Luxembourg’s financial sector was not built in a day. In the collective imagination—especially outside Luxembourg—the sector’s history probably evokes the 1980s, i.e. the years of internationalisation and booms in private banking and easy money. But there were plenty of major moments before then.
The advantages of Luxembourg’s financial centre have traditionally been banking secrecy and attractive taxation, both of which have seen a steady decline in relevance. More fundamentally, the country’s political and legal stability, along with its qualified and multilingual workforce, can perhaps be credited with the spectacular development of financial activities. Above all, however, the real strength of the financial centre is the mindset of its unprejudiced legislator, which is determined to seize opportunities and do everything it can to create the most welcoming framework possible.
Some call it pragmatism, others laxity—the debate is far from over. Consider the number of attacks suffered in recent years, some of which weren’t fully justified (the “Lux Letters” fiasco died down almost within a day). Nevertheless, the sector has not only brought great wealth to the country, but also an international influence and visibility wholly disproportional to Luxembourg’s size. It has thus met one of the goals of erstwhile politicians who didn’t want the grand duchy crushed by its large neighbours.
One particularly momentous year, when it comes to legal pragmatism, was 1929. Two institutions emerged that would help usher in the modern-day financial sector: the Stock Exchange and Holding 29. Both benefited from non-existent taxation. Indeed, the emergence of tax havens is a legacy of the First World War: the economy had suffered and the international monetary system was destroyed. Large countries increased their taxation to finance their reconstruction, while small states suffered from the drying up of international trade. The groundwork was there, and Luxembourg followed a movement started by Switzerland and Liechtenstein.
According to its creators, the opening of the Luxembourg Stock Exchange was intended to promote Luxembourg securities, but above all to attract the listing of foreign securities. This is why stock market operations are tax-exempt. The purpose of Holding 29 was to group together financial holdings in various companies and to ensure that they were managed as a single entity, ensuring also that the regrouping happened in the country. The “H29” was subject only to a registration fee, a stamp duty and a subscription fee.
These tax advantages no longer exist. The stock exchange has become a recognised marketplace for bonds and investment funds, and is a reference in the world of sustainable finance. As for the “H29”, it became extinct on 31 December 2010 in the name of tax transparency and will never really be replaced. The family asset management company (SPF), created in 2007 to succeed it, will never be as favoured by its target audience.
Patience is the friend of imagination, as it turns out for Luxembourg. These new instruments emerged in 1929, but by the end of the Second World War there were only ten banks in the country. It wasn’t until the 1950s that the financial centre took off.
This article was originally published in Paperjam. It has been translated and edited for Delano.