In the financial world, substance means that real decision-making and operations are truly taking place in a particular jurisdiction.
Substance rules require financial firms to show that critical business functions are carried out in Luxembourg (or another place if that’s where the business in headquartered) and that local branches are not simply a letterbox outpost. Outfits that comply with the regulations can be based here and distribute their financial products across the entire EU.
Substance became a more sensitive issue with Brexit, which induced many investment companies to move their European hubs from London to Luxembourg and Dublin, while lots of banking operations decamped to Frankfurt and Paris.
Between June 2016 and March 2022, the consultancy EY counted roughly 7,000 employees that had relocated from the UK to the EU, with 2,900 new jobs created in the bloc. However, that number was lower than the 31,000-41,000 expected by Oliver Wyman.
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Substance does not mean that all staff and all decisions have to be based in a single jurisdiction. Under the concept of “delegation” various functions can be located in several different places at the same time, as long as there is adequate staffing, resources and control at the main site.
Critics complain the system is abused by companies seeking light-tough regulation or favourable tax deals, and the European Commission periodically tightens the rules.
On the other hand, Statec reported the number of people employed in the grand duchy’s financial services industry rose by more than a quarter in the decade to March 2024, to 55,300. A Luxembourg for Finance and Deloitte study released in 2023 said that nearly a third of all jobs in the country were directly or indirectly tied to the sector. Both of those are rather substantial numbers.
