Luxembourg CRD VI Transposition: The New Third-Country Branch Regime

CRD VI requires EU Member States to introduce a harmonized framework governing how third-country undertakings may provide core banking services within the European Union. Subject to certain exemptions, CRD VI mandates that a locally authorized branch be established in each EU Member State where those services are provided. No EU passport is available, meaning that a separate branch authorization is required in each Member State in which the services are provided.

The relevant CRD VI provisions have been transposed into Luxembourg law through the introduction of a new Section (comprising Articles 32-2 through 32-19) into the Luxembourg Law of 5 April 1993 on the financial sector, as amended (the “Financial Sector Law”).

The branch provisions will be fully applicable as of 11 January 2027, which is the deadline by which in-scope third-country undertakings that cannot rely on an exemption must operate through a duly authorized branch.

1. Core banking services in scope

The branch requirement applies to the following categories of services (together, the “Core Banking Services”):

• the acceptance of deposits and other repayable funds (Annex I, item 1 of the Financial Sector Law);
• lending (including, inter alia, consumer credit, mortgage credit, factoring with or without recourse, and financing of commercial transactions (including forfeiting)) (Annex I, item 2 of the Financial Sector Law); and
• guarantees and commitments (Annex I, item 6 of the Financial Sector Law).

2. Third-country undertakings in scope

The scope of the branch requirement varies depending on the type of Core Banking Services provided.

Acceptance of deposits and other repayable funds

The branch requirement applies to any third-country undertaking that accepts deposits or other repayable funds in Luxembourg, regardless of its regulatory status or classification.

Lending, guarantees and commitments

For lending, guarantee and commitment activities, the branch requirement is narrower. It applies only where the third-country undertaking qualifies, or would qualify if it were established in the European Union, as a "credit institution" within the meaning of the Capital Requirements Regulation[1].

As a result, third-country undertakings that do not meet the definition of a credit institution under European Union law are not subject to the branch requirement in respect of lending and guarantee activities. This includes, in particular, non-EU investment funds and other non-bank lenders. Such entities may continue to extend credit to Luxembourg counterparties without being required to establish a branch. The new regime therefore has no impact on private credit activities directed at Luxembourg borrowers.

3. Place of provision of Core Banking Services

The branch requirement applies only to Core Banking Services provided “in” Luxembourg. Determining whether a third-country undertaking is deemed to provide its services on Luxembourg territory is therefore a critical question.

The parliamentary comments refer to an interpretive note on banking services issued by the European Commission [2], which clarifies that the place where an activity is carried out must be determined by reference to the place of “characteristic performance” of the service in question. A service is considered to be provided in Luxembourg only where its characteristic performance takes place on Luxembourg territory.

Consistent with existing practice, where a banking activity is carried out entirely and exclusively on a remote basis from a third country, without any relevant connecting factor to Luxembourg territory, the provision of that service may be qualified as taking place outside Luxembourg and may accordingly fall outside the scope of the branch requirement. The parliamentary commentary to the Law confirms this approach.

The assessment is inherently fact-specific and must be conducted on a case-by-case basis.

The Law provides for the following exemptions from the branch establishment requirement. Each requires careful factual assessment and proper documentation.

1. Reverse solicitation

No branch is required where the client approaches the third-country undertaking on its own exclusive initiative. The exemption is strictly construed. Indirect solicitation disqualifies it, and it cannot be relied upon to expand the relationship beyond the service initially requested by the client. A contractual clause purporting to characterise the relationship as client-initiated is not, by itself, sufficient to establish the exemption; the third-country undertaking bears the burden of demonstrating the actual client initiative and must be in a position to evidence the client-initiated nature of the relationship, although no particular form of proof is prescribed. The exemption does not apply where the client was approached by an intermediary acting on behalf of the third-country undertaking.

2. Interbank exemption

Core Banking Services provided exclusively to a credit institution as counterparty are exempt from the branch requirement.

3. Intra-group exemption

Core Banking Services provided within the same group (within the meaning of the Capital Requirements Regulation) are exempt. Intra-group financings are therefore unaffected by the new regime.

4. MiFID II-ancillary services

Core Banking Services provided on an ancillary basis in the context of MiFID II investment services are exempt, to avoid overlap with the MiFID II third-country regime. Whether a service is “ancillary” depends on the facts. In practice, it covers services such as credit or guarantees linked to the safekeeping and administration of financial instruments or credit enabling an investment transaction. It does not cover Core Banking Services provided on a standalone basis, with no connection to a MiFID II service.

1. Grandfathering

The branch requirement does not apply to contracts concluded before 11 July 2026, which benefit from a grandfathering protection under the Law. The parliamentary commentary expressly confirms that this protection extends to framework agreements entered into before that date: execution modalities arising under such pre-existing agreements (including drawdowns and similar mechanics) are covered by the grandfathering exemption and do not trigger the branch requirement even where they are performed after 11 July 2026.

2. Amendments after 11 July 2026

Amendments require careful case-by-case assessment. The Law and its parliamentary commentary are silent on the treatment of amendments to grandfathered contracts made after 11 July 2026.

Amendments that do not alter the economic substance of the arrangement (such as purely administrative or technical changes) are more likely to be treated as consistent with the continuation of the existing contract and therefore within the scope of the grandfathering protection. By contrast, amendments that materially alter the terms of the arrangement (such as increases in the amounts, extensions of maturity, the addition of new counterparties, or other changes that fundamentally modify the economic relationship) risk being treated as a new provision of services and should be assessed before implementation.

The Luxembourg competent authority (Commission de Surveillance du Secteur Financier) is expected to issue further guidance on the practical application of the third-country branch requirement regime. A number of interpretive questions remain open, including the precise contours of the characteristic performance test in cross-border lending scenarios and the scope of permissible amendments to grandfathered contracts. Market participants are encouraged to monitor regulatory developments closely, as further clarification on the application of the new provisions may affect the analysis for specific arrangements.