## 1luxea2019001 - 2.6 percent in 2018, above the EU average.

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### Recent developments
- Real GDP growth increased to 2.6 percent in 2018 from 1.5 percent in 2017; average headline growth in 2014–17 was revised downwards from 3.5 to 3.0 percent.
- The economy is operating close to potential with unemployment at 5 percent (seasonally adjusted) — its lowest level since 2009 — and high-frequency confidence indicators above long-term averages.
- Inflation:
  - Average CPI and core inflation (HICP) declined to 1.5 and 0.9 percent, respectively.
  - Core inflation increased to 1.4 percent year-over-year (yoy) in December.
- Fiscal outturn 2018:
  - General government budget surplus estimated at about 2.4 percent of GDP.
  - Stronger-than-expected CIT revenues — largely attributable to sizable tax arrears payments — and PIT revenues due to high employment and wage growth.
  - Public debt declined to about 22 percent of GDP.
- Balance of payments and external:
  - Current account balance reported at 4.7 percent of GDP in 2018.
- Financial sector developments:
  - Banking system: overall Tier 1 capital ratio above 25 percent; median Liquidity Coverage Ratio of 174 percent.
  - Non-performing loans ratio at about 1 percent in 2018:Q3.
  - Credit to the resident non-financial private sector grew above 10 percent yoy.
  - Investment funds: aggregate net assets declined 2.3 percent at end-2018, first decline in 8 years.

### Outlook and risks
- Growth projections and inflation:
  - Real GDP growth: 2019: 2.6 percent; 2020: 2.8 percent; thereafter declining gradually to potential growth of 2.6 percent.
  - Unemployment projected at about 5 percent over the medium term.
  - Core inflation projected to increase to 1.9 percent in 2019 and remain at that level over the medium term.
- Key downside risks:
  - Weaker-than-expected global growth.
  - A disorderly Brexit.
  - Changes in international tax rules.
  - A sharp tightening of global financial conditions.
  - Domestically, rising real estate prices that could exacerbate already elevated household indebtedness and increase affordability challenges.
- Growth-at-Risk scenario:
  - A one-standard deviation negative shock to the Eurostoxx50 index growth would shift the one-quarter ahead GDP growth distribution to the left, reducing the 5th percentile growth from -1.3 to -2.9 percent yoy.

### Executive Board assessment and policy guidance
- Board appraisal:
  - Directors commended sound economic policies and the favorable growth outlook while noting downside risk tilts from external and domestic factors.
- Fiscal policy guidance:
  - Maintain prudent fiscal policies and preserve sizeable buffers.
  - Welcome fiscal plans aimed at lifting potential and making growth more inclusive by increasing public investment and introducing more growth-friendly, equitable, and “green” taxation.
  - Quantify revenue risks arising from the changing international tax environment and consider mitigating measures.
- Tax transparency and anti-avoidance:
  - Commended continued commitment to implement European and global tax transparency and anti-tax avoidance initiatives.
  - Welcomed transposition of ATAD I into national law in December 2018; ATAD II planned to be transposed by end-2019.
  - Luxembourg’s rating as largely compliant was maintained in the 2019 peer review by the Global Forum; fully compliant in exchange of information on tax rulings in the latest OECD peer review.
- Financial sector resilience and recommended actions:
  - Strengthen supervision of banks’ large cross-border exposures.
  - Complete resolution plans for less systemic banks.
  - Implement Luxembourg’s component of the euro area credit register.
  - Enhance system-wide supervision and cooperation in the investment fund sector.
  - Commended strengthening of AML/CFT legislation and finalization of the first National Risk Assessment.
- Macroprudential and housing policy:
  - Welcome measures to enhance macroprudential surveillance; call for close monitoring of real estate market developments and vulnerabilities from high household indebtedness.
  - Encourage alleviating housing supply constraints and expanding the macroprudential toolkit, including introducing borrower-based mortgage lending limits.
- Pensions and structural reforms:
  - Pension system sound over the near term; merits in further reforms to ensure long-term sustainability.
  - Engage key stakeholders timely given long lags of pension reforms and consider intergenerational equity and tradeoffs.
  - Address structural gaps to boost potential and inclusiveness: reduce structural unemployment; increase labor market participation of the elderly; improve public investment efficiency.

### Fiscal policy: measures, projections, and recommendations
- 2019 draft budget measures:
  - Reduction of the overall CIT rate by 1 percentage point from 26 to 25 percent, while increasing the income threshold to which the minimum rate applies.
  - A tax credit for wage earners to partly cover the 5 percent increase in net minimum wages.
  - An increase in excise duties on fuel.
  - Extension of reduced VAT rates to several products, including electronic publications and phytosanitary products.
  - Higher spending on education, healthcare, infrastructure and the digitalization of the economy.
  - Net cost of these measures: about 0.5 percent of GDP.
- Medium-term plans (announced):
  - Step up public investment and increase supply of social housing.
  - Generalize individual income taxation to enhance female labor market participation.
  - Reform real estate taxation to counter speculation, boost housing supply, and enhance housing affordability.
  - Introduce free public transport in 2020.
- Fiscal projections and risks:
  - 2019 fiscal surplus estimated at 0.9 percent of GDP (accounting for planned fiscal impulse and assuming non-recurrence of temporary factors).
  - Fiscal surplus projected to increase to 1.3 percent of GDP by 2024, not accounting for cost of announced initiatives.
  - Structural balance projected to remain well above the MTO, revised to a surplus of 0.5 percent of GDP for 2020–22.
  - Public debt–to-GDP ratio projected to decline to about 20 percent and remain sustainable; in a sizable contingent liability shock public debt would increase but remain below 35 percent of GDP.
  - Baseline projections assume the U.S. tax reform reduces Luxembourg’s CIT revenues by about 0.3 percent of GDP over the medium term.
- Policy recommendations:
  - Preserve sizeable fiscal buffers by continuing to comfortably meet the MTO.
  - Implement government plans while preserving buffers; prioritize spending composition to promote inclusive growth and lift potential output.
  - Generalization of individual income taxation should be done in a budget neutral way.
  - Assess and quantify risks to fiscal revenues under alternative scenarios and explore growth-friendly options, including:
    - Adjusting low property taxes based on outdated property values.
    - Increasing revenues from environmental taxes (noted that revenues from environmental taxation accounted for less than 2 percent of GDP in 2016).
    - Reducing tax exemptions, including numerous non-compulsory exemptions in the VAT system.
    - Caution that further reducing the CIT rate may widen the tax base but could also result in lower CIT revenues if base-widening gains do not offset rate cuts.
- Fiscal vulnerabilities highlighted:
  - High concentration of CIT tax proceeds, with nearly three-quarters paid by less than 1 percent of taxpayers.
  - Past budget overperformance largely due to cyclical revenue strength driven by the financial services sector.
  - Cumulative FDI in SPVs has shown large inflows historically, but FDI in SPVs has started to decline.

### External position and current account
- Current account and REER:
  - Current account surplus remained stable at around 5 percent of GDP in 2018, driven by strong net services exports.
  - EBA-lite current account model estimates a current account gap (actual minus norm) of -1.5 percent of GDP and a corresponding REER overvaluation of 0.9 percent.
  - Current account gap includes a policy gap of 1.4 percent of GDP, mostly reflecting the deviation of the favorable fiscal balance outcome in 2018 from its medium-term objective.
- Other external notes:
  - Gross IIP stabilized since 2015; net IIP relatively volatile and driven by a large positive net FDI position.
  - Luxembourg is the third destination of FDI due to multinational corporations’ treasury operations.
  - The REER has appreciated moderately since 2015.

### Financial sector structure, risks, and supervision
- Banking sector:
  - Luxembourg banks are more efficient and have larger capital and liquidity buffers than an average EU bank.
  - Commission and fee income increased by 5 percent on average since 2013 and contributed about 43 percent to overall bank income in 2018.
  - Rising operational costs increase profitability risk, especially for smaller banks.
  - Increased liquidity requirements shifted exposures to short-term deposits at the central bank; liquidity stress tests suggest most banks have sufficient buffers against severe deposit outflows.
  - Solvency stress tests indicate resilience to severe macro shocks; a few small banks could breach minimum capital requirements under severe stress but systemic implications are unlikely.
- Investment fund sector:
  - Funds’ net assets declined in 2018 due to valuation effects and slowing net investment flows; growth slowed in 2018, mainly driven by UCITS.
  - Investment funds are a major player globally and are highly interconnected domestically and internationally.
  - Liquidity and maturity transformation indicators:
    - Funds reduced holdings of highly liquid assets from 17.7 to 16.2 percent of total assets since end-2014.
    - Weighted average residual maturity of debt securities held by investment funds increased from 6.9 to 8.2 years since early-2014.
    - Sovereign securities account for about 35 percent of funds’ debt security holdings.
  - Increased common risk-taking raises overlapping exposures and contagion risks; tighter global financial conditions could produce liquidity strains and spillovers.
- Supervisory and macroprudential recommendations:
  - Strengthen supervision and guidance on substance for delegated activities.
  - Provide guidance on liquidity stress testing in coordination with ESMA.
  - Enhance macroprudential-based surveillance; close data gaps for system-wide indicators of leverage and asset quality.
  - Develop system-wide stress testing and internal liquidity stress testing methodologies.
  - Continue strengthening oversight of banks’ large cross-border exposures and non-bank holding companies.
  - Finalize operational modalities of the ELA framework.
  - Implement Luxembourg’s component of the euro area credit register; BCL to work with the ECB to include household credit data.
  - Authorities announced a 0.25 percent countercyclical capital buffer to be implemented by January 2020.
  - Steps to standardize reporting of borrower-related indicators and publish the substance of the risk dashboard are underway.
  - Institutional reinforcement: approve draft bill from December 2017 to implement borrower-based mortgage lending limits; enshrine lead role of BCL in financial stability analysis.

### Investment fund sector: Box findings, metrics, and real-economy transmission
- Data and methodology:
  - Monthly fund-by-fund market data covering more than 80 percent of the fund sector from 2005:M1 to 2018:M9 used to derive risk metrics.
  - Funds grouped by investment policies: equity, high-yield (HY), bond, mixed, EM; and CNAV, VNAV, and other MMFs.
  - Probabilities of distress (PoDs) computed following a value-at-risk methodology; system-wide measures derived (fund stability index, joint probability of stress).
- Evolution and vulnerabilities:
  - Risk metrics spiked during past systemic stress episodes; financial stress in the fund sector decreased since 2016, but vulnerabilities accumulated since 2016 include increased liquidity and maturity mismatches.
- Impact of tighter global financial conditions (bivariate VAR impulse responses to one-standard deviation shock to Global Financial Conditions index):
  - Bonds: 0.4** (1-quarter ahead), 3.9** (Cumulative impact)
  - EMs: 0.3** (1-quarter ahead), 5.5** (Cumulative impact)
  - Equity funds: 0.7** (1-quarter ahead), 3.6** (Cumulative impact)
  - HY bonds: 0.5** (1-quarter ahead), 3.9** (Cumulative impact)
  - Mixed funds: 0.7** (1-quarter ahead), 5.2** (Cumulative impact)
  - MMFs: 0.9** (1-quarter ahead), 7.7** (Cumulative impact)
  - CNAVs: 0.2 (1-quarter ahead), 4.0 (Cumulative impact)
  - VNAVs: 0.3** (1-quarter ahead), 3.6** (Cumulative impact)
  - ** Statistically significant at 5 percent.
- Transmission to the real economy (three-variate structural VAR):
  - Higher systemic risk associated with lower household credit growth in the near term, suggesting a bank credit channel.
  - Real GDP growth could be reduced by about 2 percentage points in a year following a one standard deviation shock to systemic risk.
- Coverage (Luxembourg: Investment Funds Coverage, 2018M9) — (Billions of euros, unless specified):
  - Total non-monetary funds: Number of Funds: 2,374; Total net assets universe: 3,624; Coverage: 2,899; Coverage percent: 80%
  - Total MMFs: Number of Funds: 55; Total net assets universe: 268; Coverage: 247; Coverage percent: 92%
  - Total: Number of Funds: 2,429; Total net assets universe: 3,892; Coverage: 3,145; Coverage percent: 81%

### Real estate market and household indebtedness
- Mortgage lending grew above 8 percent in 2018, broadly in line with the historical trend.
- High household indebtedness could expose vulnerable households to increased debt service burden under faster-than-anticipated monetary policy normalization.
- CSSF sensitivity analysis indicates most domestically-oriented banks would withstand extreme real estate price shocks and high default rates.
- Steps taken: standardizing reporting of borrower-related indicators; activation of the countercyclical capital buffer.
- Authorities should continue close monitoring and stand ready to introduce measures to contain excessive household indebtedness.

### Fintech and AML/CFT
- Fintech engagement:
  - Luxembourg actively engaged in Fintech: blockchain technology, cryptocurrency, automated investment services, mobile and e-payments.
  - Fintech offers efficiency and business opportunities but increases operational, cyber, compliance, and ML/TF risks.
  - Recommendation: adopt a risk-based, technology-neutral regulatory and supervisory approach; close gaps in blockchain legal framework.
- AML/CFT developments:
  - Luxembourg transposed the 4th EU Anti-Money Laundering Directive into national law in 2018; CSSF strengthened AML/CFT legal framework and oversight of private banking and wealth management risks.
  - Authorities finalized the first National Risk Assessment (NRA) and should implement the national strategy focusing on private banking and foreign trusts.
  - Transposition of the 5th EU AML Directive expected timely; a Register of Beneficial Owners established in January 2019.

### Structural reforms: pensions, labor participation, housing, and public investment
- Pension system pressures and reform options:
  - European Commission’s 2018 Ageing Report projects pension expenditures to increase from 9 to 15 percent of GDP within one generation (by 2058) under a no-policy change scenario.
  - This would increase the fiscal deficit and the debt by 9 and 76 percent of GDP, respectively.
  - Luxembourg has the lowest effective retirement age in the EU (60 vs. 63 years) and the second largest replacement rate (73 vs. 46 percent).
  - Recommended reform options: increase contributions, reduce replacement rates, increase retirement age; combinations of these can ensure long-term sustainability but have macroeconomic tradeoffs.
- Labor market participation and seniors:
  - Elderly labor market participation (55–64 years old) is 40 percent, compared with the EU average of 57 percent.
  - Recent policy measures: Digital Skills Bridge program; introduction of Revenu d’Inclusion Sociale (RevIS) in January 2019; plans to move to fully individual income taxation; reform of professional reclassification scheme; creation of subsidized jobs; abolishment of some pre-retirement schemes.
  - Staff and authorities agree further action is needed, including phasing out benefits for early retirement.
- Housing supply and public investment:
  - Rapid house price increases driven by supply limits and high population growth; available buildable land is underutilized.
  - Announced policies: centralized committee to speed up land acquisition for social housing; increase social housing for rent.
  - Public investment spending scheduled to amount to over 4 percent of GDP annually.
  - Public investment efficiency findings: Luxembourg could have built up to 35 percent more infrastructure and improved infrastructure quality by 12 percent for the same cost; investment efficiency scores: infrastructure quality = 0.87; infrastructure quantity = 0.65.
  - Recommendation: implement a medium-term expenditure framework and multiyear expenditure planning to enhance coordination, prioritization, and resource allocation.

### International tax standards and BEPS implementation
- ATAD and BEPS:
  - Authorities transposed ATAD I and are on a good path to implement ATAD II by end-2019.
  - Luxembourg transposed the whole ATAD I by the law of December 21, 2018.
  - Luxembourg ratified the Multilateral Instrument (MLI) into domestic law (law 7333 passed February 14, 2019).
  - Authorities expect limited revenue impact from new international tax standards and have not yet observed significant impact.
- BEPS Actions implementation highlights:
  - Action 2 (hybrid mismatches): provisions introduced by the Law of 18 December 2015; ATAD I transposition included hybrid mismatch rules.
  - Action 3 (CFC rules): transposed via ATAD I on December 21, 2018.
  - Action 4 (interest limitation rules): transposed via ATAD I on December 21, 2018.
  - Action 5 (harmful tax practices): adopted a law on April 17, 2018 introducing an IP regime with the nexus approach.
  - Action 6 and 15 (MLI and treaty measures): MLI ratified February 14, 2019.
  - Action 12 (DAC6): Member States must implement DAC6 into domestic law by December 31, 2019; Luxembourg working on transposition.
  - Action 13 (CbCR): Luxembourg passed law on CbCR on December 23, 2016.
  - Action 14: Luxembourg working on transposition of Directive (EU) 2017/1852 on tax dispute resolution mechanisms.
- Policy stance:
  - Authorities committed to consistently meeting the MTO and keeping public debt below 30 percent of GDP.
  - Authorities monitor international tax developments closely and stand ready to adapt where necessary.

### Key statistics (Selected Economic Indicators, 2014–19)
- Real GDP (change, percent): 2014: 4.3; 2015: 3.9; 2016: 2.4; 2017: 1.5; 2018 Est.: 2.6; 2019 Proj.: 2.6.
- Gross investment (percent change): 2014: 12.2; 2015: -4.7; 2016: 7.6; 2017: 1.2; 2018: 0.6; 2019: 2.6.
- Unemployment (percent of the labor force): 2014: 7.1; 2015: 6.8; 2016: 6.3; 2017: 5.9; 2018: 5.5; 2019: 5.0.
- Resident employment (thousands): 2014: 239.7; 2015: 244.8; 2016: 250.3; 2017: 257.3; 2018: 264.5; 2019: 271.7.
- Total employment (thousands): 2014: 396.0; 2015: 406.1; 2016: 418.4; 2017: 432.8; 2018: 449.0; 2019: 464.3.
- CPI (harmonized), p.a.: 2014: 0.7; 2015: 0.1; 2016: 0.0; 2017: 2.1; 2018: 2.0; 2019: 1.6.
- General government revenues (percent of GDP): 2014: 43.3; 2015: 43.3; 2016: 43.7; 2017: 44.4; 2018: 45.5; 2019: 44.6.
- General government expenditures (percent of GDP): 2014: 42.0; 2015: 41.9; 2016: 41.9; 2017: 43.0; 2018: 43.1; 2019: 43.6.
- General government balance (percent of GDP): 2014: 1.3; 2015: 1.4; 2016: 1.9; 2017: 1.4; 2018: 2.4; 2019: 0.9.
- General government gross debt (percent of GDP): 2014: 22.7; 2015: 22.2; 2016: 20.7; 2017: 23.0; 2018: 21.4; 2019: 21.5.
- Current account balance (percent of GDP): 2014: 5.2; 2015: 5.1; 2016: 5.1; 2017: 5.0; 2018: 4.7; 2019: 4.6.
- Balance of trade in goods and services (percent of GDP): 2014: 33.3; 2015: 36.8; 2016: 35.5; 2017: 33.0; 2018: 31.0; 2019: 29.2.
- Factor income balance (percent of GDP): 2014: -28.6; 2015: -33.0; 2016: -31.7; 2017: -27.5; 2018: -25.9; 2019: -25.0.
- Transfer balance (percent of GDP): 2014: 0.5; 2015: 1.3; 2016: 1.3; 2017: -0.5; 2018: -0.5; 2019: 0.3.
- U.S. dollar per euro: 2014: 1.3; 2015: 1.1; 2016: 1.1; 2017: 1.1; 2018: 1.2.
- Nominal effective rate (2010=100): 2014: 100.5; 2015: 97.0; 2016: 98.9; 2017: 101.5; 2018: 103.5.
- General government debt: 21.4 percent of GDP in 2018 and projected to decline to 20.2 percent and 19.9 percent in 2019 and 2020 respectively.
- Pension reserve fund assets amount currently to some 33 percent of GDP.
- Environmental tax revenues accounted for less than 2 percent of GDP in 2016.

*International Monetary Fund — LUXEMBOURG: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (April 22, 2019).*

### 2.6 percent in 2018, above the EU average. Thanks to buoyant corporate and personal

### 1luxea2019001 - 2.6 percent in 2018, above the EU average. Thanks to buoyant corporate and personal

### Recent developments
- Real GDP growth increased to 2.6 percent in 2018 from 1.5 percent in 2017; average headline growth in 2014–17 was revised downwards from 3.5 to 3.0 percent.
- The economy is operating close to potential with unemployment at 5 percent (seasonally adjusted) — its lowest level since 2009 — and high-frequency confidence indicators above long-term averages.
- Inflation:
  - Average CPI and core inflation (HICP) declined to 1.5 and 0.9 percent, respectively.
  - Core inflation increased to 1.4 percent year-over-year (yoy) in December.
- Fiscal outturn 2018:
  - General government budget surplus estimated at about 2.4 percent of GDP.
  - Stronger-than-expected corporate income tax (CIT) revenues — largely attributable to sizable tax arrears payments — and personal income tax (PIT) revenues due to high employment and wage growth.
  - Public debt declined to about 22 percent of GDP.
- Balance of payments and external:
  - Current account balance reported at 4.7 percent of GDP in 2018 (Table: Selected Economic Indicators).
- Financial sector developments:
  - Banking system: overall Tier 1 capital ratio above 25 percent; median Liquidity Coverage Ratio of 174 percent.
  - Non-performing loans ratio at about 1 percent in 2018:Q3.
  - Credit to the resident non-financial private sector grew above 10 percent yoy.
  - Investment funds: aggregate net assets declined 2.3 percent at end-2018, first decline in 8 years.

### Outlook and risks
- Growth prospects remain favorable with staff projections of Real GDP growth at 2.6 percent in 2019.
- Downside risks identified:
  - Weaker-than-expected global growth.
  - A disorderly Brexit.
  - Changes in international tax rules.
  - A sharp tightening of global financial conditions.
  - Domestically, rising real estate prices that could exacerbate already elevated household indebtedness and increase affordability challenges.

### Executive Board assessment and policy guidance
- Executive Directors commended sound economic policies and the favorable growth outlook while noting downside risk tilts from external and domestic factors.
- Fiscal policy:
  - Directors encouraged the authorities to maintain prudent fiscal policies and preserve sizeable buffers.
  - They welcomed fiscal plans aimed at lifting potential and making growth more inclusive by increasing public investment and introducing more growth-friendly, equitable, and “green” taxation.
  - Directors noted the need to quantify revenue risks arising from the changing international tax environment and consider mitigating measures.
- Tax transparency and anti-avoidance:
  - Directors commended continued commitment to implement European and global tax transparency and anti-tax avoidance initiatives and welcomed transposition of ATAD I into national law in December 2018; ATAD II planned to be transposed by end-2019.
  - Luxembourg’s rating as largely compliant was maintained in the 2019 peer review by the Global Forum; fully compliant in exchange of information on tax rulings in the latest OECD peer review.
- Financial sector resilience:
  - Directors welcomed progress on implementing the 2017 FSAP recommendations and emphasized further enhancing oversight of the highly interconnected financial sector.
  - Recommended actions:
    - Strengthen supervision of banks’ large cross-border exposures.
    - Complete resolution plans for less systemic banks.
    - Implement Luxembourg’s component of the euro area credit register.
    - Enhance system-wide supervision and cooperation in the investment fund sector.
  - Commended strengthening of AML/CFT legislation and finalization of the first National Risk Assessment.
- Macroprudential and housing policy:
  - Welcomed measures to enhance macroprudential surveillance but called for close monitoring of real estate market developments and vulnerabilities from high household indebtedness.
  - Encouraged alleviating housing supply constraints and expanding the macroprudential toolkit, including introducing borrower-based mortgage lending limits.
- Pensions and structural reforms:
  - Acknowledged that Luxembourg’s pension system is sound over the near term but saw merits in further reforms to ensure long-term sustainability.
  - Emphasized engaging key stakeholders timely given long lags of pension reforms and considering intergenerational equity and tradeoffs.
  - Noted need to address structural gaps to boost potential and inclusiveness:
    - Reduce structural unemployment.
    - Increase labor market participation of the elderly.
    - Improve public investment efficiency to achieve better value-for-money and enhance resource allocation.

### Key statistics (Selected Economic Indicators, 2014–19)
- Real GDP (change, percent): 2014: 4.3; 2015: 3.9; 2016: 2.4; 2017: 1.5; 2018 Est.: 2.6; 2019 Proj.: 2.6.
- Gross investment (percent change): 2014: 12.2; 2015: -4.7; 2016: 7.6; 2017: 1.2; 2018: 0.6; 2019: 2.6.
- Unemployment (percent of the labor force): 2014: 7.1; 2015: 6.8; 2016: 6.3; 2017: 5.9; 2018: 5.5; 2019: 5.0.
- Resident employment (thousands): 2014: 239.7; 2015: 244.8; 2016: 250.3; 2017: 257.3; 2018: 264.5; 2019: 271.7.
- Total employment (thousands): 2014: 396.0; 2015: 406.1; 2016: 418.4; 2017: 432.8; 2018: 449.0; 2019: 464.3.
- CPI (harmonized), p.a.: 2014: 0.7; 2015: 0.1; 2016: 0.0; 2017: 2.1; 2018: 2.0; 2019: 1.6.
- General government revenues (percent of GDP): 2014: 43.3; 2015: 43.3; 2016: 43.7; 2017: 44.4; 2018: 45.5; 2019: 44.6.
- General government expenditures (percent of GDP): 2014: 42.0; 2015: 41.9; 2016: 41.9; 2017: 43.0; 2018: 43.1; 2019: 43.6.
- General government balance (percent of GDP): 2014: 1.3; 2015: 1.4; 2016: 1.9; 2017: 1.4; 2018: 2.4; 2019: 0.9.
- General government gross debt (percent of GDP): 2014: 22.7; 2015: 22.2; 2016: 20.7; 2017: 23.0; 2018: 21.4; 2019: 21.5.
- Current account balance (percent of GDP): 2014: 5.2; 2015: 5.1; 2016: 5.1; 2017: 5.0; 2018: 4.7; 2019: 4.6.
- Balance of trade in goods and services (percent of GDP): 2014: 33.3; 2015: 36.8; 2016: 35.5; 2017: 33.0; 2018: 31.0; 2019: 29.2.
- Factor income balance (percent of GDP): 2014: -28.6; 2015: -33.0; 2016: -31.7; 2017: -27.5; 2018: -25.9; 2019: -25.0.
- Transfer balance (percent of GDP): 2014: 0.5; 2015: 1.3; 2016: 1.3; 2017: -0.5; 2018: -0.5; 2019: 0.3.
- U.S. dollar per euro: 2014: 1.3; 2015: 1.1; 2016: 1.1; 2017: 1.1; 2018: 1.2.
- Nominal effective rate (2010=100): 2014: 100.5; 2015: 97.0; 2016: 98.9; 2017: 101.5; 2018: 103.5.

*International Monetary Fund — LUXEMBOURG: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (April 22, 2019).*

### 8.      Staff’s bottom line assessment is that Luxembourg’s external position is broadly

### 8. Staff’s bottom line assessment is that Luxembourg’s external position is broadly consistent with fundamentals and desirable policies

### External position and current account
- The current account surplus remained stable at around 5 percent of GDP in 2018, driven by strong net services exports.
- The EBA-lite current account model estimates a current account gap (actual minus norm) of -1.5 percent of GDP and a corresponding REER overvaluation of 0.9 percent.
- The current account gap includes a policy gap of 1.4 percent of GDP, mostly reflecting the deviation of the favorable fiscal balance outcome in 2018 from its medium-term objective.

### Real and financial sector developments (key findings)
- GDP growth has generally been above the euro area average and recently driven by strong domestic demand.
- Buoyant employment growth, partly driven by cross-border workers, reduced unemployment to its lowest level since 2009.
- Economic sentiment indicators, notably consumer confidence, are above historical averages.
- Despite strong performance of banks’ core business, valuation effects weighed on banks’ net income in 2018.
- Banks are increasingly well capitalized (Regulatory Tier 1 Capital Ratio series shown).
- Strong growth in credit to the private sector has been largely driven by credit to non-financial corporations.
- Funds’ net assets declined in 2018 due to valuation effects and slowing net investment flows; growth in fund assets slowed in 2018, mainly driven by UCITS.
- The gross IIP has stabilized since 2015, while the net IIP is relatively volatile and driven by a large positive net FDI position.
- Luxembourg is the third destination of FDI due to multinational corporations’ treasury operations.
- The REER has appreciated moderately since 2015.

### Outlook and projections
- Real GDP growth projections:
  - 2019: 2.6 percent
  - 2020: 2.8 percent
  - Thereafter: declining gradually to potential growth of 2.6 percent
- Unemployment: projected to remain at about 5 percent over the medium term.
- Core inflation: projected to increase to 1.9 percent in 2019 and remain at that level over the medium term.
- Headline inflation: follows a similar path, with weaker oil contribution partly offset by higher services inflation.
- The financial sector is expected to remain a key driver of growth in the medium term.

### Risks (balance of risks tilted to the downside)
- Weaker-than-expected global growth could adversely impact exports and FDI inflows, lower asset price and credit performance, and weaken profitability of the financial sector and fiscal performance.
- Changes in international taxation could alter tax planning strategies of multinational firms, affecting inward FDI and tax revenues.
- Brexit:
  - Luxembourg likely to benefit from relocations of some U.K.-based financial services firms, but a disorderly Brexit could pose challenges through investment funds’ exposure to U.K. assets and trading venues and increased market volatility.
  - The delegation model and Memorandum of Understanding between ESMA and the U.K. FCA are referenced as mitigating factors.
- Sharp tightening of global financial conditions could weaken profitability of Luxembourg’s highly interconnected financial sector, with adverse implications for tax revenues and growth.
- Growth-at-Risk scenario:
  - A one-standard deviation negative shock to the Eurostoxx50 index growth would shift the one-quarter ahead GDP growth distribution to the left, reducing the 5th percentile growth from -1.3 to -2.9 percent yoy.

### Authorities’ views (summary)
- Authorities agreed the outlook remains favorable but clouded by external risks, including the risk of a sharp tightening in financial conditions.
- They view the overall impact on banks from Brexit as low due to limited direct net exposures to the United Kingdom, but consider a disorderly Brexit could increase market volatility and performance risk for investment funds.
- Authorities concurred with staff that Luxembourg’s external position is broadly consistent with fundamentals.

### Fiscal policy: maintaining strong buffers (findings, measures, and recommendations)
- 2019 draft budget key measures:
  - Reduction of the overall CIT rate by 1 percentage point from 26 to 25 percent, while increasing the income threshold to which the minimum rate applies.
  - A tax credit for wage earners to partly cover the 5 percent increase in net minimum wages.
  - An increase in excise duties on fuel.
  - Extension of reduced VAT rates to several products, including electronic publications and phytosanitary products.
  - Higher spending on education, healthcare, infrastructure and the digitalization of the economy.
  - Net cost of these measures: about 0.5 percent of GDP.
- Medium-term government plans (announced):
  - Step up public investment to close infrastructure gaps and increase the supply of social housing.
  - Generalize the individual income taxation to enhance female labor market participation.
  - Reform real estate taxation to counter speculation, boost housing supply, and enhance housing affordability.
  - Introduce free public transport in 2020.
  - Cost and timeline of these measures are yet to be determined.
- Fiscal balance and projections:
  - 2019 fiscal surplus is estimated at 0.9 percent of GDP (accounting for planned fiscal impulse and assuming non-recurrence of temporary factors).
  - Fiscal surplus projected to increase to 1.3 percent of GDP by 2024, not accounting for cost of announced initiatives over the medium term.
  - Structural balance projected to remain well above the MTO, which was revised from a deficit of 0.5 percent of GDP to a surplus of 0.5 percent of GDP for 2020–22.
  - Public debt–to-GDP ratio projected to decline to about 20 percent and remain sustainable under different scenarios; in a sizable contingent liability shock public debt would increase but remain below 35 percent of GDP.
  - Baseline projections assume the U.S. tax reform reduces Luxembourg’s CIT revenues by about 0.3 percent of GDP over the medium term.
- Policy recommendations:
  - Preserve sizeable fiscal buffers by continuing to comfortably meet the MTO, given volatility of the tax base and potential contingent liabilities related to the financial sector.
  - Implement government plans while preserving buffers; prioritize spending composition to promote inclusive growth and lift potential output.
  - Generalization of individual income taxation should be done in a budget neutral way.
  - Authorities should assess and quantify risks to fiscal revenues under alternative scenarios and explore growth-friendly options to mitigate them, including:
    - Adjusting low property taxes based on outdated property values.
    - Increasing revenues from environmental taxes (noted that revenues from environmental taxation accounted for less than 2 percent of GDP in 2016).
    - Reducing tax exemptions, including numerous non-compulsory exemptions in the VAT system.
    - Caution that further reducing the CIT rate may widen the tax base but could also result in lower CIT revenues if base-widening gains do not offset rate cuts.
- Fiscal vulnerabilities noted:
  - High concentration of CIT tax proceeds, with nearly three-quarters paid by less than 1 percent of taxpayers.
  - Past budget overperformance was largely due to cyclical revenue strength driven by the financial services sector.
  - Cumulative FDI in Special Purposes Vehicles (SPVs) has shown large inflows historically, but FDI in SPVs has started to decline.

*Source: IMF staff report (1luxea2019001).*

### 17.      The government is committed to implementing the new international tax standards

### 17.      The government is committed to implementing the new international tax standards

### International tax standards and fiscal stance
- The authorities have transposed ATAD I and are on a good path to implement ATAD II by end-2019.
- The 2019 peer review report by the OECD Global Forum confirmed the rating of Luxembourg as “largely compliant” with the internationally agreed transparency standards for tax purposes.
- Authorities expect the revenue impact of the new international tax standards to be limited and noted that Luxembourg has not yet observed any significant impact.
- Recent strong tax revenue performance partially reflects comparative advantages such as political and social stability and a well-developed financial industry ecosystem.
- Fiscal policy commitments and targets:
  - Commitment to consistently meeting the MTO.
  - Commitment to keep public debt below 30 percent of GDP.
  - Sizable fiscal buffers should be preserved to address adverse external risks.
  - Authorities agree that the composition of public spending should be attuned to structural needs.
  - Staff advice: explore growth-friendly options to mitigate revenue risks from changes in international taxation.

### Financial sector: structure and systemic linkages
- The financial system is strongly interconnected domestically and globally; investment funds are a major player worldwide.
- Financial linkages with the rest of the world represent the bulk of the domestic financial sector’s assets and liabilities.
- Domestic inter- and intra-sectoral linkages remain large, notably for investment funds which are highly interconnected with the rest of the sector.

### Investment fund sector vulnerabilities and risk metrics
- Risk metrics based on fund-by-fund data until 2018:Q3 suggest systemic risk declined since the start of U.S. monetary policy normalization in 2016, but sector-wide data indicate increased common risk-taking behavior.
- Increased common risk-taking would raise interconnectedness through overlapping exposures and contagion risks; tighter global financial conditions could produce liquidity strains and spillovers.
- Liquidity and maturity transformation indicators:
  - Investment funds reduced holdings of highly liquid assets from 17.7 to 16.2 percent of total assets since end-2014.
  - The weighted average residual maturity of debt securities held by investment funds increased from 6.9 to 8.2 years since early-2014.
  - Sovereign securities account for about 35 percent of funds’ debt security holdings.
  - Investment funds increased exposure to sovereign securities issued in the United States and other advanced economies; this raises exchange rate risk despite greater geographic diversification.
- Liquidity transformation measure note: Indicator derived as the ratio of (Assets under management – liquid assets (broad) + short-term liabilities ≤ 30 days + redeemable equity ≤ 30 days) to assets under management. Liquid assets include demand deposits, MMF shares, AAA and AA-rated government bonds, and A-rated government bonds (subject to a 15percent haircut).

### Banking sector resilience and risks
- Luxembourg banks are more efficient and have larger capital and liquidity buffers than an average EU bank.
- Commission and fee income:
  - Increased by 5 percent on average since 2013.
  - Contributed about 43 percent to overall bank income in 2018.
- Rising operational costs (regulatory compliance, investment in new technology) increase profitability risk, especially for smaller banks.
- Increased liquidity requirements shifted exposures from group entities to short-term deposits at the central bank, partly mitigating cross-border exposure risks.
- Liquidity stress tests by the CSSF suggest most banks have sufficient buffers against severe deposit outflows.
- Solvency stress tests indicate the banking system remains resilient to severe macro shocks; however, low profitability and high available-for-sale positions could lead a few small banks to breach minimum capital requirements under severe stress, though systemic implications are unlikely.

### Regulatory, supervisory, and macroprudential recommendations
- Continue following up on 2017 FSAP recommendations.
- Investment fund supervision:
  - Strengthen supervision, including guidance on substance requirements for delegated activities.
  - Provide guidance on liquidity stress testing in coordination with ESMA.
  - Enhance macroprudential-based surveillance: closely monitor liquidity and maturity mismatches, market risks from common risk-taking, and close data gaps (system-wide indicators for leverage and asset quality).
  - Pursue development of system-wide stress testing and internal liquidity stress testing methodologies.
- Banking supervision:
  - Continue strengthening oversight of banks’ large cross-border exposures; recent increased resources to review existing waivers for large exposure limits is welcome.
  - Reinforce oversight of non-bank holding companies of banks in line with the upcoming European approach.
  - Complete appropriate resolution plans for less systemic banks.
  - Finalize operational modalities of the contingent emergency liquidity assistance (ELA) framework as specified in the 2017 FSAP.
  - BCL should continue working with the ECB to include household credit data in the ECB’s harmonized credit bureau initiative.
- Macroprudential policy:
  - Authorities announced a 0.25 percent countercyclical capital buffer to be implemented by January 2020.
  - Steps to standardize reporting of borrower-related indicators and to publish the substance of the risk dashboard are underway.
  - Institutional framework could be reinforced by: (i) approving the draft bill from December 2017 to implement borrower-based mortgage lending limits; and (ii) enshrining into law the de-facto lead role of the Banque Centrale du Luxembourg (BCL) in financial stability analysis.
- Governance and AML/CFT:
  - Enshrine operational independence of the CSSF and the Commissariat aux Assurances (CAA) in legislation; align codes of conduct for non-executive members of the BCL Supervisory Board and introduce codes for the non-executive boards of the CSSF and CAA.
  - Formalize the relationship between the government and banks with state participation on an arms-length basis.
  - Continue addressing ML/TF risks: Luxembourg transposed the 4th EU Anti-Money Laundering Directive into national law in 2018; CSSF strengthened AML/CFT legal framework and oversight of private banking and wealth management risks; authorities finalized the first National Risk Assessment (NRA) report and should implement the national strategy focusing on private banking and foreign trusts.

### Real estate market and household indebtedness
- Mortgage lending grew above 8 percent in 2018, broadly in line with the historical trend.
- High household indebtedness could expose vulnerable households to increased debt service burden under faster-than-anticipated monetary policy normalization.
- CSSF sensitivity analysis indicates most domestically-oriented banks would withstand extreme real estate price shocks and high default rates.
- Steps taken:
  - Standardizing reporting of borrower-related indicators.
  - Activation of the countercyclical capital buffer.
- Authorities should continue close monitoring and stand ready to introduce measures to contain excessive household indebtedness.

### Fintech developments
- Luxembourg is actively engaged in Fintech (blockchain technology, cryptocurrency, automated investment services, mobile and e-payments).
- Fintech can bring efficiency and new business opportunities but also increase operational, cyber, compliance, and ML/TF risks.
- Recommendations:
  - Address Fintech developments with a risk-based, technology-neutral regulatory and supervisory approach.
  - Closing gaps in the blockchain legal framework is a positive step.

### Authorities’ views and implementation progress
- Authorities view the financial system as resilient and concur on structural changes in banks’ revenue toward fee and commission income.
- Supervisory priorities: monitor bank profitability (especially smaller stand-alone banks) and intragroup credit risk.
- Authorities agree on vulnerabilities in the investment fund sector from repricing of risk premia and common strategies; they support enhancing system-wide investment fund supervision, closing data gaps, and building internal risk analysis capacity.
- Progress on 2017 FSAP recommendations includes active participation in EU and international forums to develop consistent leverage measures, guidance for liquidity stress testing by investment fund managers, and standardized stress testing for Money Market Funds.
- CSSF is developing liquidity stress testing capacity and analyzing liquidity management tools.
- Reinforcement of oversight of non-bank holding companies and operationalization of the credit register will proceed via a European approach.
- On supervisory governance, national authorities remain comfortable with their model where the Ministry of Finance representative chairs supervisors’ non-executive boards.
- CSSF strengthened AML/CFT legal framework and oversight of private banking and wealth management; authorities expect timely transposition of the 5th EU AML Directive and are implementing a national strategy based on NRA findings.

### Structural reforms: pension system, housing, and labor market
- Pension system sustainability:
  - European Commission’s 2018 Ageing Report projects pension expenditures to increase from 9 to 15 percent of GDP within one generation (by 2058) under a no-policy change scenario.
  - This would increase the fiscal deficit and the debt by 9 and 76 percent of GDP, respectively.
  - Luxembourg currently has the lowest effective retirement age in the EU (60 vs. 63 years) and the second largest replacement rate (73 vs. 46 percent).
  - Recommended reform options: increase contributions, reduce replacement rates, increase retirement age.
  - Staff simulations: all reform options can ensure long-term sustainability but have macroeconomic tradeoffs—higher retirement age raises GDP per capita and consumption relative to baseline; lower replacement rates and higher contributions reduce disposable income and consumption per capita; higher contribution rates can reduce GDP per capita via labor market distortions.
- Housing supply constraints:
  - Rapid house price increases driven by supply limits and high population growth contribute to affordability pressures.
  - Available buildable land is underutilized; municipalities rarely use taxation on unused land to discourage hoarding.
  - Announced policies to expand housing supply include creating a centralized committee to speed up land acquisition by the state to build social housing and increasing social housing available for rent.
- Labor market:
  - Labor market is buoyant with signs of labor shortages and skills mismatches; historically low job seekers to vacancies ratio.
  - Young and less qualified workers benefited from strong job creation in construction and services to enterprises.
  - Long-term unemployment has declined but remains high relative to peers.

*Source: 1luxea2019001 - 17.      The government is committed to implementing the new international tax standards (PDF chapter).*

### 2009. Furthermore, elderly labor market participation (55–64 years old)—at 40 percent—is

### 1luxea2019001 - 2009. Furthermore, elderly labor market participation (55–64 years old)—at 40 percent—is

### Labor market participation and seniors
- Elderly labor market participation (55–64 years old) is 40 percent, significantly lower than the EU average of 57 percent.
- Recent policy measures to raise labor market participation of seniors:
  - Digital Skills Bridge program to help employees adapt to digital transformation and reduce skill mismatches.
  - Introduction of the Revenu d’Inclusion Sociale (RevIS) in January 2019, allowing beneficiaries to keep a higher part of welfare benefits after accepting a job offer.
  - Plans to move to fully individual income taxation to increase incentives for female labor market participation.
  - Reform of the professional reclassification scheme (could reduce the share of disability pensions), creation of subsidized jobs, and abolishment of some pre-retirement schemes.
- Staff and authorities agree further action is needed, including phasing out benefits for early retirement, to raise elderly participation which remains one of the lowest in the EU.

### Unemployment and labor market tightness
- Historically low job seekers to vacancies ratio signals a tight labor market (chart referenced: Job Seekers to Vacancies Ratio, 12-month moving average).
- The recent decline in unemployment benefited youth most, but structural long-term unemployment remains high compared to 2009.
- Long-Term Unemployment Rate is tracked as a 12-month moving average (chart referenced).

### Pension system sustainability and fiscal costs
- Fiscal costs implied by the pension system are depicted in chart series across 2016–2058 (chart referenced: "Fiscal Costs Implied by the Pension System (Percent of GDP)").
- Staff view: pension system is sound over the short and medium term, but faces long-run challenges from less favorable migration flows and population ageing.
- Recommendation: engage with key stakeholders timely on reforms to secure long-term sustainability given long lags of pension reforms and intergenerational equity concerns.

### Public investment, infrastructure, and efficiency
- Luxembourg has maintained relatively high public investment spending (above 5 percent of GDP since 2000 on average).
- This has produced one of the highest public capital stock-to-GDP ratios among EU countries, but infrastructure bottlenecks remain (e.g., transportation).
- Public investment efficiency findings:
  - Luxembourg could have built up to 35 percent more infrastructure and improved infrastructure quality by 12 percent for the same cost.
  - Investment efficiency scores: infrastructure quality = 0.87; infrastructure quantity = 0.65.
- Recommendation: implement a medium-term expenditure framework and multiyear expenditure planning to enhance coordination, prioritization, and resource allocation; improve public investment efficiency to maintain strong fiscal position while upgrading infrastructure.

### Fiscal risks and international tax developments
- Multinational profits are a major source of Luxembourg’s fiscal revenue: about 30 percent of Luxembourg’s tax revenue originates from the taxation of capital (highest percentage within the EU28).
- Eurostat foreign affiliate data: foreign-owned entities generate almost 60 percent of gross operating surpluses in the non-financial sector; U.S.-owned firms contribute around 22 percent.
- U.S. tax reform impacts:
  - Combined (state and federal) CIT fell by 14 percentage points; combined CIT fell from around 40 to 26 percent.
  - OECD average CIT = 24 percent.
  - Applying Beer, Klemm, and Matheson (2018) elasticities and a country-specific weight of 19 percent suggests long-term revenue losses in Luxembourg could be 7 percent of CIT revenues (about 0.4 percent of GDP).
  - Revenue losses could increase to 11 percent of CIT revenue in the long run (about 0.6 percent of GDP) if the government reduced the headline rate by one percentage point.
- Broader international changes: implementation of BEPS actions, adoption of ATAD I (December 2018) and planned adoption of ATAD II by January 2020, automatic exchange of information on cross-border tax rulings since January 2017, EU debate on CCCTB, and OECD/IMF discussions on taxation options (user-based allocation, minimum tax rates, destination-based taxation, formula apportionment, residual profit tax).

### Financial sector resilience and supervision
- Continue implementing 2017 FSAP recommendations to enhance financial sector resilience:
  - Strengthen supervision of banks’ large cross-border exposures.
  - Complete resolution plans for less systemic banks.
  - Implement the country’s component for the euro area credit bureau.
  - Issue guidance on substance requirements for delegated activities in the investment fund sector and engage with foreign regulators where delegated portfolio and risk management are prominent.
- Macroprudential oversight:
  - Countercyclical capital buffer activated.
  - Steps to standardize reporting of borrower-related indicators and plans to publish the risk dashboard are welcome.
  - Draft bill to implement borrower-based mortgage lending limits should be swiftly approved.
  - Continue monitoring real estate sector risks and vulnerabilities from excessive household indebtedness.
- Governance of supervisors:
  - Strengthen governance arrangements and enshrine operational independence of the CSSF and the CAA in legislation.
  - Align code of conduct for non-executive members of the central bank supervisory board with best practice and adopt codes of conduct for non-executive boards of the CSSF and the CAA.

### Staff appraisal and policy recommendations (summary)
- Growth outlook remains favorable but risks are tilted to the downside (external risks: weaker global growth, changes in international tax rules, disorderly Brexit, tightening global financial conditions; domestic risk: rising real estate prices could lead to excessive household indebtedness).
- Fiscal policy:
  - Implement announced fiscal measures while preserving sizable fiscal buffers.
  - Quantify tax revenue risks under alternative scenarios and explore growth-friendly mitigation options.
- Structural policies:
  - Continue measures to raise elderly labor participation (including phasing out early retirement benefits).
  - Follow through on medium-term reform agenda to alleviate housing supply constraints (urban planning law changes, boost social housing, reform real estate taxation).
  - Improve public investment efficiency and strengthen budgetary framework.
- Financial sector and AML/CFT:
  - Continue implementing FSAP recommendations and strengthen macroprudential tools and supervision.
  - Implement national strategy based on the first National Risk Assessment; focus on private banking and foreign trust risks.
  - Address Fintech-related risks using a risk-based approach.
- Recommendation: next Article IV consultation with Luxembourg to be held on the standard 12-month cycle.

*Source: IMF staff report excerpt (Luxembourg).*

### Box 2. Risks in the Investment Fund Sector and Implications for the Economy

### Box 2. Risks in the Investment Fund Sector and Implications for the Economy

### Data, grouping, and methodology
- Monthly fund-by-fund market data covering more than 80 percent of the fund sector from 2005:M1 to 2018:M9 were used to derive risk metrics.
- Funds are grouped by investment policies: equity, high-yield (HY), bond, mixed, and emerging-market (EM) funds; and constant net asset value (CNAV), variable net asset value (VNAV), and other money market funds (MMFs).
- Probabilities of distress (PoDs) for each fund class were computed following a value-at-risk methodology; stress is proxied by the share of funds with returns falling in the tail of the overall distribution of returns of all funds over a 12-month rolling window.
- System-wide measures derived:
  - Fund stability index: probability of any fund class becoming stressed given at least one fund class has already been under stress.
  - Joint probability of stress: likelihood that all fund classes become stressed simultaneously.
- PoDs are used to recover joint likelihoods of stress applying the Consistent Information Multivariate Optimization methodology.

### Evolution of stress and vulnerabilities
- Derived risk metrics spike during past systemic stress episodes: the global financial crisis, the European debt crises, and the pickup in financial market volatility in 2016 when the Fed started interest rate normalization.
- Financial stress in the investment fund sector has decreased since 2016, reflecting a prolonged period of loose global financial conditions.
- Vulnerabilities that have accumulated since 2016 include increased liquidity and maturity mismatches; fund classes with larger vulnerabilities have higher likelihoods of being under stress.
- Available data do not cover financial stress resulting from the pullback in equity markets in Q4.

### Impact of tighter global financial conditions (VAR results)
- A bi-variate VAR (global financial conditions index and PoDs) using quarterly data from 2006:Q1 to 2018:Q3 indicates:
  - A one-standard deviation shock to the global financial conditions index is significantly associated with higher stress (increase in PoDs) for most fund classes.
  - The cumulative impact is greater for EM, mixed, and HY funds.
  - Funds with large liquidity/maturity mismatches and high leverage can experience liquidity strains from idiosyncratic redemptions and could generate spillovers through asset liquidation to other parts of the sector.
- Point estimates of Change in PoDs (due to one standard deviation in GFSI) — impulse responses of PoDs to one standard-deviation shocks to the Global Financial Conditions index (bivariate VAR for each fund class):
  - Bonds: 0.4** (1-quarter ahead), 3.9** (Cumulative impact)
  - EMs: 0.3** (1-quarter ahead), 5.5** (Cumulative impact)
  - Equity funds: 0.7** (1-quarter ahead), 3.6** (Cumulative impact)
  - HY bonds: 0.5** (1-quarter ahead), 3.9** (Cumulative impact)
  - Mixed funds: 0.7** (1-quarter ahead), 5.2** (Cumulative impact)
  - MMFs: 0.9** (1-quarter ahead), 7.7** (Cumulative impact)
  - CNAVs: 0.2 (1-quarter ahead), 4.0 (Cumulative impact)
  - VNAVs: 0.3** (1-quarter ahead), 3.6** (Cumulative impact)
  - Notes: Figures represent impulse responses; ** Statistically significant at 5 percent.

### Transmission to the real economy
- A three-variate structural VAR (logistic transformation of the systemic risk metric, yoy household credit growth, and yoy real GDP growth; shock identification via Cholesky decomposition with systemic risk metric ordered first) finds:
  - Higher systemic risk is associated with lower household credit growth in the near term, suggesting a bank credit channel between investment fund stress and the economy.
  - Other channels, including a direct impact of lower fund performance on GDP, are also relevant.
  - Real GDP growth could be reduced by about 2 percentage points in a year following a one standard deviation shock to systemic risk.
- Impulse responses:
  - Response of household credit growth to a systemic risk shock: negative (impulse response profile shown in source; deviations depicted ±2 Standard deviations).
  - Response of real GDP growth to a systemic risk shock: negative (impulse response profile shown in source; deviations depicted ±2 Standard deviations).

### Coverage and sample composition (Luxembourg: Investment Funds Coverage, 2018M9)
(Billions of euros, unless specified)
- Non-monetary Funds
  - EM: 53 (Number of Funds); 150 (Total net assets universe); 120 (Coverage); 80% (Coverage percent)
  - HY: 46; 146; 117; 80%
  - Other: 633; 978; 782; 80%
  - Equity funds: 957; 1,371; 1,097; 80%
  - Mixed funds: 685; 979; 783; 80%
  - Total non-monetary funds: 2,374; 3,624; 2,899; 80%
- Money Market Funds
  - CNAV: 10; 196; 181; 92%
  - VNAV: 15; 30; 28; 92%
  - Other MMFs: 30; 41; 38; 92%
  - Total MMFs: 55; 268; 247; 92%
- Total: 2,429 (Number of Funds); 3,892 (Total net assets universe); 3,145 (Coverage); 81% (Coverage percent)
- Sources: CSSF; and IMF staff calculations.

*Prepared by Moez Souissi, in collaboration with Jana Bricco (EUR); IMF staff calculations.*

### Box 4. Ensuring Long-Term Sustainability of Luxembourg’s Pension System (concluded)

### Box 4. Ensuring Long-Term Sustainability of Luxembourg’s Pension System (concluded)

### Key findings on pension system pressures and metrics
- Luxembourg is projected to experience the highest increase in pension expenditures among EU countries.
- Luxembourg has the lowest effective retirement age in Europe.
- Unlike other European countries, Luxembourg has not yet started to link retirement age to higher life expectancy.
- Luxembourg has the second largest replacement rate in Europe.
- Given the low effective retirement age, Luxembourg’s gross pension wealth is almost double the EU average.

### Quantitative indicators (as reported in source figures)
- Life Expectancy vs Statutory Retirement Age, 2070: country markers shown across a span from 64 to 88 years for statutory retirement age (men) and life expectancy (men). (Source: European Commission 2018 Ageing Report.)
- Scenario panel time series (2016–2070) illustrated comparisons for:
  - Baseline
  - 15% reduction in replacement rate
  - 68 years retirement age
  - 30% contribution rate
  - Replacement and retirement age combinations
  - Replacement and contribution combinations
  - Retirement age and contribution combinations
  (Sources: EC's 2018 Ageing Report, Eurostat, and IMF staff estimations.)
- Fiscal Balance Implied by Pension System Actuarial Model: cross-country percent of GDP comparisons place Luxembourg (LUX) among highest implied fiscal balances. (Source: EC's 2018 Ageing Report, Eurostat, and IMF staff estimations.)
- Gross Pension Wealth, 2016 (Multiples of annual gross earnings): Luxembourg ranks notably above the EU average (Source: OECD).
- Change in Gross Public Pension Expenditures, 2016–70 (Percentage points of GDP): Luxembourg is among countries with the largest increases. (Source: European Commission 2018 Ageing Report.)
- Average Effective Exit Age from Labor Market, 2017 (Years): Luxembourg’s average effective exit age shown between 56 and 70 years with Luxembourg positioned toward the lower end. (Source: European Commission 2018 Ageing Report.)
- Replacement Rate, 2016 (Pension as percent of average wage): Luxembourg appears among top countries with replacement rates up to 90 percent in the ranked panel. (Source: European Commission 2018 Ageing Report.)

### Policy recommendations and reform options
- Gradual combined action on key pension parameters would ensure sustainability of the pension system.
  - Actions implied across scenarios include:
    - Reducing replacement rates (example scenario: 15% reduction in replacement rate).
    - Increasing statutory/retirement age (example scenario: 68 years retirement age).
    - Increasing contribution rates (example scenario: 30% contribution rate).
    - Combinations of the above (replacement and retirement age; replacement and contribution; retirement age and contribution).

### Contextual implications and transmission
- Low effective retirement age combined with high replacement rates generates very large gross pension wealth relative to EU peers and contributes materially to projected increases in public pension expenditures.
- Absent linkage of retirement age to higher life expectancy, Luxembourg faces larger actuarial and fiscal adjustments compared with peer countries that have already begun such linkages.

*Source: IMF staff synthesis of Box 4 text and accompanying figures in the referenced IMF country report content.*

### Appendix I. Implementation of BEPS Actions in Luxembourg

### Appendix I. Implementation of BEPS Actions in Luxembourg

### Overview
- The appendix summarizes Luxembourg’s implementation status of the OECD/G20 BEPS Action Plan across Actions 1–15 as reflected in domestic legislation, transpositions of EU directives (ATAD I, ATAD II, DAC6, DAC3), and ratification of the Multilateral Instrument (MLI).
- Luxembourg actively participates in relevant working groups and international fora, including the OECD/G20 Inclusive Framework on BEPS.

### Action 1 — Tax challenges of the digital economy
- More than 110 countries and jurisdictions agreed to review two key concepts of the international tax system in response to a G20 mandate.
- Members of the OECD/G20 Inclusive Framework on BEPS will work towards a consensus-based solution by 2020, as set out in the Interim Report on the Tax Challenges Arising from Digitalisation released on March 16, 2018.
- No agreement reached among EU Member States on a proposal for a (EU) Council Directive on a digital services tax ("DST").
- New technical discussions on a Digital Advertising Tax Directive (DAT) started in January 2019; Luxembourg actively participates in related working groups.

### Action 2 — Hybrid mismatch arrangements
- Luxembourg has regulations to neutralize hybrid mismatches based on EU Directive 2014/86/EU amending the Parent-Subsidiary Directive (2011/96/EU).
- Provisions introduced by the Law of 18 December 2015 amending articles 147 and 166 of the Luxembourg Income Tax Law (LITL).
- Luxembourg transposed the whole ATAD I by the law of December 21, 2018, including introduction of rules on hybrid mismatches.
- ATAD II (detailed rules regarding hybrid mismatches with third countries) will be transposed into national law by December 31, 2019.

### Action 3 — Controlled foreign company (CFC) rules
- Luxembourg transposed the whole ATAD I by the law of December 21, 2018, including Article 7 of ATAD I on CFC rules.

### Action 4 — Interest limitation rules
- Luxembourg transposed the whole ATAD I by the law of December 21, 2018, including the introduction of specific interest limitation rules.

### Action 5 — Harmful tax practices (transparency and substantial activity)
- Spontaneous exchange of certain information applies in Luxembourg based on tax treaties and the Convention on Mutual Administrative Assistance in Tax Matters (MAC).
- Directive 2015/2376 (DAC 3), transposed by the law of July 23, 2016, extends automatic exchange of information to decisions and agreements on advance cross-border tax rulings (counterpart to Action 5).
- Luxembourg adopted a law on April 17, 2018 introducing a new IP regime which includes the nexus approach advocated in Action 5.

### Action 6 — Treaty abuse prevention
- Measures of Action 6 will be implemented via the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI").
- On February 14, 2019, the Luxembourg Parliament passed law 7333 ratifying the MLI into Luxembourg domestic tax law.

### Action 7 — Artificial avoidance of permanent establishment
- The new definition of permanent establishment is part of the MLI (to be implemented via ratification/transposition noted under Action 6/15).

### Actions 8–10 — Transfer pricing (intangibles, risks, capital, high-risk transactions)
- The Budget Law of December 23, 2016 introduced article 56bis into the LITL, incorporating the arm’s length principle based on OECD principles as revised by Actions 8–10.
- End of 2016, authorities issued an administrative circular referencing article 56bis LITL on the transfer pricing framework for companies carrying out intra-group financing activities in Luxembourg.

### Action 11 — Measuring and monitoring BEPS
- Luxembourg participates in the corresponding working party at the OECD.

### Action 12 — Mandatory disclosure rules for aggressive tax planning
- On June 21, 2017, the European Commission issued a proposal to amend Directive 2011/16/EU regarding mandatory automatic exchange in relation to reportable cross-border arrangements.
- On May 25, 2018, ECOFIN formally adopted Council Directive (EU) 2018/822 amending Directive 2011/16/EU (commonly referred to as "DAC6").
- Member States must implement DAC6 into domestic law by December 31, 2019; Luxembourg is working on transposition.

### Action 13 — Transfer pricing documentation and country-by-country reporting (CbCR)
- On December 23, 2016, the Luxembourg Parliament passed the law on CbCR, transposing EU Directive 2016/881 of May 25, 2016 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (counterpart of Action 13 minimum standard).

### Action 14 — Dispute resolution mechanisms
- On October 10, 2017, the Council of the EU adopted Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the EU.
- Luxembourg is working on transposition of the Directive into national law.
- Several provisions of Action 14 will be implemented into Luxembourg’s tax treaties via the MLI.

### Action 15 — Multilateral instrument to modify bilateral tax treaties
- Action 15 develops a multilateral instrument to update tax treaties to BEPS minimum standards.
- On February 14, 2019, the Luxembourg Parliament passed the law ratifying the MLI into Luxembourg domestic tax law.

*Source: Appendix I. Implementation of BEPS Actions in Luxembourg (from the supplied IMF PDF content).*

### 9. Strengthen monitoring of systemic

### 9. Strengthen monitoring of systemic risk in the investment fund industry and, in alignment with international and European efforts, develop instruments to take preemptive measures to mitigate these as appropriate.

### Investment fund systemic-risk monitoring — findings and actions
- The CSSF has further increased its risk surveillance of systemic risks in investment funds, including by closing data gaps via multiple data sources (such as UCITS risk reporting, AIFMD reporting, EMIR, external data providers).
- The CSSF made progress in developing its liquidity stress testing capacity.
- The CSSF contributes to work at the ESRB-/ ESMA-Level to develop preemptive measures to address risks from liquidity mismatch and leverage.
- The CSSF actively participates in dedicated working groups at both the European and international levels.

### Related supervisory recommendations and status (selected items from FSAP Update)
- Recommendation 10: Strengthen the institutional framework to increase the willingness to act, including by enshrining in the law the de facto leading role of the BCL.
  - Status: MT
  - Note: The authorities consider the current institutional framework to be adequate.
- Recommendation 11: Publish the risk dashboard and a note assessing systemic risk.
  - Status: MT
  - Action: They are planning to publish the substance of the risk dashboard this year.

### Banking regulation and supervision — selected measures and status
- Recommendation 12: Increase intensity of supervision over intra-group exposures, with banks required to demonstrate continued eligibility in their use of large exposure limit waivers.
  - Status: NT
  - Actions and findings:
    - Ongoing monitoring by the CSSF has been strengthened, including quarterly review of intragroup exposures, and an escalation process to reevaluate eligibility for the waiver in case of ad hoc information in the context of annual SREP.
    - Since mid-2018, monitoring has been enhanced with the new EU monthly reporting on maturity mismatches.
    - The CSSF continues to weekly monitor the Rating and CDS of parent entities and to conduct its annual horizontal review of intra-group exposures and waivers, which serves as a basis for individual waiver reviews.
    - The CSSF hired an additional staff in 2019 to review existing waivers.
- Recommendation 13: Continue monitoring ability of banks to absorb a real estate market price decline.
  - Status: C
  - Actions and findings:
    - CSSF conducts an annual stress test analysis based on bank individual LTV distributions, accounting for extreme price declines and high default rates in the Luxembourg residential real estate market leading to capital losses and risk-weighted assets increases.
    - Results are incorporated within the annual CSSF-Solvency Stress Test, shared and discussed with supervisors, and considered in ongoing supervision and in the SREP.
- Recommendation 14: Increase frequency of on-site inspections of subsidiaries of SIs.
  - Status: C
  - Note: The SSM is implementing this recommendation.
- Recommendation 15: Harmonize data reporting standards for loan-to-value and debt-to-income ratios.
  - Status: I
  - Actions and findings:
    - Work on harmonizing definitions was conducted over the past year in close cooperation with banks active in the real estate sector to increase awareness and ensure smooth implementation.
    - Harmonized definitions for the LTV and DSTI ratios as well additional relevant indicators are included in CSSF circular N°18/703.

### Investment fund regulation and supervision — selected measures and status
- Recommendation 16: Strengthen guidance on substance in the context of delegated activities and actively engage with regulators in jurisdictions where such activities are prominent.
  - Status: NT
  - Actions:
    - CSSF issued specific guidance on substance requirements in the context of delegated activities in CSSF Circular 18/698 (published on August 23, 2018).
    - CSSF engaged with supervisory authorities in third-country jurisdictions where UCITS delegates are established (including Hong Kong, Switzerland, and the U.S.).
- Recommendation 17: Issue guidance on the holdings of directorships of funds and their managers.
  - Status: NT
  - Action:
    - CSSF issued specific guidance on the holdings of directorships of funds and their managers in CSSF Circular 18/698 (published on August 23, 2018).
- Recommendation 18: Assess whether safeguards to ensure depositary independence are adequate.
  - Status: NT
  - Actions:
    - CSSF started revisiting this issue internally in 2018.
    - Discussions with industry representatives within the CSSF UCI Committee started in early 2019.

### Insurance regulation and supervision
- Recommendation 19: Implement revised early warning system under Solvency II regime.
  - Status: NT
  - Action:
    - The CAA has designed a risk-based early warning system based on a risk appetite level chosen by insurance and reinsurance undertakings as part of the ORSA process.

### Contingency planning and financial safety nets — exposures and transferability
- Recommendation 20: Develop policies on intragroup exposures and the transfer of custodian functions in recovery and resolution.
  - Status: I
  - Findings and actions:
    - No formal policies are in place to address transfer of custodian functions; CSSF determined custody service is generally substitutable due to presence of numerous depositary banks in Luxembourg, though some banks qualify custodian functions as critical in recovery plans.
    - Transfer may be time consuming due to legal and contractual constraints and the volume of assets.
    - The SRB is undertaking further work with CSSF and concerned banks to identify and address issues.
    - EU regulations currently do not explicitly exclude intra-group exposures from a bail-in; likelihood of bail-in remains an important factor for large-exposure intra-group exemptions. In the context of BRRD2 negotiations at EU Council level, there is a broad consensus for excluding intragroup exposures from bail-in regardless of their maturities.
    - In absence of SRB’s formal policy regarding depositary banks—particularly collective investment schemes—the CSSF has not yet put in place its own policy regarding use of transfer tools (e.g., sale of business tool (share deal or assets deal)) for transferring the depositary function.
    - Several resolution plans were drafted and approved during the 2018 resolution planning cycle by the CSSF for banks with specialized business models and for banks providing custodian functions; plans identified preferred resolution strategies on a case-by-case basis considering net asset volumes from CIS and potential contagion effects (e.g., funds of funds). Draft plans were submitted to the SRB.

### Financial market infrastructure oversight — selected measures
- Recommendation 21: Reduce CBL’s exposure to commercial banks vis-à-vis CSDs and central banks.
  - Status: NT
  - Actions:
    - Clearstream efforts to reduce dependencies on commercial banks are ongoing, including reducing concentration risk on cash correspondent banks (CCBs) in USD and GBP by adding additional CCBs for those currencies.
    - Target state is to be achieved by May 2019.
    - Negotiations with the Bank of England on whether Clearstream could be granted access to GBP are ongoing.
- Recommendation 22: Require establishment of third data center and conduct a full failover test.
  - Status: NT
  - Action:
    - Negotiations and tests with possible vendors that meet Clearstream’s standards are ongoing; currently no concrete timeline for final implementation.

### Anti-Money Laundering / Combating the Financing of Terrorism (AML/CFT)
- Recommendation 23: Ensure the 2016/2017 national risk assessment focus adequately on TCSP risks.
  - Status: I
  - Actions and findings:
    - Luxembourg finalized its first National Risk Assessment (NRA) in September 2018 based on data available as end 2017. The NRA focused, amongst others, on TCSPs, and analyzed both the inherent risk as well as mitigating actions.
    - The NRA represents the basis of the national AML/CFT strategy and the broader national ML/FT risk assessment and mitigation exercise.
- Recommendation 24: Agree on the roles and responsibilities in dealing with a system-wide crisis.
  - Status: NT
  - Note: This recommendation is being considered by the Ministry of Finance.
- Recommendation 25: Finalize the operational modalities of emergency liquidity assistance provision.
  - Status: MT
  - Note: Operational modalities are in the process of being finalized.

### Data, statistics, and institutional notes (selected figures and timelines)
- Time Frame codes used: C = continuous; I (immediate) = within one year; NT (near term) = 1–3 years; MT (medium term) = 3–5 years.
- Agencies referenced: BCL = Banque centrale du Luxembourg; CAA = Commissariat aux Assurances; CBL = Clearstream Banking Luxembourg S.A.; CdRS = Comité du Risque Systémique; CSSF = Commission de Surveillance du Secteur Financier; ECB = European Central Bank; MoF = Ministry of Finance; MoJ = Ministry of Justice; SRB = Single Resolution Board; SREP = Supervisory Review and Evaluation Process.
- Selected statistical items (as reported in the staff report informational annex, dates as of March 31, 2019):
  - Quota: 1,321.80 SDR million (100.00 percent of quota)
  - Fund holding of currency: 1,132.09 SDR million (85.65 percent)
  - Reserve Tranche Position: 189.73 SDR million (14.35 percent)
  - Net cumulative allocation (SDR Department): 246.62 SDR million (100.00 percent)
  - Holdings (SDR Department): 247.88 SDR million (100.51 percent)
- Luxembourg finalized its first NRA in September 2018 based on data as of end 2017.
- CSSF circulars referenced by number and date:
  - CSSF Circular 18/698 (published on August 23, 2018) — guidance on substance in delegated activities and on holdings of directorships.
  - CSSF circular N°18/703 — harmonized definitions for the LTV and DSTI ratios and additional relevant indicators.

*Source: 1luxea2019001 - 9. Strengthen monitoring of systemic (Luxembourg: FSAP Update 2017 — excerpt; IMF staff report informational annex, April 22, 2019).*

### 21.4 percent of GDP in 2018 and are projected to decline to 20.2 percent and 19.9 percent in 2019 and

### 1luxea2019001 - 21.4 percent of GDP in 2018 and are projected to decline to 20.2 percent and 19.9 percent in 2019 and

### Fiscal position
- General government debt and balance:
  - 21.4 percent of GDP in 2018 and are projected to decline to 20.2 percent and 19.9 percent in 2019 and 2020 respectively.
  - The budget is in surplus.
  - The Government maintains a self-set public debt limit of 30 percent of GDP.
- Fiscal stance and risks:
  - Low and declining public debt levels, a budget in surplus, and continued full respect of EU fiscal rules demonstrate the Government’s long-standing commitment to sound fiscal policies.
  - Authorities are aware of existing revenue risks and stand ready to actively address them (examples: fiscal remedies in response to the change to the EU VAT regime applicable to electronic commerce activities; continued policy adjustment in the context of ongoing BEPS-related developments).
  - Maintaining fiscal room for maneuver acts as a countercyclical fiscal buffer and adds to the economy’s resilience to potential shocks.
- Long-term considerations:
  - Population ageing could pose challenges in the long-run; cost of ageing projections are subject to volatile assumptions on demographic and economic developments.
  - A dedicated pension reserve fund provides a significant buffer, with assets amounting currently to some 33 percent of GDP, which allow to sustain pension expenditures over a substantial period into the future, even under a no-policy change scenario.
  - Past reforms have introduced a parametric framework that facilitates adjustments, but political economy considerations remain key. Authorities emphasize discussing possible reforms with social partners.

### Economic policy and public investment
- Public investment priorities and targets:
  - Public investment spending is scheduled to amount to over 4 percent of GDP annually.
  - Investment objectives: address infrastructure needs (including housing and public transportation), prepare the economy for technological change, diversify the financial sector and the economy.
  - Investments in ICT infrastructure and e-Government remain key.
- Social and environmental priorities:
  - Policies aim at making growth more socially inclusive.
  - Reducing the carbon footprint of the economy and supporting R&D are priority areas.
  - The Government remains committed to the emission targets agreed under the Paris agreement.
  - Planned increase in fuel taxation cited as an illustrative measure.
- Institutional cooperation:
  - Authorities look forward to working with staff to further improve public investment efficiency.

### Tax transparency, BEPS, and international tax alignment
- Recent legislative and administrative actions:
  - Over the last five years, the Government has taken and continues to take decisive actions to align its tax framework to international standards, including those set by the OECD, such as the BEPS action plan.
  - Luxembourg is participating in the automatic exchange of information in the field of taxation and has put into place a BEPS-compliant IP box regime.
  - In 2018 and 2019 respectively, parliament transposed the Anti-Tax Avoidance Directive (ATAD) I, as well as the Multilateral Instrument (MLI).
  - The authorities expect to transpose the ATAD II by the end of 2019.
  - Earlier steps include regulations aimed at neutralizing hybrid mismatches and the introduction of the arm’s length principle into national law.
- Peer review and commitments:
  - The 2019 peer review report by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes found Luxembourg to be “largely compliant” with the international standard of transparency and exchange of information on requests.
  - The Government remains committed to staying actively engaged in all relevant fora and to aligning the tax framework to international developments.
- Policy stance on global tax changes:
  - Authorities are monitoring developments in the international tax environment closely and stand ready to adapt where necessary.
  - Authorities stress the importance of a global level playing field, noting Luxembourg’s comparative advantages such as political and social stability, prudent policies and an effective governance framework.

### Financial sector resilience and regulation
- Overall soundness:
  - The financial sector remains sound.
  - Banks are profitable and maintain high levels of capital, liquidity and asset quality.
  - NPLs are very low, both in absolute levels and compared to peers.
  - Banks remain resilient to shocks as stress tests indicate.
  - The fund industry remains an important component of the financial industry in Luxembourg, distributing to a diverse pool of investors both in the European internal market and globally.
- Supervisory and macroprudential measures:
  - Authorities continuously adjust the national regulatory framework and macroprudential surveillance to evolving international standards and best practices, following up on IMF recommendations.
  - Increased frequency of on-site inspections for investment funds and banks.
  - Strengthened engagement with authorities of other jurisdictions.
  - Revised early warning indicators under the Solvency II regime are used.
  - Steps taken to standardize reporting of borrower-related indicators.
  - Authorities contribute to development of consistent leverage measures, guidance for liquidity stress testing by investment fund managers, and standardized stress testing for money market funds.
- Systemic Risk Committee and resolution:
  - Existing and emerging risks are closely monitored, including at the level of the Systemic Risk Committee (CdRS).
  - Authorities remain attached to the objective of further risk reduction in the banking sector at EU level to facilitate the completion of the banking union.
  - Institutions, including subsidiaries, must maintain sufficient levels of own funds and eligible liabilities to allow for smooth operationalization of resolution strategies.
- AML/CFT framework:
  - Luxembourg transposed the 4th EU AML Directive (AMLD4); transposition work relating to the AMLD5 is on schedule.
  - Authorities conducted a National Risk Assessment (NRA) in line with OECD best practices and are implementing a strategy to ensure measures are commensurate with the risks identified in the NRA.
  - A Register of Beneficial Owners of corporate and other legal entities was established in January 2019 in conformity with AMLD4 provisions.
  - These efforts are intended to further strengthen the supervisory framework and authorities are engaged in discussions in fora such as ESMA, ESRB, FSB, IOSCO, SSM and SRM.

### Housing market
- Demand and policy response:
  - Economic developments and related population growth generate strong demand in the housing market.
  - Government priorities: increase availability of social housing, change urban planning laws, boost construction of social housing, and reform real estate taxation to reduce speculation (actions aligned with 2018 Article IV recommendations).
- Financial and macroprudential measures:
  - Authorities actively monitor and manage potential risks, including within the Systemic Risk Committee (CdRS).
  - Introduction of macroprudential measures contributes to the build-up of capital buffers in the banking system.
  - A draft enabling bill to extend the macroprudential toolkit by including tools allowing for borrower-based mortgage lending measures is in the legislative process.

### Diversification efforts and innovation
- Sectoral diversification:
  - Government efforts aim to increase resilience to shocks and facilitate employment across sectors by diversifying the financial sector itself and the economy as a whole.
- Innovation and climate finance:
  - Fostering innovation in financial technology and promoting climate finance (including public-private partnerships) remain priorities.
  - Inception of the Luxembourg House for Financial Technology (LHoFT) and the International Climate Finance Accelerator Luxembourg showcase government ambitions.
- ICT and space initiatives:
  - Continued development of the ICT sector via first-class infrastructures and telecommunication.
  - Legal and regulatory environment implemented to enable private investors and companies to explore and use space resources via the SpaceResources.lu initiative.
- Business climate:
  - Government attention to developing a climate conducive to business, investment and innovation, as reflected in the 2019 Budget.

*Source: IMF staff and Luxembourg authorities text in the provided chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1luxea2019001.pdf_