The title of the article says it all – if you live in Luxembourg and you don’t own stocks, you are making a disservice to yourself. And I will go even a bit further: if you are below the age of 50, you probably should have an ever-increasing slice of your portfolio allocated to stocks – doing otherwise will likely prove very costly in the long term. I explain why below.
In Luxembourg, capital gains derived from the sale of movable assets – in which stocks and other financial products are included – are taxed progressively between 0% and 45.78%, depending on your overall level of income. However, if you hold on to your movable asset for more than 6 months, any capital gains become tax exempt. There’s another condition, which is to own less than 10% (directly or indirectly) of the company(ies) in which you own stock(s), but this is unlikely to ever become relevant for a common investor.
If you are taking anything from this article, this is what I want you to memorize: holding a financial asset for more than 6 months exempts you from paying taxes on the money you make from that asset.
In my view, this is a game changer for wealth creation for 4 reasons:
1 – All that you earn is yours to keep
Not having to pay capital gain taxes means that 100% of the value of your portfolio is yours to keep when you eventually decide that it is time to start using it for your own enjoyment.
Take this example: you are 30 years old, you invest for 35 years, with monthly contributions of 500€ and at a return rate of 8% (which is conservative when compared to the historical average of the SP500), you will end up with roughly €1,085,000, out of which €210,000 are your own hard-earned money and €875,000 are capital gains.
In Luxembourg, if your portfolio is worth €1,085,000, at the end of the 35 years you’ll have €1,085,000. Clean.
In Germany, where the rate is 26.38%, you’ll have €854,175. You’ll have to pay €230,825 as taxes.
In France, where the rate is 30%+4% if you are a high-earner, you’ll have €822,500 (and this is assuming that you are not a high-earner). You’ll have to pay €262,500 as taxes.
How long would it take you to save €230,825 or €262,500? In both cases, it is more money than the €210,000 you’ve contributed during the 35 years of investing!
2 – Rebalances and exits are “free”
Throughout your investment path you’ll likely want to exit (sell) some positions, usually because you’ve changed your view towards a certain asset or because you want to rebalance your portfolio. While opinion-changes can be easily hedged against if you invest in broad-based low cost index funds, rebalancing from stocks to bonds as you get older is hard to avoid. This is another area where being tax exempt becomes a massive advantage.
Imagine a scenario where you are 100% invested in stocks, and when you reach your 50th birthday, you decide to decrease risk and move 20% of your portfolio to bonds. Following the same example from point 1, at your 50th birthday you would have around €290,000 in your portfolio, out of which €168,000 are capital gains.
In Luxembourg you sell €58,000 of stocks, and you buy €58,000 of bonds.
In France, selling 20% of your portfolio would mean that, instead of buying €58,000 of bonds, you would just buy a bit less than €48,000, because €10,000 would have to be paid in taxes to your government. And it’s just not about the €10,000, but also about all the income that those €10,000 will no longer produce for you in the remaining 15 years of your investment path (roughly €21,700!).
Keep in mind that here are keeping it simple here and analysing the impact of just one rebalancing. As you approach retirement you would have to perform rebalances at least once a year, which result in a more negative impact from taxes.
Not having to pay taxes removes all tax considerations from your investment strategy, giving you flexibility to exit positions and rebalance as necessary.
3 – Prioritizes long term investment
In short, the Luxembourg government is telling you that, if you want to gamble with your money and do short-term trading in the stock market that’s absolutely fine, but you’ll have to pay taxes on the money you make. Although the main purpose is to tax those who invest for a living (otherwise their income would be tax-free), you can see how this is a big disincentive to short-term trading: anyone interested in buying and selling stocks on a short holding period will have to be a LOT better investor than someone who just buys and hold on to a financial asset for a long time.
“How better?” you ask – let’s see: If a trader pays an effective tax rate of 33% on her trades and I pay 0% on my long-term portfolio, she will have to make 50% more money from her trades than I do from my passive long term investing. In practice, if I make 10% on the SP500, she will need to find a way of making 15%, just to match my income. Sounds easy? Remember that Banks and Asset Managers cumulatively spend billions every year on financial analysts and state-of-the-art software to gain miniscule advantages over their competitors. Going from a 10% average return to a 15% average return is something achievable by a tiny (t-i-n-y) fraction of investors.
Unless you are a truly exceptional investor, short-term trading is just not worth the risk, time and effort. Stick to the long-term.
4 – Promotes saving and investing
The more your money grows, the stronger your incentive to keep investing rather than spending. Consider this: if €10,000 today will be worth €11,000 in 5 years, you might prefer to spend it now. However, if that same €10,000 could grow to €18,000 in 5 years, you’d be more likely to keep it invested.
This connects to the time value of money (TVM). The TVM principle states that money available now is worth more than the same amount in the future, because present money can earn returns over time. Think about it: would you rather receive €1,000 today or in 5 years?
Luxembourg’s tax benefit lets us keep 100% of our investment returns, which amplifies the TVM effect by allowing greater long-term growth. This creates a positive cycle—better returns highlight the value of early investing, encouraging you to save more to maximize TVM’s benefits.
In my perspective it really is a no-brainer to invest regularly if you are living in Luxembourg.
The tax exemption of capital gains is a game-changer for wealth creation. It allows investors to keep 100% of their returns, rebalance portfolios without tax penalties, and benefit from a system that encourages long-term investing over short-term speculation. More importantly, it fosters a culture of saving and investing, reinforcing the power of compound growth and the time value of money.
If you’re living in Luxembourg and not investing in stocks, you’re leaving a massive opportunity on the table. The earlier you start, the more you stand to gain. The system is set up in your favor—use it wisely.
