Mutation of Luxembourg Treasury

Thierry Bovier, Ralf Heussner and Fabrizio Dicembre, respectively partner International Tax, partner Transfer Pricing and Business Model Optimization and director CFO Services, Treasury advisory at Deloitte Luxembourg discuss the effect of BEPS and Brexit, among other factors, on the treasury landscape in Luxembourg.




"The OECD Base Erosion Profit Shifting action plans are going to remodel part of Luxembourg’s tax legislation."

Thierry Bovier, Partner International Tax, Deloitte Luxembourg




It seems clear that the tax legislation is/will be evolving, what is your view for treasury centers in Luxembourg going forward?


Thierry Bovier,
Partner International Tax, Deloitte Luxembourg


The Luxembourg tax legislation has traditionally been in line with the corporate objectives of a treasury center. To illustrate this, we could look at the absence of interest withholding tax paid by a Luxembourg company to a corporation or a bank, the ability for an EU corporation paying to a Luxembourg company to rely on the EU interest and royalty directive or a double tax treaty, the absence of interest limitation deduction rules, or the ability to opt for a non-EUR functional currency.

However, the OECD Base Erosion Profit Shifting action plans are going to remodel part of Luxembourg’s tax legislation mainly through the EU Anti-Tax Avoidance Directives’ transposition and Multilateral Instrument’s adoption. Are those changes a threat or an opportunity for treasury centers?

In our view, the upcoming changes make the right level of substance the cornerstone of any corporate treasury structure. Let’s take two examples to illustrate this point. 

First, as from 1 January 2019, the Luxembourg tax legislation will have a Controlled Foreign Corporation (CFC) legislation whereby some passive income can be picked up at the level of an EU parent company unless the CFC company will be able to demonstrate that it has a substantial economic activity and/or the right people to manage the risks linked to the assets held by the CFC company. The right level of substance will therefore be key to analyze the future CFC rules in Europe.

Secondly, the introduction of a Principal Purpose Test (PPT) rule provided by the multilateral instrument would deny a double tax treaty benefit if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this double tax treaty. This will give rise to uncertainties as that PPT clause is subjective by nature and thus raises various questions. For instance, what about a situation where a tax benefit is granted and the tax payer presents economic facts not linked to a double tax treaty?

The upcoming changes raise several questions and corporate treasury strategies should be reviewed from a tax perspective to determine how to best face these new challenges. It is important to bear in mind that the changes are global (e.g., US tax reform, abolition of the Swiss Finance branch regime, foreign interest limitation rules, etc.) and they create clear opportunities for Luxembourg to highlight its operational treasury solutions to remain attractive.




What are the key transfer pricing challenges affecting treasury structures in general but also specifically to Luxembourg?


Ralf Heussner,
Partner, Transfer Pricing and Business Model Optimization, Deloitte Luxembourg


Transfer pricing has become an increasingly challenging issue for taxpayers in the context of treasury structures. There are two key factors driving such complexity. The first factor is the changing international tax and transfer pricing landscape following the OECD BEPS initiative with an increased focus on substance, the treatment of synergies and passive association. The second factor consists of landmark transfer pricing audits that have taken place over the last couple of years covering treasury arrangements which have further encouraged local tax authorities to scrutinize treasury-related transactions between related parties. Taxpayers should also remember that in essence all cross-border treasury structures are affected by transfer pricing which include notional, physical and hybrid cash pooling arrangements, advanced structures that extend into payment-on-behalf-of (POBO)/collection-on-behalf-of (COBO) as well as relatively new virtual cash management (VCM) arrangements.

There is a range of key questions that need to be examined to appropriately address the transfer pricing dimension of treasury arrangements and design a defendable transfer pricing policy:

What are arm’s length interest rates or spreads for deposits and withdrawals for cash pooling arrangements and how should these be determined? This is obviously the key question from a transfer pricing perspective but the expectations and operational limitations of treasury departments on the implementation side also need to be taken into consideration, e.g. with respect to the ability of handling different spreads for deposits and withdrawals across different currencies



"We believe that now is a good time to revisit existing treasury arrangements from a strategic, operational and tax perspective."

Ralf Heussner, Partner, Transfer Pricing and Business Model Optimization, Deloitte Luxembourg



Can the interest rates or spreads agreed with external banks be used as so-called comparables and how do these rates impact the risk profile of the cash pool leader and participants?

How to deal with the current and likely ongoing negative interest environment in the Eurozone?

What level of substance and functionality is required at the level of the treasury/cash pool leader?

How should the creditworthiness of the cash pool leader and its financial capacity to bear risk (capital adequacy) be taken into consideration?

Should the cash pool leader retain all (cash pooling) benefits or not? If not, what level of remuneration should the cash pool leader retain and what share of the cash pool benefits should be allocated to the cash pool participants?

How should the creditworthiness of the cash pool participants be taken into consideration when determining interest rates or spreads for withdrawals?

How should parental and/or cross-guarantees between the cash pooling participants be taken into consideration with respect to the characterization of the cash pool leader and the treatment of cash pool benefits?

How can cash pool benefits/synergies be tax-efficiently distributed to the participants (considering direct and indirect tax aspects) and how should this be structured from a legal perspective?

How to deal with advanced treasury arrangements with respect to the additional complexity created by theinterjection of shared service centers that perform invoicing, debtor/creditor management, accounting and other services and potential investments required in infrastructure and ERP-systems?


In addition to the above points, it is also important to take into consideration the link to the long-term financing strategy. This is especially relevant with respect to monitoring that treasury transactions that are supposed to be short-term are not de-facto long-term (or structurally imbalanced) positions and to consider consistency between the short-term treasury and long-term financing arrangements (e.g. with respect to determining credit ratings for local affiliates and avoiding inconsistencies that often escalate under audit where one local affiliate enters into a long-term borrowing from its parent while at the same time having excess cash that is being invested into a cash pool).


We believe that now is a good time to revisit existing treasury arrangements from a strategic, operational and tax perspective, especially considering that significant restructurings of treasury structures are being triggered by factors such as the uncertainties created by Brexit and the impact of the Swiss tax reform where Luxembourg is crystallizing as a jurisdiction of choice for treasury activities.




What are you observing on the Luxembourg treasury market in terms of evolutions and latest trends?


Fabrizio Dicembre,
Director CFO Services, Treasury advisory, Deloitte Luxembourg


Treasury in Luxembourg follows the global trend for treasury centers, with some local specificities linked to the overall fast developing economy, one of the world’s largest fund industries, strong players in the banking sector, local or international, all noting the indirect impact of Brexit, and the US and Swiss tax reforms.


The current global trend is to reorganize treasury operations in regional centers of excellence creating cost-efficient structures, optimizing cash operations, developing concepts of in-house banking (payment on behalf – collection on behalf), concentrating investments, and centralizing intercompany financing into specific holdings.


Luxembourg has traditionally been one of the destinations selected by global corporations for registering their treasury operations. However, many companies chose Luxembourg for light structuring of their holdings and did not build up dedicated treasury resources in those holdings. This is now changing. 

"The fact that major international banks have decided to relocate their European hub to Luxembourg (linked to Brexit), boosts the market and reinforces the offer of local solutions for banking."

Fabrizio Dicembre, Director CFO Services, Treasury advisory, Deloitte Luxembourg


Treasury in Luxembourg is also a growing role in the fund industry. Over the past years, we have seen the creation of new treasury centers linked to fund managers, especially in the alternative fund sector (real estate and private equity) which after years of strong growth are in need of treasury to support their growth, reduce their banking and transactional costs, and manage the implications of negative interests. Treasury is seen as a business-enabling function and a resource for future growth. Some fund managers have announced the transfer of their international operations from the UK to Luxembourg, further increasing the demand in Luxembourg. 


The Luxembourg banking landscape is changing. We are seeing an increasing offer of corporate banking on the Luxembourg market. Obviously, the size of the market is not comparable to the major European hubs, however the fact that major international banks have decided, or are considering, to relocate their European hub to Luxembourg (linked to Brexit), boosts the market and reinforces the offer of local solutions for banking, which is the growing request from treasury centers, as there is a strong trend to favor resident accounts versus off-shore solutions, especially for euro.


In terms of talent, the attraction of Luxembourg remains high. Its quality of life, the safe environment, its cosmopolitan society and stable political environment are some of the country’s key assets. At the same time, Luxembourg is suffering from a high inflation of residential costs, especially due to short demand in the rental segment and from an inadequate educational offer. However, these issues are high on the government’s agenda and Luxembourg is working on improving its offering in this respect.


As a conclusion, Luxembourg is an attractive place to locate treasury operations and should be considered in the treasury reorganization process or when organizing new treasury centers. Luxembourg has multiple benefits and should take advantage of its position to further attract treasury centers.