The Impact of Tax Amnesty and Banking Secrecy on Luxembourg’s Private Wealth Management Industry

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Introduction

The end of banking secrecy and tax amnesty regimes have led to significant changes in the Luxembourg private wealth management industry. Banks have had to adapt their business models, skills, and qualifications to provide advice and structuring services to high net worth individuals and family offices.

Key Points

1. Tax Amnesty Regimes

• Some European countries, including Germany, the Netherlands, and Austria, had domestic tax amnesty regimes that allowed for the regularization of undeclared assets held by foreign clients at offshore accounts.
• Luxembourg’s ICMA Private Wealth Management Charter of Quality was issued to provide guidance on how to deal with undeclared assets held by foreign clients at Luxembourg private banks.

2. Short-term Effect on Luxembourg Banks

• The primary short-term goal of Luxembourg banks was to assist clients in regularizing their assets in their respective countries of residence.
• This involved active management, client base review, and decision-making to off-board clients who were not willing to confirm their tax status.

3. Medium and Long-term Challenges

• The business model shifted towards serving high net worth individuals and family offices.
• Banks had to change their skill sets and qualifications to provide advice and structuring services.
• They also had to introduce a tax control framework, internal governance, policies, and procedures to ensure compliance with international tax laws.

4. Industry Growth

• Despite the disruptions caused by the end of banking secrecy, the Luxembourg private wealth management industry has successfully managed the transformation and is now growing.
• Assets under management in private banking have not decreased but rather increased during the past ten years.
• The distribution of client wealth bands has shifted towards higher net worth individuals and family offices.

Conclusion

The growth path will continue going forward due to the need for and complexity of international wealth structuring, which is at the heart of Luxembourg’s value proposition in Private Wealth Management. Tax compliance is essential in this context.

As a result, it can be expected that:

• The number of tax audits in Luxembourg will increase.
• There will be more initiations for tax offence proceedings, leading to soaring liability risks for corporate bodies and executives.
• Banks will need to establish their own tax strategy, assign clear responsibilities within their organizations, and thoroughly document their governance.

These elements will serve as a first line of defense in the event of tax audits and mitigate the risks for both the organization and its executives.