Private Banking in Luxembourg

The Law provides that the financial sector (including banks and professionals of the financial sector) are precluded from the passing of information on individual accounts. Privacy rules can only be lifted in limited cases defined by law.

Many foreign individuals have elected Luxembourg as their base for banking and wealth management.

Individuals may choose to structure their assets through a company, a fund, or another entity.

Others have opened bank accounts in Luxembourgish banks.

Depending on their choice of entity, their citizenship, and whether they are resident or domiciled, some individuals may incur tax liability in Luxembourg or abroad. In most cases, the Grand Duchy does not impose a tax liability on individual foreigner banking in Luxembourg but the individual's tax liabilities may remain in their country of residence. As the relevant laws become increasingly complex and abstruse, respecting reporting duties is becoming more difficult, hence full understanding is a necessity.

The Council Directive 2003/48/EC, of 3 June 2003, on taxation of savings income in the form of interest payments provides that Luxembourg paying agents (which may be banks or other vehicles established in Luxembourg) should levy a withholding tax at a rate of 35% on certain interest payments.

However, it is important to note that :

• not all the interest income is deemed to be an interest as defined by the EUSD (for example, income from profit participating loans and trackers etc are classed as  dividends)

• only individuals resident in Europe fall within the scope of the withholding tax

• companies or some funds, such as SIF, SICAR, Securitisation Funds, are not targeted by the EUSD

The withholding tax obligation may be cancelled if the individual taxpayer either:

• provides an exemption certificate - drawn up by the taxpayer's tax authority, or

• gives a mandate to the paying agent agreeing to automatically report nominative

• information to the  tax administration  of his country of residence (for of members of the EU).

To avoid migration of funds, the European Commission also negotiated with other countries (such as Switzerland, Liechtenstein, Monaco, Andorra, San Marino) and with some dependent territories (for example Anguilla, Aruba, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Montserrat, Netherlands Antilles, Turks and Caicos Islands) who apply equivalent provisions to those of the directive. (NB Bahamas, U.S.A., etc are not applying the same provisions.)

The European Commission, on the request of the ECOFIN Council, is also negotiating with other financial centres, such as Hong Kong and Singapore, in order to extend the geographical scope of the directive.

In 2008, the European Commission proposed to amend the EUSD in order to extend its scope to cover certain non-targeted income , interests obtained via investments in certain innovative financial products, certain life insurance products, and certain companies, as well as via a Fund fulfilling certain conditions.

The Council has not yet unanimously agreed to this proposal as there is still a lack of political consensus.

Double tax treaties signed between Luxembourg and certain other countries allow the latter to request information from the Luxembourg tax authorities about their tax residents.

However, in many cases  requested information cannot be disclosed by the bank and cannot be given to the Luxembourg tax authorities for supply to the requesting state.

Luxembourg has now agreed a new  double tax treaty with certain countries which allows for an exchange of letters to exchange banking information (Art 26).

Here is the list of the countries which may ask information even to bank on a taxpayer :