Why Think Luxembourg for a Securitization Vehicle?

Avocats, Luxembourg / Lawyers, Luxembourg

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Luxembourg’s new law on securitization establishes an attractive regime for securitization vehicles (“SV”) allowing them to acquire a wide spectrum of claims and receivables and reissue specific and multiform securities to investors.

The SV not only proposes a flexible and advantageous corporate structure in relation to its form and management, but also offers protecting measures for the SV and their investors.

It further offers to the investors a full range of possibilities to obtain a neutral, or nearly neutral, tax treatment.

Hence, it is expected that this vehicle will be widely used by domestic and foreign investors.

What is it?

·        A very attractive legal, regulatory and tax framework (the “Law”) for securitization undertakings established by the Law of 22 March 2004 on Securitization which is intended to facilitate securitization operations while offering a maximum of security for the acquired assets and for the investors therein.

How are “securitization operations” defined?

·        Securitization means the transaction by which a securitization undertaking acquires or assumes, directly or thorough 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, whole value or yield depends on such risks.

·        This flexible definition allows the securitization vehicles to acquire and transform into securities any movable or non-movable, tangible or intangible assets, as well as existing or future receivables.

·        Securitization vehicles are undertakings which carry out or participate in securitization transactions by assuming all or part of the securitized risks (the acquisition vehicles), or by the issuing of securities to ensure the financing thereof (the issuing vehicles).

·        The methods of assumption of risks linked to the assets may be freely chosen by the SV. Thus, for instance, the acquisition of assets and the issuance of securities may be split so that two different vehicles, one for each purpose, are created.

How are investors protected?

·        The securitized assets may be protected from insolvency risks of the SV via contractual provisions which will protect the SV from individual interests of the parties involved:

o       Subordination provisions: to subordinate the rights of investors and creditors to the prior payment of other securities or debt by the SV;

o       Non-recourse provisions: investors and creditors undertake not to seize the assets of the SV;

o       Non-petition clause: investors and creditors undertake not to petition for bankruptcy or other collective or reorganization proceedings involving the SV.

How is it organized?

·        Either in the form of a company or in the form of a securitization fund.

·        SV incorporated under the form of a company:

o       Available corporate forms are: the public limited company, limited liability company, partnership limited by shares or co-operative organized as a public limited company.

o       The articles of incorporation of the company may authorize its board of directors to create multiple compartments which shall each correspond to a separate portion of its assets and liabilities. This allows for the separate management of each compartment. Hence, a compartment is not affected by the risks or liabilities of other compartments. Any liability concerning a specific compartment, and arising from litigation or liquidation, remains isolated therein and will not affect the other compartments.

·        SV established under the form of a securitization fund:

o       Such mutual funds do not have legal personality. Hence, they may be set up as a co-ownership or as a trust. In either case, the fund must be regulated by management regulations and managed by a management company having legal personality;

o       The management regulations may provide for the creation of multiple compartments, which may each be governed by separate and specific rules and correspond to a distinct co-ownership or fiduciary estate and each may be liquidated separately.

o       Registered office of the SV structured as a company or of the management company of the SV structured as a fund must be located in Luxembourg.

How is it supervised?

·        SV making issue to the public on a non-continuous basis are not subject to the approval and supervision of the CSSF (i.e. the financial services regulator).

·        Only SV which issue securities to the public on a continuous basis must be authorized by the CSSF which shall approve its articles of incorporation (or the management regulations for a fund and the management company) as well as the members of the administrative, management and supervisory bodies, and significant shareholders.

·        Authorized SV must entrust the custody of their liquid assets and securities with a Luxembourg credit institution.

·        Authorized SV are supervised by the CSSF. They must ascertain that they comply with the Law and their obligations. In this respect, the CSSF may require communication of any information or carry out on site investigations and inspect all documents.

·        Appointment of an auditor is required for both, authorized and non-authorized SV.

·        Publication of financial documentation.

How is it taxed?

·        Although a distinction must be drawn between SV organized as securitization funds and SV organized as companies, in both cases, the tax burden of SV is significantly limited.

·        SV organized as funds are flow through entities and not taxable as such in Luxembourg. Unlike other Luxembourg investment funds, they are subscription tax exempt.

·        While SV organized as companies are taxable entities (corporate tax rate at 30.38%), the remuneration of investors (as bondholders or shareholders) and creditors is considered as payment of interests and therefore fully deductible, thereby limiting the tax liability.

·        In addition, SV are not subject to wealth tax, contribution duty is limited to EUR 1,250.- and management services are VAT exempt.

What is the non resident investor’s Luxembourg tax exposure?

There is no Luxembourg tax exposure in the hands of any non-resident involved in the SV.