Foreign direct investment (FDI) in Luxembourg

FDI in Figures

Luxembourg offers a business climate favourable to foreign investment, with a very attractive tax system. According to UNCTAD's 2021 World Investment Report, FDI inflows stood at USD 62.1 billion in 2020, up from USD 14.8 billion a year earlier, despite the global economic crisis triggered by the Covid-19 pandemic. This is a sharp increase that has made the country the sixth-largest global recipient in terms of FDI inflows, gaining 19 places since last year. In 2020, the total stock of FDI stood at USD 627 billion. According to figures from OECD, half of FDIs received by Luxembourg come from the countries of the European Union, although the main investor is Bermuda (13.5%), followed by the UK (13.1%), Ireland (12.1%) and the Netherlands (9.3%). In terms of sectors, financial and insurance activities attract more than four-fifths of all investments (81.6%), with manufacturing accounting for only 2.8%. Luxembourg is also the world's second-largest investor, behind China, with as much as USD 127 billion invested in 2020, compared to USD 34 billion in 2019. According to the latest figures from OECD, in the first six months of 2021 FDI inflows to Luxembourg stood at only USD 2 billion, compared to 52.3 USD billion in the same period one year earlier.

According to the World Economic Forum (WEF), the country ranks 18th on the 2020 Global Competitiveness Index. The government of Luxembourg has established some measures in order to make the country even more attractive to FDI, such as fiscal benefits, equipment and construction projects. The government focused on key innovative industries like logistics; ICT; health technologies, including biotechnology and biomedical research; clean energy technologies; space technology and financial services technologies. The country has long been considered a tax haven, though in recent years it has taken steps related to the process of harmonisation of financial standards both within the EU and at the international level. Furthermore, the “Multilateral Convention to Implement Tax Treaty Related Measures To Prevent Base Erosion and Profit Shifting” - which aims at combating tax avoidance by multinational companies - entered into force for Luxembourg in 2019. In 2021, the bill of law n°7885 introduced a mandatory notification and pre-approval requirement for certain foreign direct investments made by non-EEA investors in a local entity operating in a sensitive sector in the territory of Luxembourg (e.g. transport, telecommunications services, electricity generation and distribution, gas conditioning and distribution, the treatment and distribution of water, healthcare activities, technologies relating to artificial intelligence, infrastructure and systems for the exchange, payment and settlement of financial instruments). Finally, the country ranks 72nd out of 190 economies in the World Bank’s latest Doing Business report (losing six positions compared to the previous edition).

What to consider if you invest in Luxembourg

Strong Points

Luxembourg has many attractive assets for investors on its soil. Here are the main ones:

• One of the most open economies in the world, with few foreign exchange controls and foreign capital flowing freely, allowing the country to have an undisputed pro-business environment
• The country is a global finance hub with a strong and broad banking sector (126 banks listed in 2021 - Central Bank of Luxembourg) and a thriving investment fund industry.
• A very attractive tax system that provides the country with solid and consistent income
• One of the lowest public debts in the European Union
• Extremely developed transport infrastructure connecting the country to major cities and foreign capitals (motorways, air and trains)
• A highly skilled multilingual workforce with significant purchasing power
• Outstanding quality of the digital infrastructure (Luxembourg has the highest concentration of Tier IV data centres in Europe and ranks 3rd in the EU for connectivity - 2020 Digital Economy and Society Index)

Weak Points

The main obstacles to investment in Luxembourg are:

• A weakly diversified economy and extremely dependent on its banking and financial sector
• An employment market dependent on "frontier" workers, resulting from a small and ageing Luxembourg working population
• The long-term budgetary impact of the ageing of the population and the necessary reforms of the country's pension system

Government Measures to Motivate or Restrict FDI

The Luxembourg government has taken  measures to encourage the establishment of businesses on its soil:

•  Subsidies granted to SMEs (retail, restaurant or hotel) through the National Society for Investment Credit (SNCI)
• Community income tax and business tax exemption of 25% for eight years for start-up businesses
• Commercial licenses granted faster and more transparently
• Measures were put in place to protect minority investors in order to facilitate their ability to resolve commercial damages in court and to facilitate access to the key information about the companies in which they invest

In general, Luxembourg's tax legislation provides various incentives in the following areas: investment tax credit, risk capital, tax incentives for research and development (R&D) and intellectual property (IP), recruitment of the unemployed, audiovisual activities, vocational training.