitigates the effects of double taxation and covers income, inheritance, and value added taxes amongst others.

Political, economic and social stability have contributed to build Luxembourg’s reputation as a prime business location. Add this to one of the highest productivity levels in the world (based on an EU-average of 100 in 2011, Luxembourg obtains 169 vs. 110 for the Eurozone according to Eurostat), the moderate national deficit (21% of 2012 GDP according to Statec), the low unemployment rate (6.1% in 2012) and the AAA-rating and you will not wonder anymore why numerous multinationals moved part or all of their operations to Luxembourg.

 

Manage your banking costs by using Luxembourg banks’ cash pooling services

Some of these usually include Treasury and Financing operations given the availability of state-of-the-art infrastructure to support these operations. The banking community offers a wide range of services such as cash pooling in all main currencies, the use of SWIFTNet protocal and SEPA for payments and financing. Cash pooling allows companies to combine their debit and credit positions from several accounts into a single one. Companies that have opted for that solution may obtain more efficient liquidity management, a reduction of banking costs and an enhanced visibility on the cash position of the group. Two types of cash pooling services are offered in Luxembourg and grant companies the possibility to tailor the solution to their needs. Physical pooling implies that separate sub-accounts are transferred to a concentration account in order to eliminate idle cash and fund cash outflows. Entities sharing the use of the pool may be in surplus or deficit from a transactional point of view but bank accounts remain zero-balanced. It can be used for multiple legal entities in one or several countries for a single currency. At the other end of the spectrum reside the notional pooling services that balance entries on a set of virtual accounts with no changes to the bank accounts held by the entities sharing the pool. The main advantages of notional pooling are the possibility of using several currencies and the cancellation of the bid/offer spread since companies earn and lend at the same interest rate provided by the bank managing the pool. Using notional cash pooling in Luxembourg is especially cost-efficient as there is no withholding tax on interest earned in a pooling arrangement.

 

Optimize your order-to-cash process by implementing a payment factory

Many companies keep on managing their payment process and bank accounts at the entity level. While it can appear more flexible in terms of structure and daily operations, it may also imply a lack of visibility on the group cash flows, cash position, complex approval processes, higher operational risks and higher transactions costs. In order to reduce these risks and costs and considering the law enacted by the European Parliament for the migration of Euro direct debits and credit transfers to SEPA standards, leading groups are seizing this opportunity to evaluate the possibility of implementing a payment factory, i.e. a central hub created in order to gain further control over the processing of previously decentralized payment flows. Luxembourg IT and banking service providers offer all required success factors including the acceptance of all main standards for interfaces (e.g. SWIFTNet, ISO 20022 XML, SEPA), ERP consulting firms and tax and legal experts for direct/indirect tax considerations.

 

Use tailored solutions for your financing

Along with these services, banks also offer all kinds of structured finance products to answer various requests from Treasury and Financing centers. These include syndicated loans, securitization, credit derivatives and other capital market instruments. Luxembourg is the second largest investment fund centre in the world after the US, which ensures a high degree of expertise of market players (e.g. banks, corporate service providers, auditors). The country offers an attractive regulatory framework for setting up feasible securitization structures at a reasonable cost.

This combination of a robust economy, high professional expertise, attractive financial conditions and ideal central position make Luxembourg a great location for firms that are willing to establish operations or a regional headquarter in Europe.

 

Brice Lecoustey and Paul Fournier, EY, Luxembourg