Introduction
The Grand Duchy of Luxembourg (Luxembourg) has been at the forefront of the financial markets’ and the structured finance’s trends and evolutions. Over the years, it grew to become a hub for securitisation and structured finance transactions with one of the world’s safest business environment, notably as a result of its financial, political and social stability and innovative approach towards the financial sector. Issuers and investors in Luxembourg benefit from strong and stable regulatory and tax frameworks, in line with European Union directives and regulations.
The Luxembourg law of 22 March 2004 on securitisation, as amended (the Securitisation Law), together with the Luxembourg law of 10 August 1915 on commercial companies, as amended (the 1915 Law), govern Luxembourg securitisation vehicles (SVs). The purpose of the Securitisation Law was to create a comprehensive, flexible and reliable legal and tax framework for securitisation transactions carried out by Luxembourg SVs. Not only the Securitisation Law aims at protecting the interests of the investors, but also of the creditors of the SV. The Securitisation Law also enables the securitisation of a large range of asset classes. Since the entry into force of the Securitisation Law more than a decade ago, the number of SVs incorporated in Luxembourg has been steadily growing. A considerable number of SVs are nowadays active in Luxembourg for the purpose of securitising assets located all over the globe.
- Definition of securitisation and types of SVs
‘Securitisation’ is defined in the Securitisation Law as the transaction by which a securitisation undertaking (organisme de titrisation) acquires or assumes, directly or indirectly through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties, and issues securities (valeurs mobilières), the value or yield of which depends on such risks.
The Securitisation Law recognises three types of SVs:
- securitisation undertakings, that carry out the securitisation in full (i.e. they acquire the securitised risks and issue the corresponding securities);
- securitisation undertakings, that essentially participate in the securitisation transaction by assuming all or part of the securitised risks (i.e. the acquisition vehicles); and
- securitisation undertakings, that essentially participate in the securitisation transaction by issuing securities to ensure the financing of the securitisation (i.e. the issuing vehicles).
The SV’s articles of association, management regulations or issuance documentation have to include a specific reference and submission to the Securitisation Law.
- Legal forms
An SV can be structured as a company or as a fund.
An SV company may be set up as a public limited liability company (société anonyme) (S.A.), a corporate partnership limited by shares (société en commandite par actions), a private limited liability company (société à responsabilité limitée) (S.à r.l.) or a cooperative company organised as a public limited liability company (société cooperative organisée comme une société anonyme). The minimum share capital for an S.A. is EUR 31,000 and for an S.à r.l. EUR 12,500.
An SV may also be set up as a co-ownership of assets (without legal personality), a so-called securitisation fund, managed by a Luxembourg-based management company (société de gestion) in accordance with its management regulations. The securitisation fund may further be set up under a fiduciary arrangement, whereby the assets are held by the fiduciary for the account of the investors.
- Compartmentalisation
Luxembourg SVs may be compartmentalised, meaning that the estate of an SV can be segregated into different compartments, each representing a distinct part of the assets and liabilities of the SV. In other words, the compartmentalisation enables a segregation of the assets and liabilities of the SV among various compartments, whereby such assets and liabilities are by law ring-fenced on a compartment-by-compartment basis, including in the case of insolvency of the SV. The rights of recourse of the investors and creditors are as a rule limited to the assets of the SV. Where such rights relate to a specific compartment or have arisen in connection with the creation, operation or liquidation of a specific compartment, the recourse of the relevant investors and creditors is then limited to the assets of that compartment. Among investors, each compartment is treated as a separate entity, unless otherwise specified in the constitutional documents of the SV.
Compartmentalisation must be authorised in the constitutional documents of the SV and the creation of one or more compartments is entrusted to the management body of the SV.
- Financing
The acquisition of the securitised risks by an SV must be financed through the issuance of securities (valeurs mobilières), the value or yield of which is linked to such risks. There is no definition of securities in the Securitisation Law. The Luxembourg Supervisory Commission of the Financial Sector (Commission de Surveillance du Secteur Financier) (the CSSF) considers in its Frequently Asked Questions guidance on securitisation issued in 2013 (the Securitisation FAQ) that (i) instruments that are considered as securities under their governing law (lex contractus) and (ii) instruments that constitute securities within the meaning of Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (the MiFID), are deemed to be securities for the purpose of the Securitisation Law. By derogation to the 1915 Law, shares (parts sociales) and bonds issued by SVs organised as private limited liability companies (S.à r.l.) also qualify as securities for the purpose of the Securitisation Law.
An SV may issue equity and debt securities in bearer, registered or dematerialised form (subject to the limitations set forth by the 1915 Law). There is a high degree of contractual flexibility and, accordingly, an SV may issue securities whose value or yield is linked to specific compartments, assets or risks, or whose repayment is subject to the repayment of other instruments, certain claims or certain categories of shares. Insolvency remoteness can be achieved through the use of limited recourse, non-petition and subordination provisions in the issuance or constitutional documents of the SV.
An SV may temporarily use loans in order to pre-finance the acquisition of the assets to be securitised in advance of the actual issuance of the securities (i.e. warehousing). Otherwise, borrowing can only be used on an ancillary basis (e.g. liquidity facilities in case of lack of synchronisation between the cash flows relating to the securitised assets and the financial flows relating to the securities issued by the SV) and/or in the case a credit line is temporarily necessary for the purpose of the securitisation. Borrowing can also be used to improve the investors’ return. In this scenario, borrowing is only acceptable if the financing of the securitisation transaction also includes the issuance of securities for a proportionally substantial amount. In each case, the issuance documentation must disclose any additional risks for investors resulting from such leverage.
SVs do not have to comply with any debt/equity ratios.
- Securitisable risks
Risks relating to the holding of assets, whether movable or immovable, tangible or intangible, as well as risks resulting from the obligations assumed by third parties or relating to all or part of the activities of third parties, may be securitised. Securitisation transactions in Luxembourg typically involve a wide range of assets, such as commercial loans, mortgage loans, car lease receivables, consumer credits, non-performing loans, commodities, income from operating businesses, etc.
The CSSF has confirmed in its Securitisation FAQ that an SV may originate loans, and this operation will be regarded as a securitisation, provided the SV does not use funds collected from the public to engage in credit activities for its own account and that the issuance documentation of the securities (a) clearly defines the assets on which the service and the repayment of the loans granted by the SV will depend or (b) clearly describes (i) the borrowers and/ or (ii) the criteria for the selection of the borrowers, in order to allow investors to gain adequate knowledge of the risks (including credit risk) and the return on their investments at the time of issuance of the securities. In each case, the features of the loans granted by the SV have to be described in the issuance documentation. In presence of loans originations, particular attention should be paid to the passive management requirement for SVs.
The CSSF further accepts the securitisation of commodities (or similar assets) to the extent that the acquisition of such commodities aims at providing financing to an entity and that the commodities constitute a collateral securing the repayment obligations of such entity. The SV may also issue securities in the form of structured products providing investors with an exposure to the price fluctuations of the underlying commodities.
- Acquisition of securitised risks
The SV may assume the securitised risks by acquiring the assets directly, by using credit derivatives or by committing itself in any other way. Securitisation transactions (notably transactions involving the use of credit derivatives) do not constitute insurance activities subject to the Luxembourg law of 6 December 1991 on the insurance sector, as amended.
According to the Securitisation Law, the law governing the assigned claims determines the assignability of such claims, the relationship between the assignee and the debtor, the conditions under which the assignment is effective against the debtor and the conditions for the valid discharge of the debtor’s obligations. The assignment of an existing claim to, or by, an SV becomes effective between the parties and against third parties as from the moment the assignment is agreed upon among the parties (unless agreed otherwise). Future claims may also be assigned. The assignment of a claim to, or by, an SV entails the transfer of the underlying guarantees and security interests securing such claim.
- Listing in Luxembourg
Luxembourg is a worldwide leader for the listing of securities. The Luxembourg Stock Exchange (the LuxSE) was founded over 80 years ago and has always been at the forefront of listing innovations, notably by being the first exchange to list a Eurobond in 1963, a Sukuk in 2002 and a Schengen bond in 2014. To date, the LuxSE operates two markets: (i) the regulated market (within the meaning of MiFID), which falls within the EU harmonised regime (the Regulated Market) and (ii) the exchange regulated market, set up in 2005 as a multilateral trading facility within the meaning of MiFID which provides an alternative market to the Regulated Market (the Euro MTF).
The LuxSE has a longstanding experience in the listing of asset-backed securities. As of July 2015, it had over 3,500 asset-backed securities listed on its two markets issued by more than 3,000 issuers from more than 100 countries. The LuxSE is committed towards a cost efficient and client oriented listing process. Combined with a favourable regulatory and tax regime, this makes Luxembourg the ideal venue for securitisation transactions.
- Supervision
Luxembourg SVs are in principle unregulated entities not subject to any authorisation or prudential supervision, unless they issue securities to the public on a continuous basis. In the latter case, the SV must be authorised by the CSSF. According to the Securitisation FAQ, an SV is deemed to issue securities on a continuous basis where it makes more than three issues to the public per year. For multi-compartments SVs, this threshold is determined at the level of the SV on a consolidated basis and not at the level of each compartment.
The concept of public is not defined in the Securitisation Law, and differs from the notion of “offer to the public” under the Law of 10 July 2005 on prospectuses for securities, as amended, implementing Directive 2003/71/EC of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, as amended (Prospectus Directive).
The CSSF considers that in certain circumstances, issues of securities will be considered not to be made to the public. This is the case for issues of securities exclusively addressed to professional clients (as defined in Annex II of MiFID) which are not considered to be made to the public for the purpose of the Securitisation Law. Securities having a nominal value of at least EUR 125,000 each are also assumed to have not been issued to the public. The Securitisation FAQ further indicates that a listing of securities issued by an SV does not automatically result in the securities being viewed as issued to the public. As a rule, private placements of securities do not constitute issuances to the public. However, the characterisation of private placement is assessed on a case-by-case basis by the CSSF and, for example, the subscription of securities by an institutional investor or financial intermediary with a view to a subsequent placement of such securities to the public qualifies as an issue made to the public for the purpose of the Securitisation Law.
Whereas unregulated SVs are not required to appoint a custodian bank, regulated SVs have to entrust the custody of their liquid assets and securities to a credit institution established or having its registered office in Luxembourg.
The annual accounts and financial statements of both regulated and unregulated SVs have to be audited by one or more independent auditors (réviseurs d’entreprises agréés). Where several compartment have been created, each will have to be separately detailed in the financial statements of the SV.
- Reporting Obligations
Both regulated and unregulated SVs, which qualify as financial vehicle corporations engaged in securitisation transactions, have to comply with the reporting obligations laid down in (i) Regulation ECB/2013/40 of the European Central Bank of 18 October 2013 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions (the Regulation ECB/2013/40) and (ii) circular 2014/236 of the Luxembourg Central Bank (BCL) dated 25 April 2014 on statistical data collection for securitisation vehicles (Circular 2014/236). Circular 2014/236 lays down an initial registration obligation on Luxembourg SVs and ongoing and periodic reporting obligations. The ongoing reporting obligations apply to all SVs and include notifications to the BCL in case the SV is liquidated or in presence of major changes to the information provided at the time of registration. SVs whose balance sheet exceeds certain thresholds will also need to comply with the periodic reporting obligations towards the BCL, including quarterly reports and monthly reports.
When entering into derivatives contracts, SVs will fall within the scope of Regulation (EU) No 648/2012 of 4 July 2012 on over the counter derivatives, central counterparties and trade repositories (EMIR). As a result, SVs may be subject to the reporting obligations and, where applicable, other obligations (e.g. clearing) under EMIR and related rules and regulations.
- AIFMD
Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers (the AIFMD) and the Luxembourg law of 12 July 2013 on alternative investment fund managers (the AIFM Law) do not apply to securitisation special purpose entities (SSPE). SSPEs are defined in the AIFMD as entities whose sole purpose is to carry on a securitisation or securitisations within the meaning of Regulation ECB/2008/30 of the European Central Bank of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions and other activities which are appropriate to accomplish that purpose (Regulation ECB/2008/30). Regulation ECB/2008/30 has been repealed with effect as from 1 January 2015 by Regulation ECB/2013/40.
According to the Securitisation FAQ, securitisation vehicles issuing collateralised loan obligation (CLOs) are considered as being engaged in securitisation transactions and as a result, are not subject to the AIFMD. In contrast, entities which primarily act as a “first” lenders (i.e. originating new loans) are not considered as being engaged in securitisation transactions and will thus fall within the scope of AIFMD.
Independently from the qualification as an SSPE for the purpose of the AIFMD, the CSSF considers that (i) SVs which only issue debt instruments and (ii) SVs which are not managed in accordance within a defined investment policy within the meaning of the AIFM Law, do not constitute alternative investment funds (AIFs) for the purpose of the AIFM Law.
- Management of assets
An SV must have a passive attitude when managing its assets. The role of the SV should be limited to the administration of financial flows linked to the securitisation transaction itself and to the ‘prudent-man’ management of the securitised risks, and exclude all activities likely to qualify the SV as entrepreneur (for example, by providing of services to third parties). Any management by the SV of claims, assets or activities of third parties that creates an additional risk in addition to the risk inherent to such claims, assets or activities or which aims at creating additional wealth or promoting the commercial development of the SV’s activities would be incompatible with the Securitisation Law, even if the actual management of the assets and activities has been delegated to an external service provider.
An SV may entrust the assignor or a third party with the collection of the securitised receivables, as well as other management tasks, without such persons having to apply for an authorisation under the Luxembourg law of 5 April 1993 on the financial sector, as amended.
An SV cannot assign its assets, except in accordance with the provisions set forth in its constitutional documents. It may only grant security interests over its assets in order to secure the obligations it has assumed for their securitisation or in favour of its investors. Security interests and guarantees created in violation of this restriction are void by operation of law.
- Taxation
Corporate taxation
An SV company is fully subject to Luxembourg corporate income tax (CIT) and municipal business tax (MBT) on its worldwide income. For the fiscal year 2016, the CIT rate is 22.47% (including the 7% solidarity surcharge for the employment fund) and the MBT rate is 6.75% in Luxembourg City. As a result, the current aggregate rate is 29.22% for the fiscal year 2016 in Luxembourg City.
An SV company benefits from a special tax deduction right which aims to achieve tax neutrality. Under such right, commitments (engagements) vis-à-vis investors and creditors are tax-deductible. As a result, interest on debt instruments and commitments to pay out dividends to equity holders are considered as tax-deductible for income tax purposes.
As from 2016, an SV company is subject to a minimum annual net wealth tax (NWT). For the fiscal year 2016, if the sum of fixed financial assets, transferable securities and cash at bank of the SV company exceeds 90% of its total gross assets and EUR 350,000, the minimum NWT charge would be set at EUR 3,210. If not, the minimum NWT charge would range from EUR 535 to EUR 32,100 depending on the SV company’s total gross assets amount. As the assets of an SV company generally consist of at least 90% financial type assets, the annual minimum tax should not exceed EUR 3,210.
As SV companies are fully taxable Luxembourg-resident companies, they should be considered as “liable to tax” in the sense of tax treaties and therefore qualify as resident under such tax treaties. A resident under a tax treaty is generally entitled to its benefits. Ultimately, the relevant source country must confirm whether tax treaty benefits are granted to SV companies. SV companies should also be entitled to the benefits of European Directives (e.g. Directive 2015/121 of 27 January 2015 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States or Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States).
Similarly, a fund type SV is transparent for tax purposes, hence it will not be subject to CIT, MBT or minimum annual NWT. A fund type SV should generally not qualify as a resident under tax treaties and should therefore generally not be entitled to treaty (or European Directives) benefits.
Withholding tax and non-resident taxation
Interest and dividend payments to investors by an SV company are not subject to Luxembourg withholding tax. Distributions by a fund type of SV are also not subject to withholding tax. Concerning SVs which have issued shares, non-resident shareholders (those without a Luxembourg permanent establishment to which the shares of an SV company are allocable) are only taxable in Luxembourg when they realise a capital gain in respect of an important shareholding (generally at least a 10% shareholding) in an SV company within six months after the acquisition of the shares, or they became non-resident taxpayers less than five years before the disposal took place, after being Luxembourg resident taxpayers for more than 15 years. However, shareholders, who reside in a country with which Luxembourg has a tax treaty in force, should generally not be taxable on such capital gains, if an exemption is provided for in the treaty.
VAT
Management services provided to an SV benefit from a VAT exemption and VAT leakage is therefore reduced to a minimum. As long as they are specific and essential to the management of the SV, collateral management fees and investment advisory fees may be considered to be covered by this exemption. Subscription, underwriting and placement fees may also be VAT exempt based on the general exemption of fees on the negotiation of securities.
Other
Agreements entered into in the context of a securitisation transaction and all other instruments relating to such transaction are not subject to registration formalities, even when referred to in a public deed or produced in court or before any other public authority, provided that they do not have the effect to transfer rights which must be transcribed, recorded or registered and which relate to immoveable property located in Luxembourg, or to aircraft, ships or riverboats recorded on a public register in Luxembourg.
- Conclusion
The Securitisation Law, with its flexible, lightly regulated and tax efficient regime, provides for a wide range of attractive vehicles to achieve securitisations and structured finance transactions. In addition, the diversity in terms of structures and eligible assets under the Securitisation Law is making Luxembourg a successful venue for securitisations. This success is confirmed by the ever growing number of SVs incorporated in Luxembourg.
Vassiliyan Zanev, attorney at law, is a partner of the Banking & Finance practice group. He specialises in banking and finance, including in particular securitisation, structured finance, capital markets, lending and regulatory work. Prior to joining Loyens & Loeff, he acquired three years of banking and finance experience in a major UK-based law firm in Luxembourg. Vassiliyan was admitted to the Luxembourg Bar in 2003.
Peter Adriaansen, tax adviser, co-heads the Tax practice group of Loyens & Loeff Luxemborg. He divides his time between our London and Luxembourg offices. He specialises in Luxembourg and Dutch international tax consultancy relating to private equity, investment funds, holding and financing activities, joint ventures, mergers and acquisitions. He regularly advises Luxembourg listed entities, family offices and international private clients on cross-border structuring. Peter is a member of the Dutch Association of Tax Advisers, and of the International Fiscal Association (IFA).
Arnaud Barchman, attorney at law, is a senior associate in the Banking & Finance department of Loyens & Loeff Luxembourg. He specialises in capital markets transactions, including debt and equity issuances, initial public offerings, listings, securitisation, financial markets regulations and securities laws. Before joining Loyens & Loeff, Arnaud acquired three years of experience in a major UK-based law firm in Brussels. Arnaud is a member of the Brussels Bar since 2008 and was admitted to List IV of the Luxembourg Bar in 2012.
Frank van Kuijk, tax adviser, is a member of the Tax practice group. He specialises in international tax law, predominantly Luxembourg-oriented. He advises a wide range of multinationals and private equity funds with respect to their tax structure in Luxembourg. His advice mainly relates to acquisitions, project financing, structured finance, securitisations, corporate reorganisations and IP. He worked three years at the Rotterdam office, two years at the Luxembourg office and two-and-a-half years at the London office. Frank is a member of the International Fiscal Association, Luxembourg branch (IFA) and the Dutch Association of Tax Advisers.
Loyens & Loeff Luxembourg S.à r.l. is a leading Luxembourg law firm staffed by over 110 lawyers and tax specialists, who provide comprehensive and fully integrated legal and fiscal advice on corporate law, M&A, private equity and venture capital, investment funds, banking and finance, commercial law and litigation, real estate and tax law. Our lawyers and tax advisers work closely together to provide clients with comprehensive and fully integrated legal and fiscal assistance. Our clients include companies, financial institutions, investment funds and individuals. Our office is part of a worldwide network of 13 offices with around 820 attorneys, tax advisers and civil law notaries. For more information, please visit the website at www.loyensloeff.com.
