Luxembourg achieves medium overall compliance with international standards and codes, with a score of 53.3 out of 100 in our Standards Compliance Index. Luxembourg's compliance in the areas of macroeconomic fundamentals and market infrastructure is mixed. As a Euro area member, Luxembourg benefits from the highly transparent monetary policy of the European Central Bank, and it has subscribed to the International Monetary Fund's Special Data Dissemination Standard since 2006, but there are no independent assessments of its fiscal transparency policy. Similarly, Luxembourg ranges from "full compliance" (payment systems) to "intent declared" (accounting) in the market infrastructure area and lacks comprehensive information on its corporate governance practices. It largely meets international requirements for its insolvency framework, has enacted laws to align its auditing practices with international standards, and continues to make progress in strengthening its anti-money laundering regime. A generally high level of compliance in the financial supervision area is marred by a lack of an independent assessment of the Grand Duchy's adherence to the revised Insurance Core Principles.

Macroeconomic Policy and Data Transparency

Luxembourg subscribed to the International Monetary Fund (IMF) Special Data Dissemination Standard (SDDS) on May 12, 2006 and met all SDDS requirement at the time of subscription. Based on information provided on the IMF's SDDS website, Luxembourg meets SDDS requirements for periodicity, coverage, and timeliness of data, although it does avail of the flexibility option with regards to timeliness for national accounts and analytical accounts of the central bank. Luxembourg also fulfills SDDS requirements for the access dimension, except for wages/earnings and stock price index entry points, where there is no mention of the requirement for simultaneous release of data to all interested parties. Information on the IMF's SDDS website also shows that Luxembourg meets most SDDS requirements for integrity of data. It does not, however, clearly state the confidentiality of individually identifiable information for a few data categories, and there is no clear identification of ministerial commentary or internal government access for exchange rates. With regard to the quality of data, information provided on the IMF's SDDS website indicates that Luxembourg does not provide the requisite information on component detail and cross-checks for the data categories, general government (public sector operations), or interest rates. More »

Luxembourg adopted the Euro with its launch in January 1999. Thus, its monetary policy is no longer governed by the Central Bank of Luxembourg. Rather, the Governing Council of the European Central Bank (ECB) determines Luxembourg's monetary policy, and the Eurosystem (consisting of the ECB and the central banks of the member states that have adopted the euro) is responsible for its implementation. According to the IMF, the Eurosystem and the ECB maintain high transparency standards and a commitment to openness. The ECB observes the IMF's codes and standards for monetary policy transparency and pursues an active policy of communication with the public. More »

Luxembourg's fiscal system suffers from the lack of a medium-term perspective and various weaknesses in its budget management practices. The IMF reports in its 2006 Article IV Consultation that the government views the European Union (EU) Stability and Growth Pact, to which it is subject as a Euro member, as a sufficient medium-term framework to align fiscal objectives. The Organization for Economic Cooperation and Development (OECD) notes in its 2006 policy brief that Luxembourg should improve its budget management practices by providing medium-term budget trends in their proposals (specifically including social security system costs); adopt a more outcome-based approach instead of technical line-by-line authorizations; and reduce the number of "special funds" used to execute the public investment projects. However, overall, there is insufficient information as to Luxembourg's compliance with IMF's Code of Good Practices on Transparency in Fiscal Policy. More »

Institutional and market infrastructure

A 2003 European Commission (EC) Final Report of the Expert Group for the "Best Project on Restructuring, Bankruptcy and a Fresh Start" noted that Luxembourg has fully adopted 28 of the World Bank's Principles for Effective Insolvency and Creditor Rights Systems, almost fully adopted 9 of them, and partially adopted the remaining 4. The foundational legislation underpinning Luxembourg's insolvency practices is the Commercial Code of 1807, which is buttressed by provisions of later, specific-purpose laws and amendments. PricewaterhouseCoopers reported in 2006 that Luxembourg has traditionally been perceived as debtor-friendly in matters of insolvency, but the legislation passed during last several years has attempted to shift the balance to accommodate a greater focus on creditor rights, as well. More »

In 2002, a European Commission Regulation No. 1606 was passed by the European Parliament and the European Council of Ministers. The new regulation required all European Union member states adopt International Financial Reporting Standards (IFRSs), formerly International Accounting Standards (IAS), issued by the International Accounting Standards Board. As a result, all EU-listed companies are required to prepare their consolidated financial statements following IFRSs as adopted by the EU beginning on January 1, 2005. Listed companies in Luxembourg therefore follow IFRSs in preparation of their consolidated accounts. Further, the 2006 EC report on the implementation of the Regulation No. 1606 of 2002 points out that Luxembourg permits IFRSs in the annual accounts of listed companies and in the annual and consolidated accounts of all other companies. Apart from the mandatory application of IFRSs, some companies voluntarily follow the practice, whereas others follow Luxembourg's Generally Accepted Accounting Principles (GAAP) which, according to the Deloitte 2007 report, differ from the international standards. However, Luxembourg's legal environment is undergoing changes regarding accounting requirements. As explained in a 2007 IAS Plus update, the national commercial law will be amended to introduce IFRSs into Luxembourg law as a legal alternative to the current local accounting principles. Moreover, the Luxembourg authorities are drafting a commercial law which will give all limited liability companies registered in Luxembourg the option to use IFRSs for statutory accounts. Luxembourg already permits IFRSs as an option for credit institutions. More »

Until 2006, the corporate governance framework in Luxembourg consisted of the 1915 Law on Commercial Companies (as amended), and securities regulations, including Grand-Ducal Regulations, 1998 Law Creating a Supervision Commission of the Financial Sector, and 1998 Law Concerning the Supervision of the Markets of Financial Assets (as amended). In April 2006, the Luxembourg Stock Exchange (LSEX) established the Ten Principles of Corporate Governance for listed companies, which entered into force on January 1, 2007. These Principles are based on the comply-or-explain principle, and include requirements on the role and composition of the Boards of Directors, and relations with shareholders and investors. The LSEX is supervised by the authority responsible for the prudential supervision of credit institutions, the Commission for the Supervision of the Financial Sector (CSSF). On November 1, 2007, the Law on Markets of Financial Instruments was enacted to incorporate new provisions on transparency for shares and transaction reporting. The European Union Transparency Directive No. 2004/109/EC was also transposed into Luxembourg law on January 11, 2008 through the Law on Transparency Requirements, in which supervision of transparency requirements are transferred from the LSEX to the CSSF. However, there is insufficient information publicly available directly addressing Luxembourg's compliance with the Organization for Economic Cooperation and Development Principles of Corporate Governance. More »

According to a 2006 self-assessment prepared by the Institute of Registered Auditors (IRE) as a part of the International Federation of Accountants' (IFAC) Member Body Compliance Program, in Luxembourg, audit of financial statements is conducted in accordance with International Standards on Auditing (ISAs). The IRE adopts the pronouncements of the International Auditing and Assurance Standards Board (IAASB) without any modifications and, as explained in the self-assessment, ISAs are supplemented with additional guidance for application in Luxembourg. However, the self-assessment noted that at the national level there is a timing difference between the IFAC and IRE effective dates. Nevertheless, at the European level, due to the enactment of European Union Directive 2006/43/EC of the European Parliament and Council, which came into force in May 2006, all statutory audits of annual and consolidated accounts in the EU countries must be conducted on the basis of ISAs as adopted by the European Commission. EU member states shall adopt and publish the provisions necessary to comply with this Directive before June 29, 2008. Member states may impose additional requirements relating to the statuary audits of annual and consolidated accounts for periods expiring on June 29, 2010. The auditing standards for listed entities and non-listed entities are the same. More »

In 2004, the IMF released an assessment on Luxembourg's compliance with the Financial Action Task Force's (FATF) Recommendations on Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT). The IMF found Luxembourg to be broadly compliant with almost all of the FATF's recommendations. However, this assessment was based on the 2002 methodology for assessing compliance with the FATF recommendations. In 2004, the FATF released a revised methodology to assess compliance with its recommendations. Since, there has been no comprehensive assessment publicly available as to Luxembourg's compliance with these requirements. A 2007 International Narcotics Control Strategy Report by the U.S. Department of State indicated that Luxembourg had enacted a comprehensive legal and supervisory AML regime, and a 2006 report by the IMF noted that Luxembourg continues to make progress in strengthening its AML/CFT framework. As noted in the 2007 U.S. DoS report, Luxembourg also played a leading role in drafting the Third European Union Money Laundering Directive, which contains the requirement for all EU member states to implement the FATF's recommendations. However, there is little subsequent information publicly available as to whether Luxembourg adopted the Third EU Money Laundering Directive into domestic legislation. Luxembourg's Financial Intelligence Unit was established within the Ministry of Justice, and AML/CFT activities are criminalized under the 2004 AML/CFT Law. More »

An assessment conducted by the IMF in 2002 on the payments systems in Luxembourg concluded that the two main payment systems in the country, the Luxembourg Inter-bank Payment System (LIPS-Gross) and the Luxembourg Inter-bank Payment System-Netting (LIPS-Net) observed all Core Principles for Systemically Important Payment Systems (CPSIPS) as prescribed by the Committee on Payment and Settlement Systems (CPSS). A 2004 assessment by the ECB on LIPS-Gross arrived at a similar conclusion. However, both systems have since been discontinued and replaced. LIPS-Gross, Luxembourg's real-time gross settlement (RTGS) system and its Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) component, was replaced by TARGET2 in November 2007. LIPS-Net, on the other hand, was discontinued in 2006 and transactions settled through this system are now being processed on STEP2 (the pan-European platform operated by the Euro Banking Association. Subsequent to these changes, there has been little information publicly available addressing Luxembourg's compliance with the CPSIPS. On TARGET2's compliance with the CPSIPS, a 2002 report by the ECB indicated that the system is expected to fully comply with the CPSIPS. Despite the lack of information on TARGET2, it is generally believed that TARGET2 is an improvement over its predecessor and its component systems. Therefore the level of compliance assigned to Luxembourg's payment systems by past assessments is maintained until TARGET2 is fully implemented in all the member countries and assessed against the CPSIPS. More »

Financial Regulation and Supervision

The IMF undertook a Financial System Stability Assessment (FSSA) of Luxembourg and released its findings in its 2002 Report on the Observance of Standards and Codes. According to the report, Luxembourg has a high level of compliance with all of the Basel Core Principles (BCPs), however the report does not specifically address Luxembourg's compliance with each individual principle and their respective BCP. Furthermore, the report noted that the preconditions for effective banking supervision were in place, and that the supervisory framework of the CSSF, which is responsible for the prudential supervision and regulation of credit institutions, was comprehensive. However, according to a subsequent IMF 2004 Article IV Consultation report, important weaknesses were identified regarding procedure and implementation in the area of anti-money laundering and combating the financing of terrorism, and remedial actions were needed. The legal framework for banking supervision in Luxembourg is mainly based on the 1998 Law Creating a Supervision Commission of the Financial Sector, and the 1993 Financial Sector Law. More »

The IMF did not make any substantial recommendations in its 2002 FSSA, in which securities regulation practices in Luxembourg were benchmarked against the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. The IMF encouraged the supervisory authority, the CSSF, to develop an internal Code of Conduct. However, there is little further information publicly available as to whether Luxembourg authorities have established a Code of Conduct. The IMF report concluded that the basic conditions for the effective supervision of the securities markets and internal governance procedures were generally in place. Furthermore, the legal and accounting framework in Luxembourg was harmonized by European Union directives and was fully adequate to support the securities regulatory system. Per the same report, the CSSF, which acts as an independent agency responsible for the prudential supervision of credit institutions, had sufficient resources and powers to conduct an effective supervision and regulation of the securities market. More »

As a result of its favorable fiscal regime for insurance companies, Luxembourg has the potential to become one of the major European centers in the insurance sector, as stated in a 2005 U.S. Department of Commerce Country Commercial Guide. In the IMF 2002 Financial System Stability Assessment, insurance supervisory practices in Luxembourg were benchmarked against Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000. The IMF concluded that Luxembourg had a high level of observance with all relevant ICPs. Furthermore, the report noted that the preconditions for effective insurance supervision were in place and mostly implemented in a satisfactory way. The Insurance Commission was established under the 1991 Law on Insurance Services, which was last amended in December 2007, as an independent supervisory body for the insurance sector. However, given the revision in October 2003 by the IAIS of the ICPs and Methodology, there is insufficient information publicly available regarding Luxembourg's compliance with the new, more stringent principles. More »

Legend:

Credit Ratings

Moody's Aaa/Stable

Fitch AAA/Stable

Standard & Poor's AAA/Stable

Macroeconomic Data

2007 GDP (Current Prices): 50.16 billion USD (IMF)

2007 GDP (Per Capita): 104,673 USD (IMF)

2008 GDP (Growth Forecast): 3.1% (IMF)

2008 Inflation (CPI): 2.9% (IMF)

2007 Unemployment: 4.4% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 29.309 billion USD (UNCTAD)

FDI (Outward): 2.248 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): 291 million USD (OECD)