How once-secretive Luxembourg is vying for a slice of the City of London

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Pedestrians walk across London Bridge towards the City of London financial district, as The Shard tower stands on the horizon Credit: Bloomberg

It’s tough to shake off a reputation for secrecy, as Luxembourg has found out in recent years. The country took its first steps as an offshore financial centre in 1929.

In a bid to tackle the problem of double taxation, it allowed big businesses to set up holding companies exempt from income and capital gains tax.

While the country ended this regime five years ago, LuxLeaks and the sweetheart tax deals uncovered in 2014 hindered the country’s progress towards a reputation for transparency.

In the wake of the Brexit vote countries are vying for a slice of the City of London’s pie, and Luxembourg officials are keen to stress it is not only open for business, but open about the way it conducts it.

“A large part of my job is myth dispelling,” says Nicolas Mackel, the chief executive of Luxembourg for Finance, a public-private partnership.

Clutching a 50-page document titled “Surprising Lux”, the head of the financial services lobby group is armed with facts and figures.

“This brochure was the result of a radio interview where the host was quite aggressive,” he says.

“It was just before LuxLeaks broke, and they were talking about taxing international companies and the host said: 'when is Luxembourg going to have a normal economy again as you did when you had steel?’”

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A visitor walks through the newly opened Liberty Park in Lower Manhattan in New York City. Liberty Park, elevated above Liberty Street in Lower Manhattan, overlooks the National September 11 Memorial Plaza and One World Trade Center.  Credit: Getty

ArcelorMittal is still Luxembourg’s biggest single employer, he says, and its steel helped to build the towers that replaced the World Trade Centre.

Officials have taken Luxembourg’s rebranding exercise seriously.

Ahead of a meeting with finance minister Pierre Gramegna his press minder boasts: “He only does meetings on the record”.

Gramegna believes Brexit is an opportunity for Luxembourg, but not necessarily around stealing business from London.

He will fly to the UK capital this week with Étienne Schneider, the economy minister, to reinforce the country’s links. “London is a very important financial centre,” he says.

“In fact, it is our main partner and as our main partner I would like to see how we can continue that partnership and lead it through these uncertain waters.

He warns that a post-Brexit world cannot be “inward-looking” for the rest of the bloc, nor “eurocentric”. “It’s been a common goal for London and us that directives are such that we can stay attractive for the outside world,” he says. Luxembourg punches above its weight in a number of areas.

A founder member of the EU, it is one of just a handful of countries that still enjoys a AAA rating. Growth was more than 4pc last year, while unemployment, at 6.2pc, is well below the eurozone average of 10.1pc.

Most people in the country are trilingual in French, German and Luxembourgish – a dialect of German – while a fifth speak fluent English.

Experts say countries choose to list bonds in Luxembourg because of the depth and diversity of listings here. Many investment funds have also set up platforms in Luxembourg because of the way it seamlessly conducts cross-border business.

As Mackel explains: “Try going to a bank in the UK and say: I have assets in Germany and I want to get a loan against these assets to buy a house in Spain. Chances are, your bank manager will say: we will not look into that. But Luxembourg banks will because they are comfortable looking into different legal frameworks.

“This is why when an asset manager wants to set up a fund to distribute to Portugal and Germany they do it out of their Luxembourg office because we have created an ecosystem that can provide the advice people need to do cross-border business in multiple jurisdictions.”

As Alain Hondequin, secretary general of the ABBL, which represents the top banks in Luxembourg, puts it: “Many financial centres talk about being multilingual and doing cross-border business. We live it.” Banks that have used the UK as a gateway to the rest of the EU are already getting itchy feet.

A confidential Brexit briefing prepared by Deutsche Bank reportedly showed JP Morgan is likely to move parts of its UK operation to Luxembourg, while Citi, Barclays and Bank of America Merrill Lynch are thought to favour Dublin.

Mackel says one US bank is already setting up a derivatives trading desk in Luxembourg.

“Those that have done their homework have prepared very fancy powerpoint presentations where they are benchmarking the shortlisted jurisdictions, which are likely to be Frankfurt, Dublin and Luxembourg,” he says.

“From housing to international schools, to regulatory processes, they will be going through these with a fine-tooth comb.”

Amsterdam has been suggested as an alternative by some, though many bankers will balk at its bonus cap of 20pc of annual salaries.

As for Paris, it doesn’t even make the list.

“They talk a lot of talk and they make a lot of noise, but that’s because it’s the only strategy they have,” says one official.

“They talk about rolling out the red carpets, but what good is that if the carpet rollers are always on strike?”

Luxembourg’s financial industry is covered by collective bargaining, which sets rules for overtime and holidays and even gives all employees the right to half a day off to give blood.

It has raised eyebrows among some. “It’s only a problem for Anglo-Saxon banks”, says Mackel.

“But even they are fine with it. There hasn’t been a strike here for as long as I can remember.” The country’s rank on the World Bank’s Ease of Doing Business index is poor compared to its peers, with buying property cited as difficult.

There’s also a more simple point.

Luxembourg is beautiful, there are more Michelin starred restaurants per head than anywhere else in the world. But it’s just not a London or New York.

It’s for this reason that Hondequin believes there will not be a “tidal wave” of new business for any country when the UK leaves the EU.

“International capital markets, investment banking, foreign exchange are the things the UK does best. Brexit can’t change things overnight and it’s wishful thinking to think that’s the way things will go,” he says.

For Mackel, while countries like Germany and Luxembourg may take some administrative functions away, the decision-making is likely to stay in the UK capital.

Mark Yeandle, lead author of the annual Global Financial Centres Index (GFCI), believes London will remain the “place for innovation” after Brexit.

“Global banks will still need operations in Europe and US banks prefer English speaking locations,” he says. “There may a re-balancing of headcount by big European banks but not a mass exodus away from London.”

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Tourists view and photograph a commemorative sculpture at the dock where the 1985 European Schengen Agreement was signed Credit: Getty

One person who thinks Luxembourg can gain from Brexit is Robert Scharfe, the boss of the country’s stock exchange. The Bank of China first set up a branch in the country in 1979 and Luxembourg has built strong links with the world’s second largest economy since. 

Today, the relationship remains strong, and as Scharfe slides his business card across the table, the  non-English language side is not in French or German, but Chinese.

Two years ago, the Bank of China launched its first offshore renminbi “Schengen bond”.

This month, it became the first Chinese bank to list a green bond, with a $2.8bn (£2.16bn) issue. Scharfe, who recognises the rivalry between the UK and Luxembourg for Chinese business, senses an opportunity.

“Business people are looking in the mirror and thinking: what does Brexit mean for me, what could be the impact, and how can I neutralise that?

No asset manager I know sits and waits for another three years to see what is going to happen.” Scharfe believes Luxembourg has found its place on the global map.

“We have managed to attract six Chinese banks and there are more to come,” he says. “There are more to come.”

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