Luxembourg Outlook 2024 - Promising Glimpses of Hope on the Horizon

2024 sees promising glimpses of hope on the horizon for Luxembourg after a challenging year for businesses and individuals, characterised by a global economic slowdown and geopolitical instability, inflation pressure and rising interest rates.

Projections from the Luxembourg National Institute for Statistics and Economic Studies of the Grand Duchy of Luxembourg – (“STATEC”), indicate a projected 2% increase in real GDP for 2024. While inflation has tempered in Europe in recent months, with Luxembourg expected to experience an inflation rate in the region of 3% in 2024, a decline from the 3.5% recorded in 2023.

There are further signs of hope for the financial sector in Luxembourg. Having experienced a decline in overall activity throughout 2023, there are signs that the sector is geared toward a gradual reversal of this trend.

In the realm of real estate, key stakeholders, including promoters, developers, property owners and investors, have felt the impact of elevated interest rates and rising material costs. The awaited prospect of interest rate cuts could potentially restore confidence in this sector, though confirmation from the European Central Bank is pending, market analysts are anticipating the likelihood of multiple rate cuts in 2024.

What lies ahead is a landscape ripe for renegotiation of existing transaction financing arrangements and an upswing in distressed opportunities across diverse asset types. Those with available liquidity stand to benefit from current market conditions.

As we navigate the unfolding narrative of 2024, adaptability and strategic decision-making will be pivotal in capitalising on emerging opportunities.

Regulatory Developments

In addition to the macroeconomic trends outlined above there are a number of legislative and regulatory updates which companies in Luxembourg should be aware of.

According to the Financial Action Task Force (“FATF”) most recent evaluation report, released in September 2023 on Luxembourg's Anti-Money Laundering (“AML”) and Counter-Terrorist Financing (“CTF”) framework, the country received a favourable rating ranging from good to very good. This outcome is highly positive not only for Luxembourg but for the entire financial services ecosystem.

Digitalisation Law

The Luxembourg Law of 7 July 2023, commonly known as the "Digitalisation Law" serves as the transposition of Directive (EU) 2019/1151, amending Directive (EU) 2017/1132, with a focus on integrating digital tools and processes into company law. This legislation not only facilitates the digitisation of the notarial profession but also introduces various provisions, including the option for online company formation.

Key features of the Digitalisation Law include the ability to incorporate a société anonyme (SA), a société en commandite par actions (SCA), or a société à responsabilité limitée (Sarl) through a notarial deed in electronic format, eliminating the need for the physical presence of founders or their proxies. Moreover, the law permits the online payment of seed capital in cash directly into an account established in the name of the incorporating company. This comprehensive framework reflects Luxembourg's commitment to embracing digital advancements in company law and streamlining administrative processes.

Blockchain III Law

The enactment of Bill 8055 (“Blockchain III Law”), marks the culmination of the initial two iterations of related legislation and the incorporation of EU Regulation 2022/858, introducing a pilot regime for market infrastructures based on distributed ledger technology (“DLT”). This legislation brings notable changes, including the modification of the definition of financial instruments to encompass those based on DLT. Additionally, amendments to the Luxembourg Law of 5 August 2005 on financial collateral arrangements now permit the utilisation of DLT financial instruments as collateral.

This comprehensive legal framework positions Luxembourg uniquely, providing specific regulations governing the entire security token value chain.

Luxembourg Insolvency Law

The Law of 7 August 2023, focusing on business preservation and modernisation of bankruptcy law ("Reorganisation Law"), entered into force on 1 November 2023. The stipulations within this law offer specific relief measures for companies encountering financial challenges and introduce fresh regulations pertaining to bankruptcy proceedings, covering prevention, recovery, sanctions, and social considerations.

The interests protected under the Luxembourg Law of 5 August 2005 on financial collateral arrangements continue to offer robust security and legal certainty to lenders.

Non-Performing Loans and Credit Servicers Directive

The approval of Bill 8185, which aims to implement Directive (EU) 2021/2167 on credit servicers and credit purchasers ("NPL Directive"), is eagerly anticipated to take place in the upcoming calendar year by the Luxembourg Parliament. The NPL Directive establishes a comprehensive framework applicable to EU member states, addressing the transfer or assignment of non-performing loans originally issued by credit institutions.

Cross-Border Conversions, Mergers and Divisions Directive

The draft legislation, Bill 8053, aimed at implementing EU Directive 2019/2121, which regulates cross-border reorganisation operations such as mergers, demergers, and transfers of registered offices (“Mobility Directive”), is anticipated to receive approval from the Luxembourg Parliament in 2024. The primary objective of this enactment is to achieve harmonisation and streamline procedural aspects. It is important to highlight, however, that associated timelines have been extended. This extension provides an additional three months for the completion of such operations.

Notably, Luxembourg stands among the few remaining EU Member States that have yet to transpose the Mobility Directive into national law.

Fiscal Changes

Pillar Two Law

Luxembourg parliament has adopted Bill no. 8292, implementing Directive (EU) 2022/2523 on global minimum taxation for multinational enterprise groups, the so called “Pillar Two Law”, on 20 December 2023.

The new rules aim to address remaining issues linked to global tax challenges, including the introduction of a global minimum tax. The intention is to ensure that multinational enterprises (“MNEs”) with a combined annual turnover of at least EUR 750 million based on consolidated financial statements pay a minimum level of tax (15%) regardless of where they operate. The law came into force on 31 December 2023 hence MNEs with a presence in Luxembourg may have compliance obligations starting in 2024.

Public Country by Country Reporting

On 19 July 2023 Luxembourg enacted legislation to transpose the EU Directive 2021/2101 on public Country-by-Country Reporting (“CbCR”). This implementation introduces a crucial obligation for multinational groups to disclose specific tax and related group information on an EU Member State's commercial business register and the group's official website.

The scope of this regulation applies to multinational groups meeting specific criteria, such as having total consolidated group revenues surpassing EUR 750 million in each of the two preceding consecutive financial years. Additionally, the requirement extends to groups with their ultimate parent undertaking in an EU country or those with significant operations in the EU through an EU subsidiary or branch.

The effective date for compliance aligns with the EU Directive, stipulating that the new reporting obligations will become applicable for financial years commencing on or after June 22, 2024.

VAT Rate Change

As of 1 January 2024, the Value Added Tax (“VAT”) rates in effect have reverted to their pre-January 2023 levels. The standard rate is now at 17%, with reduced rates of 14% and 8%, while the super-reduced rate remains unchanged at 3%.

Director’s Fees

On 21 December 2023, the Court of Justice of the European Union (“CJEU”) delivered a landmark judgment determining that remuneration received by a director for their role as a member of the board of directors of a Luxembourg Limited Company will be no longer be subject to VAT. This change aligns with the CJEU’s rulings and signifies that directors’ fees in Luxembourg are now VAT exempt under the current legal interpretation influenced by this case law.

In Conclusion

Undoubtably, navigating the economic landscape in 2023 was challenging for most businesses and individuals in Luxembourg. Having been faced with many hurdles along the way, the resilience of the Luxembourg economy coupled with a slowdown in inflation offers promising glimpses of hope for upcoming year.

With several legislative and regulatory changes due to be rolled out over the course of 2024. For businesses in Luxembourg, is it imperative to remain informed to ensure they are ready to meet these new requirements.

For further information on any of the topics discussed above or to discuss how Cafico International can assist your business please reach out to Arek Kwapien.