Luxembourg’s talent gap
Angling for top talent is high on any government’s agenda. But for a country as dependent on foreigners as Luxembourg, the stakes are higher than for others.
Almost half of the country’s population comes from abroad, but the share of immigrants in the workforce stands at above 70%. Clearly, the country’s high salaries, economic stability, safety, and good public health insurance are attractive. But will it be enough for the future?
Luxembourg’s plans to base its economy on highly skilled workers date back decades. In the mid-1980s, the country understood the opportunities offered by a new EU law that allowed fund managers to sell their retail investment funds throughout Europe.
Becoming the first country to adopt the so-called UCITS directive into law, Luxembourg is now Europe’s largest investment management centre, and comes second only after the United States worldwide.
A third of the country’s economic output derives from the financial industry, which requires highly- educated specialists. Luxembourg also heavily invested in the logistics sector and the space industry, while the government is also making significant efforts to attract start-ups, many of which specialise in fintech.
In each of these sectors, low-skilled employees are scarce. “From an economic point of view, it is crucial not only how many (people) are migrating, but also who is migrating,” said Michal Burzynski, a labour economist at the Luxembourg Institute of Socio-Economic Research (LISER).
Luxembourg is joined by many other European countries in the competition for talent. “In Europe, direct incentives for skilled workers started to be implemented in 1990s and 2000s,” Burzynski said.
France made it easier for highly skilled foreigners to work and stay in the country, filling gaps in science, ICT and engineering with non-European staff. Austria has a quota system for people with special skills, while Finland offered tax cuts for foreigners with special expertise and income above a certain level.
“Germany allows highly qualified non-EU nationals such as scientists or top-level managers to obtain a permanent residence and work permit from the outset,” Burzynski said.
Skilled individuals are key for a country’s future prosperity, according to the OECD, as they contribute to more robust economic growth, which in turn creates more jobs, including low-skilled ones.
But unlike other countries, who can fill in at least some of the high-skill positions internally, Luxembourg relies on imported experts almost exclusively. “The level of education among immigrants is significantly higher than that of the overall population,” said Hans Neumayr, who works in the Labour Market Division at the Statec national statistics agency.
Almost twice as many immigrants hold a master’s degree than is the case in the general population, and two-thirds of jobs are for white-collar workers. Demand for high-skilled professionals is constantly growing, as opposed to lower-skilled jobs, Statec data show.
To attract top performers, immigration and fiscal policies pay a crucial role. That is why recruiters raised their eyebrows over a new proposal to slash perks for top earners who doubt that what the government has put forward in exchange will be enough.
Lid on the cookie jar
In the 2021 budget, Finance Minister Pierre Gramegna slashed the so-called warrant scheme. This allowed top managers to benefit from favourable taxation on forms of non-recurring remuneration such as a bonus. As long as a pay-out did not exceed 50% of somebody’s annual remuneration, half of the amount was tax-exempt.
In practice, a manager earning €250,000 in base salary and receiving €125,000 in the form of a warrant, would only need to pay taxes on some €62,500 on the bonus, as the rest was tax-exempt. This perk ceded to exist under the new law. “This change will have a major impact on the level of taxes those in top management role will have to pay,” said Nicolas Audiger, manager at advisory firm Mazars.
Before the change, some 3,700 people were benefiting from the warrant scheme. Everybody agrees that warrants needed to be addressed, as the law was imprecise and open to abuse. “It would just say ‘top management’ when defining those eligible, but did not specify who was [meant by that],” Audiger said.
For instance, there was no reference to minimum pay. Employees would pay a tax adviser for a letter to state their eligibility, even if their role was far from being part of top management. In practice, almost any employee could circumvent the regular income tax on bonuses at the marginal rate of 46% and keep more to themselves.
Yet recruiters fear that abolishing the scheme in its entirety - rather than fixing the loophole - might be detrimental for Luxembourg. Nutella-maker Ferrero, for instance, sees the planned review as a challenge when relocating people to Luxembourg, a spokeswoman said.
Tax experts are also unhappy that a special regime for stock options came to an end, together with the warrant scheme. “This adds uncertainty to employment conditions and stands in stark contrast to what other jurisdictions offer,” said Xavier Martinez, partner at KPMG.
“Stock option benefits encourage employees to care for the mid- and long-term performance of the company they work for as financial results determine the value of the stocks they hold,” he said.
In Gramegna’s new law, both schemes have now been replaced by a profit-sharing programme, an incentive available to all employees, not just the very top. Yet the new scheme makes Luxembourg more attractive to a wider group of top talent only on paper. “It’s true that under the new rules more people are eligible, but no company is obliged to compensate all employees,” Audiger said.
As the pay-out is discretionary, profits might be shared with the same people who used to get bonuses under the warrant scheme. In the new plan, the maximum pay would be capped at 25% of one’s annual salary and top managers benefiting from the scheme might relocate. However, what plays in Luxembourg’s advantage are modest personal taxation rates.
Income tax starts at 15%, with the upper threshold capped at close to 46% when calculated with compulsory contributions to an unemployment fund not reflected on payslips. “Luxembourg’s marginal tax rate is rather high, but not extreme, placing the country somewhere in the middle among other EU economies,” Martinez said.
Also, the social security system caps the 11.5% pension and healthcare contributions at earnings of up to €120,000. Above that, an individual pays no additional fees. In comparison, the French system imposes 23% on the entire remuneration, regardless if the annual pay is €25,000 or €250,000. “In Luxembourg, even if you earn a million or more, you still only pay some €13,000 into social security,” Audiger said.
Some perks extended
As part of the reform, the government is also extending tax breaks on benefits in kind paid by employers to people relocating. These can include housing allowance, school fee payments and similar benefits. Currently, staff can claim the reduced tax on such perks in the first five years after relocating, which would be extended to eight years and under the new regime.
Yet less than 900 people used the programme in the period between 2014 and 2018, Gramegna said recently in reply to a parliamentary question. As long as not more companies offer these perks, the scheme will not make a real difference when positioning Luxembourg as a destination for high-skilled workers.
“Many firms don’t even know it exists or just couldn’t be bothered,” Audiger said. Relocation agencies, which help newcomers settle in, confirm that such perks are less and less popular. That is also because companies increasingly are looking for staff closer to home.
“The tendency is for companies to opt for local hires, or move people from other European countries, to avoid the additional costs,” said Stéphane Compain, CEO of relocation firm LuxRelo. What might help is that the tax breaks will become available for smaller companies. So far, firms had to state that they expected to reach 20 staff “in the mid-term”.
“Smaller firms might have been discouraged to use the perk as few can guarantee growing a company to the level set in the law,” Martinez said. If they failed the hurdle, they risked having to pay back the money they saved or ask the employee to do so.
“The change will extend the scope of eligible companies, and include start-ups, who often need to hire highly-skilled IT professionals to grow,” he said. On the other hand, the scheme comes with a higher price tag, raising the minimum annual salary to be eligible for the perk to €100,000 from €50,000.
“It may be seen as a sign the government aims at encouraging only best-in-class high-skilled employees,” LISER’s Burzynski said. “It’s a logical step as higher earners pay back more in taxes [and] are also more productive,” he said.
Looking outside Europe
If Luxembourg is serious about attracting top talent, redesigning tax benefits might not be enough. Only 5% of non-national residents in Luxembourg are from other continents. “The future is in Asia,” Burzynski said.
“China and India are no longer cheap, low-skilled labour markets. The governments have been rolling out huge upskilling projects among their societies, and it’s where future high-skilled workforce should be looked for. Africa might also soon enter the picture,” he said.
Yet Luxembourg is not making it easy to secure a work permit for non-Europeans. “The immigration and work permit process can be heavy and lengthy, and it impacts Luxembourg’s competitiveness when compared to other countries,” said Geraldine Hassler, head of people and culture at KPMG. “It takes three months on average to secure a job permit, but we had cases when it lasted nine or even twelve months,” she said.
An exceptional candidate might be long gone by then, accepting a job in another country. “When it’s a role with client exposure, the long wait can be a deal-breaker,” Hassler said.
Luxembourg salaries are among the most generous in the world, the country sports the highest GDP per capita in the EU and offers a solid social security system. The low crime rate and stable economy add to a positive image. But not all is rosy. “Salaries are high, but sometimes they don’t match accommodation costs,” Compain said.
A poor response from some real estate agents, the need to decide on a rental lease within hours can scare off some expats considering a move. It can also be hard to build a network and make friends.
“People leave offices and have to go home,” said Hassler. That may be because they have opted to live in neighbouring Germany, France or Belgium - where housing is far cheaper – and need to cope with the notorious traffic jams in those directions during rush hour.
Or maybe they are rushing home to do some grocery shopping, as supermarkets close much earlier than in many other European countries. And the fact that French or German are often the social languages of choice does not help much either.
Luxembourg ranks 23rd in the latest Economist Intelligence Unit report of most liveable cities, which looks at five metrics: culture and environment, infrastructure, education, healthcare and overall stability. Vienna topped the list, with seven other European cities in the top 20.
Luxembourg did slightly better in a ranking compiled by Mercer, a human resource consultancy, in which it scored 18th, ranking below a dozen other cities in Europe.
Such results show the country still has work to do. And consultants are managing expectations. “Luxembourg might be not lively enough for younger people, and appears less attractive than Paris, Madrid, London. But those moving with a family rarely complain,” Compain said.