Luxembourg has witnessed a notable decline in foreign direct investments (FDI) linked to special purpose entities (SPEs) over the past four years. Recent data from the European Central Bank (ECB) highlights this trend, reflecting a broader shift in multinational investment strategies.
Multinational companies are increasingly moving away from using Luxembourg SPEs, leading to a significant reduction in the country’s contribution to euro area FDI assets and liabilities. In the fourth quarter of 2023 alone, Luxembourg experienced its largest withdrawals, indicating major adjustments in how multinationals manage their operations.
Special purpose entities are legal constructs set up in countries where they conduct minimal to no business activities. These entities often lack substantial employment, physical presence, or production capacity. Multinationals typically use SPEs to leverage specific benefits offered by the host country, such as channelling investments, managing risks, and optimising tax structures.
Luxembourg has long been a global financial hub, particularly known for its favourable environment for financial services, asset management, banking, and investment activities. Historically, SPEs have played a crucial role in Luxembourg’s financial sector. By the end of 2023, SPEs accounted for 22% of Luxembourg’s external assets and liabilities, a figure significantly higher than the euro area average of 11%.
SPEs established by multinational companies significantly impact FDI data, reflecting cross-border financial linkages like equity investments in foreign subsidiaries or intragroup loans. By the end of 2023, SPEs represented over one-quarter of both euro area FDI assets and liabilities. In Luxembourg, SPEs were responsible for nearly 54% of FDI assets and liabilities, second only to Cyprus at about 80%.
Despite their past prominence, there has been a steady decline in the activities of SPEs in Luxembourg over the last few years. This decline has been marked by negative transactions in FDI, with over €700 billion in assets and liabilities withdrawn between 2020 and 2023. In Q4 2023 alone, Luxembourg saw a decrease of €163.44 billion in asset value and €141.79 billion in liabilities, the largest decline in the last 16 quarters.
While SPEs do not directly contribute to employment or physical production, they support ancillary sectors such as finance, legal services, and consulting. The broader economic impact of these financial activities has been significant in Luxembourg. However, the reduction in SPE activities suggests that multinationals are restructuring their global operations, particularly by reducing their use of SPEs in euro area countries.
Luxembourg is experiencing a substantial shift in its financial sector as multinationals withdraw investments tied to special purpose entities. This trend underscores a significant adjustment in global investment strategies, with Luxembourg facing a larger impact compared to other euro area countries. As multinationals and foreign investors continue to reduce their reliance on SPEs, Luxembourg’s financial landscape is poised for further changes.
