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Luxembourg should consider tax breaks to promote sustainable investment – report

Sweeping set of recommendations in new roadmap

Luxembourg should consider tax incentives to promote sustainable investment, according to a government-backed roadmap published today.

It’s one of a series of ideas, including integrating sustainability into the Grand Duchy’s “national branding”, contained in the new Luxembourg Sustainable Finance Roadmap – which was commissioned by the government and conducted by the UN Environment Programme Finance Initiative.

“Incentives could be designed to encourage long-term, sustainable investments and discourage unsustainable investments,” the report states.

This includes assessing the nature of the incentives (the type of investment for which they are granted), and the conditions for accessing them (for example, minimum holding periods for exoneration of capital gains, or minimum duration of unit-linked insurance contracts).

“Furthermore, the multiplying effects of incentives at the level of the product issuer, investor and investee need to be integrated into this assessment.”

It adds that incentives could be linked to specific investment models. For example, the financial performance of an investment could be linked to its environmental or social benefits.

Expertise in extra-financial performance measurement
“Sound expertise in extra-financial performance measurement” was needed for such innovative incentive schemes, the report adds.

The report also notes that direct taxes have an important multiplier potential, both at the level of the investee and of the investor – and points to the success that waiving subscription taxes for microfinance has had.

“Analysis should be conducted to determine under which conditions the same measures could be implemented for sustainable investment funds at large.”

Luxembourg’s existing regime of social impact companies (SIS), which enjoy tax advantages and greater access to public procurement, could be expanded to a broader range of companies or business practices under the condition that they comply with strict ESG conditions and make reference to the taxonomy currently being developed at EU level.It goes on: “Investors could be granted tax relief on personal or corporate income tax against a sustainable investment made, for example in a sustainable-labelled investment fund or SIS company.”

Another option could be reduced VAT rates for sustainable business models and activities.

“Incentives could be designed to encourage long-term, sustainable investments”

Finance Minister Pierre Gramegna said the roadmap “builds on the strong collaborative spirit that exists here in Luxembourg between the financial center, the government and the civil society in the field of sustainable finance”. The government has set up a public-private entity called the Luxembourg Sustainable Finance Initiative to analyse the report’s findings.

Luxembourg says it is a centre for listing green bonds and the European leader in responsible investment fund assets, accounting for 30% of all funds and 40% of all assets under management. Its LuxFLAG body has pioneered sustainable finance labels.

Luxembourg has been talking about becoming a sustainable finance hub since at least 2012 – when it said it wanted to make responsible investment the third pillar of its funds industry alongside UCITS and alternative investment funds.

Luxembourg: some key facts:
◼ Second largest fund centre in the world and the most popular UCITS domicile
◼ Handles 65% of distribution of cross-border funds worldwide and funds are registered in more than 70 countries.
◼ Around 27% of all investment funds in the EU are domiciled in Luxembourg – roughly 4,000 umbrella funds with 14,700 sub-funds, and net assets of €4.2trn.
◼ Has €360bn in assets under management in private banking, with 60% of clients from the EU, and 40% from the rest of the world.
◼ A hub for European life insurance assets
◼ Home to the European Investment Bank and the European Investment Fund.