LUXEMBOURG TO CUT TAX ON ACTIVE ETFs

Trade body pushes for subscription tax to be scrapped for active strategies.

Luxembourg plans to cut taxes for actively managed exchange traded funds to give the Grand Duchy “the right starting conditions” in the growing market for the products.

The Luxembourg government levies a subscription tax – taxe d’abonnement – of 5 basis points on retail mutual funds and 1bp for institutional shares classes, which is borne by investors.

ETFs that track an index are exempt from the tax, but actively managed products are not.

Gilles Roth, Luxembourg’s minister of finance, says he “intends to reduce” the subscription tax for active ETFs.

“Thanks to its long-standing expertise in active fund management and the presence of global asset management leaders, Luxembourg should have the right starting conditions in this emerging field,” he says.

Roth announced the plans at the Association of the Luxembourg Fund Industry’s global asset management conference yesterday.

He did not specify how much the tax rate would be cut or when it would take effect.

A spokesperson for Luxembourg’s Ministry of Finance says details on the tax cut “should be announced in the coming months”.

Active ETFs in Europe had €38bn of assets under management at the end of 2023, up from €27bn the year before, Morningstar data shows.

Alfi’s chairperson, Jean-Marc Goy, says Luxembourg should scrap the subscription tax altogether for active ETFs.

Goy, who was speaking earlier at the Alfi conference, says: “We have to make sure that Luxembourg is an attractive and competitive jurisdiction for the setup of such active ETF products.”

“Active ETFs is a new product trend we see developing tremendously in the US [that is also developing] outside of the US,” Goy says.

Luxembourg’s tax announcement follows recent research that suggested Ireland’s funds industry could overtake the Grand Duchy’s within six years, with experts pointing to ETFs as one of the main drivers of Ireland’s growth, as reported by Ignites Europe.

Active ETFs domiciled in Ireland had €32.9bn of assets at the end of last year, whereas Luxembourg accounts for just €3bn, according to Morningstar data.

Michael O’Riordan, founding partner at BLACKWATER, an ETF consulting firm, says Luxembourg will need to offer a lot of incentives to ETF providers to entice them away from Ireland.

“All the servicing talent for ETFs is in Ireland, which gives Ireland a massive advantage [over Luxembourg].”

O’Riordan says: “The Luxembourg government would need to start throwing out a lot of carrots if they want to incentivise the big servicing shops to start relocating to Luxembourg.”