A recent working paper from the Luxembourg Central Bank sheds light on the utilisation of Luxembourg-based captive financial institutions (CFIs) by investment funds for structuring international holdings and acquisitions. The study, based on 2021 data, reveals an interesting detail: less than 1% of the inward foreign direct investment (FDI) held via these CFIs was invested in Luxembourg-based companies or assets.
Captive finance companies, wholly-owned subsidiaries responsible for financing their parent firms’ product purchases, play a crucial role in Luxembourg’s financial landscape. The outward FDI through CFIs in 2021 primarily targeted private companies (65%) and real estate assets (35%), with a focus on Western Europe, particularly the Euro area.
In private equity, the largest portion of outward FDI went to information, telecommunications, and computer services (17%), followed by utilities (12%) and chemicals and non-metallic mineral products (10%). Real estate investments were more concentrated, with commercial buildings receiving 45%, industrial buildings 24%, and residential properties 15%.
The primary destinations for outward FDI in private equity were Germany, the UK, France, Spain, Italy, the US, Denmark, Sweden, and the Netherlands. Similarly, real estate investments primarily went to Germany, the UK, Spain, the Netherlands, France, and Italy.
Despite the significant outward FDI, the inward FDI position for private companies in Luxembourg and real estate targets in the country remained relatively low, accounting for about 0.64% and 0.26% of the inward FDI position, respectively. The study highlights the complexity and diversity of investment structures involving Luxembourg CFIs and emphasises the limited allocation of FDI into local assets.
