Why is the Ratio of Debt-to-GDP so Large for Non-Financial Companies in Luxembourg?

The debt-to-GDP ratio for non-financial companies (NFCs) in Luxembourg is large compared to other EU countries. The paper argues that this large ratio stems from a structural characteristic of Luxembourg pertaining to its role as a global financial center. Indeed, the country hosts a large number of NFCs and notably foreign-controlled NFCs (including large multinational enterprises) that benefit from Luxembourg as a financial platform to manage their business activities and structure their corporate investments. In addition, debt issued by foreign-controlled companies predominates over debt issued by national NFCs. On the liability side, the financing channel mainly relies on loans granted by NFCs (notably, intra-group loans) and by captive financial institutions and money lenders. On the asset side, these resources finance the purchase of unlisted shares or the granting of long-term loans to NFCs and to captive financial institutions and money lenders. While the ratio of debt-to-GDP places Luxembourg NFCs as the largest holders of debt across EU countries, alternative indicators suggest the opposite result. This is notably the case of the ratio of debt-to-financial assets, as Luxembourg NFCs hold the largest stock of financial assets across EU countries. These features should be taken into consideration to avoid any misinterpretation of the large ratio of NFC debt-to-GDP.