Why Do Billionaires Hide Wealth In This Tiny 'Duchy'?

Forbes has spent months figuring out how and why some billionaires put their fortunes in the tiny country of Luxembourg.

Source: Forbes

Bernard Arnault is the typical example…

Accordingly, billionaire Bernard Arnault, chairman and chief executive officer of LVMH group and Amancio Ortega, former chairman of fashion brand Zara, has placed assets worth nearly $30 billion from planes, helicopters to vineyards and luxury hotels into small joint stock companies in Luxembourg.
In August, French mogul Bernard Arnault, then the world's third-richest man, sold a 5.5% stake in retailer Carrefour for about $850 million in stock through Cervinia Europe, a company with business registration licensed in Luxembourg.
Arnault founded Cervinia Europe in 2013 and later transferred part of its shares in Carrefour to another company based in Luxembourg. He founded this company to hold shares in Carrefour in 2007, when he first acquired a 9.1% stake.
However, this is not the only property that Arnault own Luxembourg. In addition to his shares in Carrefour, he owns more than 20 companies located in the country.

Source: Forbes Afrique

According to Forbes, some of the notable benefits of this approach are that if Arnault were to liquidate Cervinia Europe then he would acquire nothing (including money from the sale of Carrefour shares) because of being taxed. Since Luxembourg does not need to pay taxes on dividends (if the parent company holds at least $1.4 million in shares or 10% of the company's shares for a year), as of 2007 he can received nearly $900 million in dividends from Carrefour.

But he’s not the only one…

Arnault may be the richest person investing through Luxembourg holdings, but he's not the only one. Luxembourg is popular with billionaires and wealthy investors because of its lack of strict regulation, favorable tax regime, large number of tax lawyers, accountants and consultants.
In March 2019, the Luxembourg authorities launched an open registry to track the beneficiaries of all companies under the 2016 European Union (EU) directive, adopted after the release of the Panama Papers. The registry has identified ownership of more than 140,000 companies registered in this country with a total population of 626,000.

Source: OCCRP

In 2021, the Organized Crime and Corruption Reporting Project (OCCRP), together with French newspaper Le Monde collected registration data and made it possible for public search by an individual's name. Together with Le Monde and the OCCRP OpenLux project, Forbes analyzed the database and discovered that dozens of the world's billionaires, including 2 of the 20 richest, hold assets worth billions of dollars in joint stock companies in Luxembourg.
The billionaires' assets, previously unreported and in companies, include luxury hotels in the Italian Alps and the Caribbean island of Saint Barth, vineyards in France, Adriatic marinas, as well as shares of non-public companies and real estate on different continents worth at least $29 billion.

Why Luxembourg is an attractive destination

Jan Fichtner, a senior research fellow at the University of Amsterdam who studies offshore financial hubs, revealed: "Luxembourg has a gray area where individuals use companies to stash part of their assets. The country has political stability and good legal mechanisms."
In addition, Luxembourg has tax treaties with a number of countries, including the US, China, Russia and all EU members, making it an attractive destination for investors looking to reduce tax burdens. Besides, Luxembourg is one of the first places to place Eurobonds - which attracts large corporations and wealthy families, increases the popularity of holdings and leads to rapid development of the financial services industry in this country.
Forbes identified the main method billionaires use to invest in foreign assets through Luxembourg. For example, Arnault and the Spanish mogul Amancio Ortega, hold shares in public companies, non-public companies or real estate through Luxembourg companies and take advantage of the country's exemption from tax on dividends.
Meanwhile others, like Russian businessman Mikhail Prokhorov and Italian-American billionaire John Elkann, own smaller properties such as hotels or private companies through Luxembourg companies and sometimes liquidate them (tax-free) on the sale of shares.

Source: Bloomberg

For billionaires with large companies in Luxembourg, the main benefit is tax-free reinvestment of dividends and capital gains into other assets. Reinvestment allows investors to be completely tax exempt on dividends. At the same time, setting up a company in Luxembourg is not too expensive.
According to Tom Townsend, executive director of Open Ownership, a nonprofit organization specializing in transparent corporate governance, needs between $5-10 million to create a legal entity and transfer money to it.
The fact that the world's richest people have been holding assets for decades in places like Luxembourg or South Dakota, which is hard to track.

Source: Kiwi

H/T: Forbes