Luxembourg’s Euro Note Love Affair Raises Eyebrows Over Taxes

While the European single currency’s existential crisis drags on in Athens, it turns out Luxembourg likes its euros — a lot — as foreigners with accounts in the Grand Duchy try to stay one step ahead of the taxman.

Luxembourg’s central bank issued 15 percent more euro notes in 2013, reaching a level that was almost double the tiny European country’s gross domestic product, according to a report on cash and crime from The Hague-based Europol. In Italy the figure stayed steady over that period at 9 percent of GDP, while in France it dropped from 5 percent to 4 percent.

The best explanation for the cash spike may be that French, Germans and Belgians with accounts in neighboring Luxembourg were cashing out those holdings as the government prepared to gut bank secrecy laws and exchange tax information with other countries, said Mark Van Thiel, a former deputy director of the Swiss Money Laundering Reporting Office. Bank notes leave no paper trail for national tax authorities, and if local banks are handing out stacks of bills, that’s more bad press for Luxembourg, he said.

The EU is already probing whether secret tax deals Luxembourg negotiated with the likes of Amazon.com Inc. broke the law. The Grand Duchy was led at the time by Jean-Claude Juncker, who is now president of the European Commission.

Bad Light

The corporate tax deals “shed a lot of bad light on the Luxembourg government under Mr. Juncker,” said Van Thiel, who runs ICQM, a compliance consulting firm in Zurich. “If now, statistics at least point towards the possibility that Luxembourg allowed cash outflows from accounts that were closed, it’s not the best of news.”

The Swiss Bankers Association recommends its members scrutinize any requests to close a bank account and convert its contents to cash of more than $25,000, with some Swiss banks operating on a lower threshold. The Luxembourg Bankers Association declined to comment about its policies on closing bank accounts.

Pierre-Henri Conac, a law professor at the University of Luxembourg, also said the most logical explanation for the currency surge is foreigners cashing out Luxembourg accounts before their details are turned over to their local tax authorities.

It’s all about the “closing of bank accounts, probably with relatively small amounts, by foreign residents ahead” of the deadline, Conac says.

‘Cash Averse’

But Conac says there might be a more mundane explanation: the willingness of well-heeled Luxembourgers to use 500-euro ($544) notes to buy everyday items such as clothes and groceries, behavior that might draw looks in other European countries.

“It should not be surprising to have large denominations in use in Luxembourg and sometimes increases in cash since it has the highest GDP per capita in the world,” Conac says.

The European Union law enforcement agency, however, said the nation is “one of the most cash averse countries” in the 28-nation bloc.

Spokespeople for the Luxembourg Central Bank and Frankfurt-based European Central Bank that oversees the euro, declined to comment.

The country’s finance ministry said in a statement that Luxembourg has very strict “rules in the field of anti-money laundering and counterfeiting, which are rigorously enforced.”

That misses the point, which is paying taxes, said Van Thiel.

“In the fight against the avoidance of tax payments, it could be embarrassing,” he said.