Over the coming six months, Linklaters will be closely monitoring and analysing political and legislative developments during Luxembourg’s presidency of the EU Council. We will be tracking news from the presidency, progress on the various issues Luxembourg has set as priorities, and exploring the whys and hows of decisions and developments as they happen. For this first in a series of communications Patrick Geortay, Luxembourg capital markets and banking partner, will place you at the heart of the upcoming discussions and provide insights into their implications.
Luxembourg, which took over the rotating presidency of the European Union on 1 July, faces a heavy workload during a critical period for the EU. In addition to overseeing the union’s response to the unfolding economic and financial crisis enveloping Greece, the grand duchy has set out ambitious priorities in areas including completing the post-crisis reform of financial institutions and markets and enhancing transparency and co-operation in tax matters.
The government also aims to maintain momentum towards establishment of a capital markets union to spur European economic growth, and make progress in areas ranging from energy union and the digital single market to the circular economy and the EU’s Transatlantic Trade and Investment Partnership negotiations with the United States. The Luxembourg presidency has set out its full agenda for the next six months at www.eu2015lu.eu.
Banking and financial services
Bank structural reform
Luxembourg will push the negotiations further on bank structural reform, a post-financial crisis initiative prompted by a 2012 report by Finnish Central Bank head Erkki Liikanen. On 19 June EU finance ministers agreed a draft regulation imposing ring-fencing or separation of retail deposit-taking and lending from riskier trading and other investment banking activities on the biggest and most complex “globally systemically important” banks.
The proposal would determine systemic importance according to institutions’ size, interconnection with international financial markets and/or exceeding thresholds for trading activities or retail deposits. It distinguishes between proprietary trading and other trading activities, unless the latter present excessive risk, and stipulates that trading banks cannot accept retail deposits protected under guarantee schemes. Exemptions are envisaged for institutions in the UK and elsewhere that are already subject to national rules, but these may face additional requirements.
The legislative process is forecast to take at least six months, but the EU Commission hopes it can be finalised before year-end. Linklaters Luxembourg capital markets and banking partner Patrick Geortay comments: “A great deal of progress has been made toward the EU banking union over the past three years, but there are still some issues to be ironed out, notably a uniform deposit guarantee scheme for the euro zone. That is not among the priorities of the Luxembourg presidency, because there is as yet no political consensus on the issue.”
Despite the finance ministers’ agreement, Mr Geortay cautions that the legislative process will still take time, noting that considerable disagreement remains in certain areas between the European Parliament and the Commission. He adds: “I’m sure there will be complex negotiations ahead, and while the Commission hopes a deal will be in place by the end of the year, I'm not certain it will be that straightforward.”
Money market funds
Also awaiting resolution is the planned regulation on money market funds, part of a broader EU strategy to bring so-called “shadow banking” activities under closer oversight. In April the European Parliament approved a draft regulation that has been billed as a compromise between Luxembourg, Ireland and UK, the main domiciles or management centres for constant NAV money market funds, and other EU members and the European Commission that would like to see them phased out.
The Parliament’s compromise would replace constant NAV funds with three new types of vehicles, Government CNAV, Small Investor CNAV and Low Volatility NAV funds. It has been criticised as potentially creating confusion among investors as well as increasing the likelihood of managers running more conservative portfolios. In any case, Mr Geortay says, the European Parliament is not the lead institution in the legislative process, and reaching agreement within the EU Council may be later some time.
Market infrastructure resolution
Luxembourg is also committed to the start of negotiations over proposed legislation on the recovery and resolution mechanisms for market infrastructure entities, namely central counterparties. Mr Geortay comments: “These are institutions designed to conduct clearing but also to concentrate various risks, which are supposed to be covered by several mitigating factors such as collateral, but the big issue is changes in the value of collateral, especially in turbulent markets.” The Luxembourg presidency is keen to start negotiations on a legislative proposal, but it doesn’t seem confident that a concrete legislative proposal will be in place within the next six months.
Taxation is an area that has seen Luxembourg in the spotlight over the past year and where widespread changes are in prospect, Mr Geortay says. The government’s stance is that it favours a “joined-up approach” to the fight against tax evasion and addressing the problem of corporate tax avoidance, but that this must be tackled within a global framework that creates a level playing field, lest some parts of the financial services industry simply move outside Europe.
Action Plan for Fair and Efficient Corporate Taxation
The European Commission published its Action Plan for Fair and Efficient Corporate Taxation on 17 June, with the aim of curbing tax avoidance, ensuring that governments receive sustainable revenues and strengthening the single market through a common set of rules. The action plan includes the relaunch of a plan for Common Consolidated Corporate Tax Base, which was first raised in 2011 but dropped in the face of opposition from member states.
With this in mind, the Commission is proposing a step-by-step approach, starting with the common taxable base and leaving the more contentious topic of consolidation for later. The proposals seek to ensure that companies pay their fair share of tax in the countries where they make profits, by closing loopholes, upgrading transfer pricing rules and tightening preferential regime requirements, but without harmonising corporate tax rates. “The common taxable basis for corporate taxation is quite sensitive, Mr Geortay says. “Until very recently it has never really been a starter in political terms.”
The Commission says the proposals overlap with the OECD’s initiative on Base Erosion and Profit Shifting, but tailored to the EU circumstances and requirements, notably the union’s treaty freedoms, single market, currency zone and binding legislation. Mr Geortay says “the aim is to implement the standards decided within the OECD to ensure they apply across the board.
Cross-border rulings directive
The Commission published its proposal for a Council directive on automatic exchange of information in the field of taxation, covering cross-border rulings and advance pricing arrangements, on 18 March, and member states are scheduled to begin applying its requirements from the beginning of 2016.
Mr Geortay says the issue is already broadening beyond Ireland, the Netherlands and Luxembourg, the three countries singled out last year for the tax rulings provided to multinational groups. He says: “Now the Commission is starting to gather information from more of the 23 out of 28 EU member states that issue tax rulings. In reality some member states are not keen to exchange this type of information. One of the objectives of the Luxembourg presidency will be to bring the proposal on transparency and exchange of information on tax rulings to a conclusion.”
The process may be influenced by the work of the European Parliament special committee on tax rulings, which was launched in February 2015. The committee is due to publish its report in October, and the findings will be used by the parliament’s economic and monetary affairs committee to help it draw up proposals for legislation and other measures to curb aggressive tax planning by multinationals.
EU capital markets union is an area likely to see movement over the coming months, Mr Geortay says. The goal of the plan is to create a single market in capital to complement and compensate for shortfalls in bank financing and achieve the goals of the November 2014 Investment Plan, notably the implementation of the regulation on European Long-Term Investment Funds and progress on measures regarding securitisation, standardised credit information on SMEs, private placements and a review of the EU’s Prospectus Directive.
High on the agenda of the Luxembourg presidency are plans to launch legislative proposals in respect of securitisation as well as revision of the Prospectus Directive to make the requirements currently imposed on mid-cap and small enterprises less onerous – viewed as important in bringing new dynamism to the European economy by making it easier for innovative businesses to grow and create jobs.
Says Mr Geortay: “In Europe, traditionally about 80% of the real economy has been financed by banks, and the remaining 20% by capital markets, whereas in the US it is the other way round. Given the ongoing constraints on their lending imposed by new regulation, there is clearly a need for capital markets to play a bigger role than at present. In many countries SMEs are crucial in terms of job creation and one of the key challenges will be to help SMEs to connect with the capital markets, and Luxembourg wants to finalise a proposal on securitisation and an amendment to the Prospectus Directive during the second half of this year.”
Digital Single Market
Luxembourg is committed to pursuing the agenda set out by the Commission in its Digital Single Market Strategy on 6 May, comprising 16 initiatives, to be completed by next year, based on the key pillars of access to digital goods and services, development of the market environment and enhancing the role of the digital economy within society. A proposal on copyright reform is due from the Commission by year-end, while the European Parliament’s Legal Affairs Committee has published a non-binding report. Luxembourg plans to work with the Commission on drawing up detailed proposals in areas including the elimination of ‘geo-blocking’ and enhancing digital skills as part of steps to create an inclusive e-society.
On the environment, Luxembourg will oversee the legislative process for proposed structural reforms to the EU carbon emissions trading scheme, including the creation and operation of a market stability reserve to start at the beginning of 2019. The government also plans to take up calls for Europe to shift to a more resource-efficient economic model, although the circular economy concept does not currently figure on the European Commission’s work programme.
Another of the main objectives of the Luxembourg presidency is progress on negotiations for the new EU regulatory framework for data protection, with the ambition of launching a consultation by the end of this year. Mr Geortay notes: “The Luxembourg government is keen to balance protection of personal data and privacy with the ambition to boost economic growth through the digital economy and the use of big data.”
Transatlantic Trade and Investment Partnership
Luxembourg’s presidency coincides with the intensification of negotiations between the EU and the US on the proposed Transatlantic Trade and Investment Partnership (TTIP), which would align standards and regulations on market access, regulatory co-operation and other aspects of trade rules. The talks have been underway since 2013 and there is no fixed deadline for a conclusion, but the Commission and Germany would like a deal agreed by year-end to avoid procedure being caught up in the US presidential election.
Although the TTIP has aroused some controversy in Europe, notably about arbitration procedures taking precedence over national and European law, Mr Geortay argues that the focus on the dispute resolution mechanism is somewhat exaggerated. “You don't have many choices when it comes to a resolution mechanism for an investment protection treaty,” he says. “There is the court of a particular country or an arbitration mechanism. You could create a supranational court, as exists in the EU and the European Free Trade Association, but in the context of the transatlantic partnership this does not sound realistic at this juncture. Many existing bilateral treaties on protection of investments rely on ICSID arbitration mechanism – it’s nothing revolutionary.”
He also notes that significant differences exist over areas such as financial services, which the Americans are reluctant to include in the TTIP, at least initially. “Reaching an agreement will require striking a balance between these competing concerns, perhaps using transitional provisions,” Mr Geortay says. “The US is very keen to make progress and American diplomats are striving to convince Europeans that an agreement would be mutually beneficial.”
The TTIP discussions, which more than other priority areas may require a concerted effort to explain to and win over public opinion throughout the EU, is set to add to the congestion on the Luxembourg presidency’s packed worksheet. Prime minister Xavier Bettel will make an official presentation of his government’s priorities to the plenary session of the European Parliament in Strasbourg on 8 July.