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securit i sat ion in l uxembourg
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important
notice
This brochure is for informative purposes
only. The information and opinion it con-
tains are not intended to provide tax
and/or legal advice nor to be a substi-
tute for reading Luxembourg legislationand official pronouncements deal-
ing with securitisation. The recipient
must not act on the basis of this publi-
cation without seeking particular
professional advice. In particular, any
information regarding the tax treatment
of investment in Luxembourg securiti-
sation vehicles for foreign tax purposes
should be carefully analysed with tax
advisers of the concerned countries.
ATOZ S.A. can accept no responsibility
for loss to any person acting or refraining
from acting as a result on any material
in this brochure.
July 2009
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table of contents
foreWorD 6
about luxembourg 6
about atoZ 6
about securitisation 7
1. securitisation in general 10
1.1. overvieW of the secur itisati on process 10
the originator. 12
the investor 141.2. luxembourg laW on securitisation - general 15
Definition of securitisation 15
securitisation vehicles 15
risks securitiseD 16
financing 16
fiDuciary representative 17
representation of investors anD creDitors 18
representation of the securitisation vehicle 19
2. legal anD regul atory frameWork 21
2.1. securitisation vehicle 21
legal forms, share capital anD legal reserve 21
regulatory oversight 23
accounts anD auDitor 24
language of Documents 25
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2.2. legal protection of investors 26
bankruptcy-remoteness of the securitisation vehicle 26
ring-fencing anD limiteD recourse provisions 26
assignment of claims 27
2.3. f iDuciary representative 28
legal forms, share capital anD legal reserve 28
regulatory oversight 28
accounts anD auDitor 29
3. tax aspects 31
3.1. securitisation vehicle 31
income anD net Worth taxes 31
vat 34
other tax aspects 34
3.2. fiDuciary representative 35
income anD net Worth taxes 35
vat 36
other tax aspects 36
4. conclusion 38
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6
about luxembourg
The Grand-Duchy of Luxembourg is
a small independent country of about
493.000 inhabitants located in the heart
of Europe. Luxembourg is a founding
member of the European Union and
is the host country of several EU insti-tutions, such as the European Court
of Justice, the European Investment
Bank, the European Investment Fund,
Euratom, the European Communities
Publication ofce and the European
Court of Auditors.
Luxembourg is a constitutional mon-
archy. Members of Luxembourg
parliament are elected every ve years.
The government is in most of the cases
the result of a coalition between the two
most representative political parties.
Over the years, successive Luxem-bourg governments have shown a
constant commitment to the devel-
opment of the nancial activities in
Luxembourg by creating a flexible
and innovative legal framework that
takes into consideration the needs
and expectations of both the local
and more importantly the international
nancial markets. This policy began in
the year 1929 with the creation of the
1929 holding company, and still conti-nues today as best shown by the early
transposition of the Investment Fund
Directives (1985, 2002) into national
law (1988, 2002), as well as by more
recent laws such as the law on SICAR
(2004), Securitization (2004), the
Specialised Investment Fund (2007),
the Private Wealth Management
Companies (SPF, 2007) and nally the
law introducing a partial exemption on
royalty income (2008).
The government’s and the authori-
ties’ exible approach combined with
their willingness to listen to the con-cerns of the nancial sector, as well
as other factors such as a highly
qualied and multilingual workforce,
makes Luxembourg an attractive
international nancial centre that has
reached overall leadership in some
of its segments.
about atoZ
ATOZ is a high-end independent advi-
sory rm offering a comprehensive and
integrated range of tax and nancial
advisory services. Atoz offers a full
range of tax and nancial advisory
services to international and local cli-
ents of various industry sectors through
a highly experienced team of 9 part-
ners and 100 professionals.
ATOZ has been named Luxembourg
‘Tax Firm of the Year’ in 2006, 2007,
2008 and 2009 at the European Tax
Awards organized by International TaxReview.
foreWorD
6
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7
ATOZ is a founding member of
TAXAND, the rst independent global
tax alliance. TAXAND was founded in
2005 by a respected, entrepreneurial
group of tax rms with a common vision
for delivering seamless, responsive
service to local and international
clients, and advice that is both the-
oretically sound and practical to
implement. Our network has grownto become a well coordinated world-
wide team of leading experts with
complementary skills and experience
– all working together to full a com-
mon business plan geared to fuelling
our clients’ success by anticipating
and advising on the tax implications
associated with strategic business
decisions. More than three-quarters
of TAXAND’s member rms are listed
in the International Tax Review’s World
Tax Guide, the world’s comprehen-
sive directory of leading tax rms. The
preeminent network of TAXAND has
grown exponentially, and has now over 300 tax partners in 45 countries and
more than 2000 professionals serving
the global marketplace.
about securit isation
Securitisation can be dened as any
nancing process by which an entity
(originator) transfers one or moreassets or risks to a dedicated vehicle
(Securitisation vehicle) in exchange
for cash, as the securitisation vehicle
is nanced by the issuance of securi-
ties backed by the assets (collateral)
transferred and the income generated
by those assets.
Securitisation involves both a process
of integration and differentiation.
• integration : homogeneous,
cash ow producing but illiquid
assets are pooled together
into an investment vehicle (i.e.securitisation).
• dif ferentiation : the cash ows
generated by the pool of assets
are redirected to support
payments to instruments
issued by the securitisation
vehicle to the capital markets.
The instruments issued by
the securitisation vehicle do
not all need to show the same
characteristics. By allocating toeach instrument (or tranche) a
different priority of payment of
interest and principle as well as
a different rate of return, each
instrument (or tranche)
will satisfy the risk-return-
maturity characteristics of a
different investor.
Even after the recent nancial crisis,
skilled securitisation is here to stay as
only securitisation allows to satisfy the
needs of a growing class of sophisti-
cated investors.
7
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88
From a Luxembourg point of view, the
Law on securitisation dated March 22nd
2004 created a specic legal and tax
framework for securitisation vehi-
cles. However, even before the law
was enacted, Luxembourg compa-
nies were engaged in securitisation
activities based notably on the law
on transfer of claims and assets to a
nancial institution1
or the law on mort-gage banks2.
The new Luxembourg law has been
designed while relying on local and
international expertise in securitisa-
tion. The main aspects of the law can
be summarized as follows :
• flexibi lity ;
• investor protection ;
• tax neutrality.
Consequently, this new law provides
a response to the market’s needs and
has begun to feature prominently inthe European securitisation market.
1 Law dated July 27th, 2003 replacing the law dated
July 19th, 1983.
2 Law dated November 21st, 1997.
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1.1. overvieW of the
securit isation process
A securitisation transaction com-
monly involves the following part ies :
• An entity called the originator ,
that either sells assets to asecuritisation vehicle as a true
sale or that transfers the risk
to a securitisation vehicle (in
particular through a synthetic
transaction3);
• Investor subscribes for equity
and/or debt securities, which
are issued by the securitisation
vehicle as a private placement
or a public offering;
• A servicing entity (often the
originator) is, in most cases,
entrusted with the collection of
income streams;
• One or more fiduciary representatives may be
appointed to safeguard the
investors’ interest;
• Rating Agencies confer a
rating to the securities issued
by the securitisation vehicle.
Cash ows generated by the assets/
risks transferred to the securitisation
vehicle, are redirected to support
payments to the investors.
1. securitisation
in general
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3 Synthetic securitisation may be dened as a
securitisation whose originator does not transfer
the assets . The securitisation vehicle assumes the
economic rights and risks relating to the underlying
assets by means of a package of agreements with
the originator and other parties.
11
Parties involved
SECURITISATION
VEHICLE
investors
assets / risks
originator
3. Return / yield
4. Repayment
of principal
3. Income
fiDuciary
representative1. Investment
assets / risks
2. Transfer of underlying
2. Purchaseprice
4. Salesproceeds
rating
agency
Risk valued
Rating conferred
auDitor
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12
the origi nator
The advantages for an originator may
be summarised as follows :
• “Off-balance sheet” treatment
of existing assets
As long as the
securitisation transaction
is structured properly, the
initial cash and proceeds
of the transaction are
added to the originator’s
assets while the assets
transferred are taken off
the originator’s balance
sheet. As a result, the
originator disposes of
liquid assets, which may
be used to nance further
investments, or to repay
debt, without having takenon further debt or having
increased shareholder’s
equity. Off-balance sheet
treatment of existing
assets is of course only an
advantage to the originator
if further debt would not be
well accepted by existing
creditors, rating agencies
or regulators.
• Improved rating and lowered
financing costs
A properly structured
securitisation transaction
will result in the isolation of
the securitised assets from
the originator's c reditors.
The separation of good quality
assets from the originator's
business will most likely lead
to a better rating of the debt
instruments issued by the
securitisation vehicle, as
compared to the general ratingof the originator.
The reason for this is that
the rating of the instruments
issued by the securitisation
vehicle is not influenced by any
extrinsic factors relating to the
originator, but depends solely
on the quality of the securitised
assets that were transferred.
Further credit enhancement
methods are of ten used :
over collateralisation, excess
spreads, reserve funds, letters
of credit ...
A higher-rated debt instrument
commands lower interest
rates and is thus cheaper to
nance. This lower cost of
nancing may be facilitated
by the originator retaining the
most junior class of instruments
issued by the securitisation
vehicle. The residual interest
or equity generally bears most,
but not all, the risk involved inthe transaction, and is often
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referred to as the rst loss
piece. In return, the residual
interest will be granted the
right to all excess cash ow
generated by the securitisation
vehicle.
It is worth pointing out that the
advantages of a securitisation
diminish to the extent that the
originator’s rating improves.
Indeed a high rating at the
level of the originator may
allow access to cheaper
funding via other means.
• Diversified sources of funding
As already mentioned, the
instruments issued by the
securitisation vehicle can
be tailored in order to meet
the risk-return-maturity
characteristics of different
investors. Thus, securitisationcan allow the originator to
attract investors who would
otherwise not invest money
with the originator.
• Lower capital requirements
for banks and insurance
companies
In order to limit the risk
of bankruptcy, regulatory
authorities require banks
and insurance companies
to hold capital, the amount
of which depends upon
the nature and size of the
risks assumed by the bank
or insurance company. By
removing securitisable assets
(and thus the risks associated
with such assets) from the
institution’s balance sheet,
regulatory capital is released,
which can then be deployed for
other purposes or returned to
shareholders.
13
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14
the investor
The advantage to an investor lies in
the issuance of instruments with dif-
ferent characteristics. This process
of issuing debt with different char-
acteristics (or “tranching”) allows a
securitisation vehicle to tailor the risk
return and maturity characteristics of
the instruments, so as to best meet
the different investment strategies of
investors.
For instance, in order to concentrate
risk in a limited number of tranches, the
securitisation vehicle may issue two or
more classes of instruments and would
specify that losses in the underlying
portfolio of assets would rst be allo-
cated to the most subordinated class
of instruments. Senior tranches would
only be affected by losses once the
principal of the subordinated classesor tranches had been fully used up.
The credit risk is thus borne to a large
extent by the junior classes of securi-
ties issued. In return, the junior classes
would attract a higher yield. The result
is the creation of multiple securities
with different credit ratings that reect
the likelihood of receiving return and
principal on a timely basis.
The credit risk may be further reduced
for senior tranches by specifying that
it has priority of payment of inter-
est and principal over subordinated
classes. This implies that rst the sen-
ior tranches are fully paid back before
junior classes are reimbursed or even
receive payment of interest. As a result,
the senior classes have a shorter matu-
rity and thus a lower risk. The class of
the most junior ranked debt is the rst
class to face a possible default, and is
thus called the rst loss piece.
While it is important to note that the
quality of the underlying asset poolmainly drives the credit rating, the loss
protection, priority of payment granted
to senior classes as well as other credit
enhancement techniques, allows the
securitisation vehicle to issue securi-
ties with ratings ranging from AAA to
unrated. The different ratings are then
reected by the different returns on
each class of instruments.
Certain structures feature a pre-deter-
mined revolving period, during which
only interest payments are made to the
investors. Any other funds received
by the securitisation vehicle are rein-
vested in further assets which are
added to the asset pool. After the
completion of the revolving period,
the principal is returned to the
investors either over a defined
period of time or in a single payment.
These structures have the ability to
create securities with long average
lives that are backed by assets with
a short maturity (credit cards, tradereceivables etc).
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1.2. luxembourg laW on
securit isation - general
Definit ion of
securit isation
The Luxembourg law dated March
22nd, 2004 defines securitisation
as an operation by which a securiti-
sation vehicle acquires or assumes
risks either directly or through another
entity . The risks incurred are the risks
attached to claims, other assets or
commitments that were assumed by
third parties or that are inherent to all
or part of the activities undertaken by
third parties.
The securitisation vehicle in turn
issues transferable securities whose
value or yield reflects these risks.
securit isation vehicles
The law denes securitisation vehi-
cles as
• vehicles which carry out
securitisation in full, or
• vehicles which participate in
securitisation transactions by
either assuming all or part of the
securitised risks - acquisition
vehicles, or by issuing securities
in order to ensure their nancing
- issuing vehicles
and whose articles of incorporation,
management regulations or issu-
ance documents provide that they are
subject to the provisions of the secu-
ritisation law.
This implies that the law equally
applies to acquisition entities that
limit their activity to acquiring risks or
assets to be securitised as well as to
issuing entities that specialise in issu-
ing transferable securities to cover the
nancing of securitisation transactions.
In order to fall within the provisions
of the present law, a securitisation
vehicle does not need to perform both
the acquisition function as well as the
issuing function.
This allows for a exible approach
when interacting with other local or
foreign securitisation vehicles.
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16
Furthermore, the law does not require
all existing securitisation vehicles to
comply with the new law. Indeed,
securitisation vehicles, which had
been set up prior to the law dated
March 22nd, 2004, do not neces-
sarily need to be transformed in
order to fall within the scope of the
securitisation law. The law merely
provides for an opt in provision,
meaning that existing vehicles may
still be used without any change.
risks securit iseD
Luxembourg law allows for the securiti-
sation of “risks relating to the ownership
of all assets, whether movable or
immovable, tangible or intangible, as
well as risks resulting from commitments
that were assumed by third parties or
that are inherent to all or part of the
activities undertaken by third parties”.
The securitisation vehicle may take
on risk either by acquiring assets, guar-
anteeing commitments or by any other
manner . Thus, securitisation can be
accomplished either by transferring
the ownership of the underlying assets
(“true sale”), or by transferring risks
associated with assets only (“synthetic
securitisation”4).
In the latter case, the Luxembourg
law specically provides that secu-
ritisation transactions cannot be
recast as insurance transactions for
legal or Luxembourg tax purposes.
Future claims originating from
present or future contracts may also
be assigned to a securitisation vehi-
cle, provided that the claim may be
sufciently identied at the time of
the sale or at any other agreed upon
moment in time.
As a consequence, virtually all assets
of ascertainable value or generating
predictable cash ows can be securi-
tised such as :
• Trade receivables, mor tgage
loans, or credit card
receivables;
• Tangible (e.g. real estate),
intangible assets (e.g. airplane
leases, film rights);
• Whole or partial business
activities (i.e. risks linked to a
business activity).
The risks thus securitised may however
not be generated by the securitisation
vehicle itself, acting as an enterprise,
but may only result from asset claims
or obligations that were originally as-
sured by third parties or result from the
activities of third parties.
FINANCING
The assumption of risk must be
financed through the issuance of
securities.
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Securities within the meaning of the
law are dened as nancial instruments
that are likely to be traded on a mar-
ket and which are freely transferable
(i.e. not subject to specic formalities
which would make them comparable
to a contract assignment).
Securities that are subject to foreign
law and recognised by the applicable
laws as transferable securities will be
considered appropriate for the pur-
pose of the present securitization law.
fiDuciary representative
In order to further improve the efciency
and the legal security of the securitisa-
tion transaction, the Luxembourg law
created a new category of regulated
“professional of the nancial sector”, the
duciary representative, whose role and
functions can be compared to those of
a trustee in Anglo-Saxon jurisdictions.
The fiduciary representative can
be either a foreign entity 5 or a
Luxembourg corporation. Luxembourg
law only applies to duciary represent-
atives that have their statutory seat in
Luxembourg.
The framework for duciary represent-
atives is based on two main pillars :
• The fiduciary representative
is subject to authorisation and
control of the Luxembourg
regulatory authority.
• The legal foundation for the
activities of the fiduciary
representative is based on
legal instruments that already
exist and are used under
Luxembourg legislation, i.e.
the agency agreement and the
fiduciary agreement;
17
4 In a synthetic transaction, the originator does not
transfer the assets off its books. The transfer of the
risk is realised through the use of a credit derivative
such as credit default swap, total return swap or
credit-linked notes.
5 Luxembourg has ratied The Hague Convention
on the Law applicable to Truts and on their
Recognition, by a law dated July 27th, 2003.
As a result, foreign trusts are recognized under
Luxembourg law.
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18
The duciary representative may be
included in the securitisation struc-
ture at the initiative of the investors
and creditors or pursuant to the
articles of incorporation or manage-
ment regulations of the securitisation
vehicle itself.
representation of
investors anD creDitors
The law provides for two types of
representation, which in practice will
have similar effects in Luxembourg,
but may be treated differently in the
country of residence of the investors
and creditors.
• Agency representation
In this case the fiduciary
representative acts as agent
on behalf of the investors and/
or creditors who have chosen
to be represented by him. The
legal entitlement to the rights
entrusted to the representative
remain with the investors and/
or creditors.
Nevertheless, the fiduciary
representative may represent
the investors and/or creditors
in court, without being required
to disclose its principals’
identity. Furthermore no
investor or creditor can
exercise his rights individually,
if they have entrusted the
defense of their rights to a
fiduciary representative.
• Fiduciary representation
In this case the investors
and creditors transfer the
entitlement to their rights to
the fiduciary representative,
in accordance with the
Luxembourg law on trusts and
fiduciary contracts.
The fiduciary representative
exercises these rights for
an agreed period of time
after which the rights and
any income generated are
transferred back. The risk and
the benefit of ownership or of
entitlement to the rights thus
remains with the investors and
creditors.
The fiduciary representative
acts in its own name and on its
own behalf, but in the interest
of the investors and creditors.
In particular, the fiduciary
representative is entitled to
accept, hold and exercise all
guarantees and receive all
payments due to the investors.
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representation of the
securit isation vehicle
The law allows for the securitisation
vehicle to assign to the duciary rep-
resentative all or part of its rights and
actions arising from a contract entered
into with a third party. The assignment
is effective against the other party to
the contract and towards all other third
parties, as from the date it has been
put in place.
This should enable a duciary repre-
sentative to ensure that the agreements
concluded by the securitisation vehicle
are managed to the best interest of the
investors and creditors.
The duciary representative can del-
egate to a third party the exercise of
rights and actions assigned to it by
the securitisation vehicle. The du-
ciary representative cannot be held
liable for damages caused by the third
party unless the representative was
not authorized to delegate or the agent
chosen was notoriously incapable or
insolvent.
19
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21
2.1. securitisation vehicle
legal forms, share
capital anD legal reserve
The law distinguishes between securi-
tisation vehicles that have either been
set up under the form of a corporation
(“securitisation company”) or under the
form of a fund (“securitisation fund”)
run by a management company.
• The securitisation company
must be set up under one of
the following legal forms :
- A public limited company
(“société anonyme” );
- A partnership limited by shares
(“société en commandite par
action” );
- A private limited company (“société
à responsabilité limitée” ) ;
- A cooperative company
organised as a public limited
company (“société coopérativeorganisée comme société
anonyme” ).
The articles of incorporation
of these companies may allow
the board of directors to create
one or more compartments
each corresponding to
a segregated part of the
company’s asset portfolio.
A securitisation company is not
subject to a specific minimum
share capital. As a result,
the minimum share capital
depends upon the legal form
and ranges between EUR
12.500 and EUR 31.000.
In accordance with
Luxembourg commercial
company law, the corporate
securitisation vehicle is
required to allocate each year
5% of its profits to the creation
of a reserve (legal reserve)until the reserve has reached
an amount equal to 10% of the
share capital.
• A securitisation fund can
choose to be governed by
the legal regime of fiduciary
contract (“fiducie”) or
co-ownership (“copropriété”).
In both cases, the
securitisation fund would
have no legal personality.
This implies that it must be
managed by a management
company.
2. legal anD
regulatory
frameWork
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22
A securitisation fund created
under the legal regime of a
fiduciary contract is governedby the law on trusts and
fiduciary contracts6.
In accordance with the
provision of this law, the
compartments of the fund
would consist of fiduciary
pool(s) of assets (“patrimoine
fiduciaire”) independent from
other compartments and from
the assets of the investors.
Under this regime, the
management company will be
the legal owner of the assets
(analogous to a trustee),
whereas the investors
(analogous to beneficiaries of
a trust) will have contractual
rights in respect of the assets
and income of the fund.
A securitisation fund created
under the legal regime of
co-ownership is governed by
the general provisions of the
Luxembourg Civil Code. Under
this regime, the investorswould have a direct ownership
in the assets of the fund and
the role of the management
company would be limited
to the mere management of
the assets. The management
company would have no legal
right to the assets under
management. In accordance
with the law of 2004, the
management company is
authorised to create distinct
compartments, that are
independent from one-
another.
Under both regimes, the
management company is a
commercial company (i.e.
must be set up under one of
the legal forms set forth by
article 2 of the law dated 10
august 1915 : S.A., S.à r.l.,
S.C.A., etc), and may manage
more than one fund. This
latter provision may providefor economies of scale,
since the same management
company may incorporate
multiple securitisation funds
each having the form of a
multi-compartment fund,
providing for different asset
types, segregation of assets
and accounting records.
A securitisation fund is not
subject to any requirements
in terms of minimum share
capital and legal reserve.
However, the management
company must meet the
minimum capital requirement
in accordance with the
company form chosen. The
required capital thus ranges
between EUR 12.500 and
EUR 31.000, depending on
the legal form chosen.
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Both a securitization fund and a secu-
ritization company may create distinct
compartments as long as such com-partments are foreseen in the articles
of incorporation or in the manage-
ment rules.
A distinct part of the assets and liabili-
ties of a securitization vehicle is then
allocated to a compartment. Each
compartment is treated as a separate
entity from an investor but also from a
creditor’s point of view.
regulatory oversight
Only securitisation vehicles engaged
in the continuous issuance of secu-
rities to the public are subject to
prior authorisation and regulation7
of the CSSF.
The term “continuous issuance” is not
explicitly dened in the Luxembourg
securitisation law, neither do related
Luxembourg laws nor European
Directives provide any clear denition8
.
However the CSSF has indicated that
it would assume that securities are
issued on a continuous basis, where
more than three issues per year were
made to the public. In this context, the
CSSF made clear that it would asses
each issue on a case by case basis in
order to determine whether or not such
an issue is considered to be placed
with the public or not. Criteria used to
asses would include the areas of com-
munication as well as the technique
used to distribute the said securities.
Nevertheless, issues to professional
clients as well as issues whose denom-
inations are equal or exceed EURO
125.000 would be assessed to have
not been placed with the public.
23
6 Luxembourg law dated 27 July 2003 on trusts and
duciary contracts.
7 In practice, the CSSF accepts to review
applications before the incorporation of the
securitisation vehicle.
8 Directive 2003/71/EC on the prospectus to
be published when securities are offered to
the public or admitted to trading and amending
Directive 2001/34/EC denes “securities issued in
a continuous or repeated manner” as “issues on
tap or at least two separate issues of secur ities
of a similar type and/or class over a per iod of 12
months”.
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24
Consequently, Luxembourg securitisa-
tion entities are subject to authorisation
if the following conditions are metsimultaneously :
• The vehicle issues securities
to the public; and
• The vehicle issues securities
on a continuous basis;
In all other cases, the entity is non-
regulated.
Thus, a one-off issuance of securities
(even in several tranches) to the pub-
lic as well as the continuous issuance
of securities through a private place-
ment may be carried out without prior
approval of the CSSF.
The authorisation of a securitisation
vehicle by the CSSF is subject to
the following being reviewed and/or
approved by the CSSF :
• The incorporation documents
of the vehicle (i.e. articles of
incorporation for corporate vehicleand management regulations
and articles of incorporation of
the management company for a
securitisation fund) ;
• The directors and key
shareholders of the company
(the management company in
case of a securitisation fund).
Moreover, the company (management
company in the case of a securitisation
fund) must demonstrate that it is suitably
organised and nancially sound so as
to be in position to full its obligations.
A regulated securitisation vehicle
must appoint a custodian bank that
has its legal seat in Luxembourg or
is a Luxembourg branch of a foreign
bank. The custodian bank will be
responsible for the custody of liquid
assets and of transferable securities
of the vehicle.
Finally, regulated vehicles are not subject
to specic publication requirements.
accounts anD auDitor
The annual accounts of a corporate
securitisation vehicle must be pre-
pared in accordance with the generally
accepted accounting principles as
provided by Luxembourg commercial
company law. Securitization vehicles
can however prepare their accounts
based on the International Financial
Reporting Standards (“IFRS”) upon
request to the CSSF. Securitisation
vehicles that are listed in accordancewith Directive 1606/2002 are obliged to
apply the IFRS. Annual accounts of a
securitisation fund are subject to simi-
lar accounting rules9 to those provided
for an investment fund (FCP10).
The annual accounts must be led
with the commercial register in
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25
Luxembourg, in accordance with
the normal commercial company law
provisions.
The accounts of all securitisation
vehicles are audited by one or more
independent auditors designated by
the Board of the securitisation com-
pany, or by the management company
in case of a securitisation fund. For
a regulated vehicle, the auditor must
be authorised by the CSSF. The audi-
tor’s report and any qualication must
be reproduced in full in each annual
report.
The auditor must report to the man-
agers of the vehicle and, in thecase of a regulated vehicle, also
to the CSSF, any irregularities and
errors of which he has become aware
while carrying out the audit.
Unlike a normal Luxembourg company,
the corporate securitisation vehicle
is not required to appoint a statutory
auditor (commissaire aux comptes),
but must appoint an independent
auditor (réviseur d’entreprises).
language of Documents
English worded agreements and
related documents of a securitisation
transaction do not need to be trans-
lated into an official language (i.e.
French, German or Luxembourgish)
before being ofcially registered.
9 Law dated December 20th, 2002.
10 FCP = Fonds Commun de Placement, an
unincorporated co- ownership similar to the unit
trust in the UK or to the mutual funds in the US.
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26
2.2. legal protection of
investors
Luxembourg law does not provide for
any specic limitations as to who is
authorised to invest in a securitisa-
tion vehicle. As a result, the vehicle
is open to all kind of investors and the
law provides for several investor pro-
tection mechanisms.
bankruptcy-remoteness
of the securit isation
vehicle
The law provides a high level of pro-
tection against the bankruptcy of all
parties involved in a securitisation
transaction.
In the case of a bankruptcy of the
originator, favourable rules in relation
to the transfer of legal ownership
of assets, make it difcult for the liq-
uidators to recover assets that werepreviously sold to the securitisation
vehicle. The transfer of ownership
to the securitisation vehicle is main-
tained even in the presence of a
commitment by the securitisation
vehicle to retransfer the assets to
the originator in the future (such pro-
visions are common in instances of
over-collateralization).
In the case of a bankruptcy of a
servicer to whom the securitisation
vehicle has delegated the recovery
of assets, the law conrms that the
securitisation vehicle has the right toreceive full payment, before the liq-
uidation proceedings of the servicer
are opened.
NON-PETITION CLAUSES
The law provides that the incorpo-ration documents may comprise
clauses, whereby investors and/or
creditors waive their rights to initi-
ate a bankruptcy proceeding against
the securitisation vehicle. The law
expressly conrms the validity and
enforceability of these provisions,
and consequently enhances the
securitisation vehicle’s protection.
ring-fencing anD
limiteD recourse
provisions
The law provides for a segregation
between the assets of the secu-
ritisation vehicle and those of the
investors. As a result, the obliga-
tions of the investors due to the
bankruptcy of the securitisation
vehicle cannot exceed the amount of
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their investment in the securitisation
vehicle.
Moreover, the investors and creditors
(pro-rata to their shareholding/inter-
est) are granted a preferential right
to the securitised assets. However,
the law species that investors and
creditors may be limited in their
recourse to the assets of the secu-
ritisation vehicle. In cases where the
securitised assets were organised
into different classes/compartments,
the investors and creditors are lim-
ited in their recourse to the assets
allocated to the different classes/
compartments in which they invested.
The result of these provisions is the
following :
• As the assets of a given
compartment are exclusively
available to satisfy the claims
of the investors that invested in
that compartment or to satisfy
creditors whose claims relate
to this particular compartment,
a single entity may in effectbe used as a multi-issuing
vehicle, where one vehicle
may be used to host multiple
securitisation transactions.
• In the same vein, the law allows
the use of tracking securities
in the case of a securitisation
company. These tracking
securities or tranches may be
backed by specic collateral and
provide for different risk, yield
and maturities.
The law confirms that subordina-
tion clauses may be used, wherebyinvestors and creditors accept to sub-
ordinate the maturity or the collection
of their rights, to the payment of other
classes of investors and creditors and
to refrain from seizing the assets of
the undertaking. This provision is
crucial to the tranching of a securiti-
sation transaction.
assignment of claims
The assignment of claims to or
from the securitisation vehicle is
enforceable towards any other party.
This provision applies also in the
case of a liquidation (even partial
liquidation, i.e. liquidation of a com-
partment), bankruptcy and any other
situation of aggregation of claims.
The sale of a future claim becomes
enforceable towards third parties from
the moment the agreement was made
between the parties. This means that,
in case the assignor les for bank-ruptcy, claims that have been assigned
before the bankruptcy are excluded
from the liquidation assets.
The assignment of the claim becomes
legally valid and enforceable towards
third parties by the mere signa-
ture of the assignment, without any
27
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28
notication formalities and irrespective
of any provision that this claim may
be repurchased at a later date. Theassigned debtor is validly discharged
from its payment obligations by pay-
ment to the assignor as long as it has
not become aware of the assignement
Nevertheless, in accordance with
International guidelines11, the law
of the country of the assignor (i.e.
the originator in our case) governs
the enforceability of the sale of the
claim towards the debtor, the rela-
tionship between the assignee and
the debtor as well as the discharging
effect of the debtor’s payment. This is
therefore a point of international lawthat must be analysed on a case by
case basis.
2.3. f iDuciary
representative
legal forms, share
capital anD legal
reserve
The exercise of the functions of du-
ciary representative is restricted to
corporations with a share capital and
equity of at least EUR 400.000. As
a result, the fiduciary representa-
tive should take either the form of :
• A public limited company(“société anonyme”); or
• A partnership limited by shares
(“société en commandite par
action”); or
• A private limited company
(“société à responsabilité
limitée”) ;
Furthermore, the fiduciary repre-
sentative is required to allocate each
year 5% of its prots to the creationof a reserve (legal reserve) until the
reserve has reached an amount equal
to 10% of the share capital.
regulatory oversight
A duciary representative is a profes -
sional of the nancial sector who must
be authorised by the relevant Minister
with responsibility for the CSSF.
The authorization by the CSSF
requires the disclosure of the iden-tity of all shareholders and associates
that have a qualifying sharehold-
ing12 in the duciary representative.
These shareholders, together with
the directors of the duciary repre-
sentative, are required to evidence
their good professional reputation.
Moreover, the persons in charge of the
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29
management of the duciary repre-
sentative should demonstrate their
professional experience.
The fiduciary representative may
not conduct any activities outside its
core business except activities that
are accessory and ancillary thereto.
accounts anD auDitor
The annual accounts of a duciary
representative must be prepared
in accordance with the generally
accepted accounting principles as pro-
vided by the Luxembourg commercialcompany law.
As for all Luxembourg professionals
of the nancial sector, the duciary
representative is required to have its
annual accounts reviewed by an inde-
pendent auditor 13.
11 Article 22 of the UN Convention on the
Assignment of Receivables in International
Trade, dated December 12th, 2001 and signed by
Luxembourg on June 12th, 2002.
12 A qualifying participation is to be understood
as a participation, direct or indirect, representing
at least 10% of the share capital or voting rights,
or which generates a material inuence on the
management of the duciary representative.
13 Article 22 of the amended law dated April 5th, 1993.
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31
3. tax aspects
The tax treatment of the securiti-
sation vehicle depends upon thelegal form under which it has been
established. A corporate securi-
tisation vehicle is subject to the
general provisions of Luxembourg
corporate income tax law, with some
exceptions set forth by the securiti-
sation law. Securitisation funds are
subject to the tax regime provided
by Luxembourg legislation for a
Luxembourg FCP14.
3.1. securitisation vehicle
income anD net Worth
taxes
SECURITISATION COMPANY
Corporate securitisation vehicles
are subject to tax in Luxembourg
at the standard corporate tax rate
(i.e. aggregate rate of 28,59% in the
Luxembourg commune). In practice
however, as most of their income is
immediately repaid to investors the
taxable profit is likely to be closeto nil.
The law provides that any commitment
(interest or dividends) to investors is
considered as a deductible expense.
A commitment to the shareholders
is considered to have been made as
soon as the “dividend” distribution14 Law dated December 20th, 2002.
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32
has been decided by a general share-
holder meeting15. Dividends paid by a
securitisation company are requaliedin Luxembourg as interest for scal
purposes.
This has the following consequences :
• Distributions of income to
investors are fully deductible
from the tax base of the
securitisation company;
• Distributions of income to
investors are not subject
to Luxembourg dividend
withholding tax.
Notwithstanding the requalication,a dividend payment will not be sub-
ject to withholding tax in accordance
with the application of the provisions
of the EU Savings Directive16 as this
income is not covered by the denition
of interest as provided by article 4 of
the said Directive.
Due to the fact that the company is
fully subject to tax, it should be enti-
tled to benefit from the double taxtreaties concluded by Luxembourg.
To this effect, Luxembourg tax authori-
ties will issue Luxembourg residence
certicates.
This can be of importance :
• firstl y, in reducing or
eliminating any withholding
taxes in the jurisdiction where
the originator or debtor is
located. This can be the
case where an element of
the securitisation transaction
is treated as a financingtransaction and the related
interest potentially subject to
withholding tax.
• secondly, in reducing or
eliminating the risk that
the vehicle is deemed to
have a taxable presence or
‘permanent establishment’ in
another jurisdiction by virtue,
for example, of the servicing
activities carried out on thevehicle’s behalf.
A securitisation company is not sub-
ject to any debt-to-equity ratio. It is
therefore able to issue securities in
any form it wishes.
Finally, a securitisation company is
exempt from net worth tax.
SECURITISATION FUND AND
MANAGEMENT COMPANY
As for the FCP, it is commonly
admitted that the securitisationfund should be considered as tax
transparent entity17. As a result, its
investors and creditors are subject
to a similar tax treatment as if they
would invest directly in the underly-
ing assets.
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The regime could be summarised as
follows :
• Withholding tax, if any, on
income from underlying
assets should be reduced in
accordance with the double tax
treaty between the country of
the debtor of the income and
the country of residence of
each investor;
• The securitisation fund is not
subject to corporate income
tax, municipal business tax
and net worth tax;
• There is no withholding tax
on distributions made by a
securitisation fund;• Double taxation at the level
of the investor will be avoided
under its own domestic tax
law or in accordance with the
double tax treaty between its
country of residence and the
country of residence of the
debtor of the underlying income;
The management company should be
considered as a corporation subject to
tax in Luxembourg. As a result, it willbe subject to Luxembourg corporate
income tax and to municipal business
tax on its worldwide prots. The nomi-
nal rate of these taxes is 21.84% for
corporate income tax (including a 4%
employment surcharge) and 6,75%
for the municipal business tax (City
of Luxembourg) so that the effec-
tive rate of tax on prots amounts to
28.59%. These rates apply to all kinds
of income18.
The management company will also
be subject to an annual net worth tax
(“NWT”) at the rate of 0.5%. This taxis levied annually on the adjusted
net asset value of the company as at
January 1st of the tax year. Broadly
speaking, the taxable base is the dif-
ference between the total assets of the
company and its third party liabilities19.
15 As a result, the income distributed would be
deductible for Luxembourg income tax purposes
during the tax year during which the decision is
taken by the securitisation vehicle to distribute
prots to its shareholders at any moment in the
future. Any prot carried forward could be subject
to tax.
16 Council Directive 2003/48/EC of June 3rd, on
taxation of savings income in the for m of interest
payments.
17The point is not entirely clear as some autho rs
consider that the securitisation fund is to be
considered as a pool of assets gathered into a
“patrimoine d’affectation”. In such a case, the tax
status would be the same as for a secur itisation
company.
18 The management company of a fund created
under the law on duciary contracts will not
be deemed to be owner of assets under its
management for tax purposes. This implies that
income from the funds would not b e taxed at its
level.
19 Please note that it is in principle possible for
the company to reduce its net worth tax liability,
provided it constitutes a reserve to be kept in its
accounts for ve years. The reduction of the net
worth tax amounts to one fth of the constituted
reserve but may not exceed the corporate income
tax due for the period for which the reduction is
requested.
33
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34
vat
The securitisation law provides that
the management of securitisation vehi-
cles located in Luxembourg is exempt
from VAT.
A key element to the application of
this exemption is the term “manage-
ment”. The commentaries to the Law
indicate that the objective is to ensure
that management services towards a
securitisation vehicle are treated in
a similar way as to the management
services to undertakings for collective
investment (“UCI”).
The administrative practice applicable
to the management of UCI is relevant
for determining the VAT treatment of
services rendered to a securitisation
vehicle. As a result, the day-to-day
management of securitisation vehi-
cles is exempt.
The following points are nevertheless
worth pointing out:
• Sub-contracted management
services can only be exempt if
certain condition are met;
• Even if the management
services are exempt from VAT,
securitisation vehicles are in
principle considered as taxable
persons for VAT purposes. This
VAT status determines the place
of supply (place of taxation) of
certain services rendered to a
securitisation vehicle.
• In practice, most of the services
rendered to securitisation
vehicles will be deemed tobe taxable in Luxembourg
where they either benet from
a VAT exemption or from the
application of Luxembourg VAT
at the lowest rate possible (15%).
• Securitisation vehicles often
must register for VAT purposes
but cannot deduct input VAT.
other tax aspects
Other tax aspects of a securitisation
vehicle (corporate or fund) include :
• The securitisation fund is
not subject to an annual
subscription tax;
• Agreements or deeds relating
to securitisation transactions
need not be registered in
Luxembourg. However,
registration is required for the
transfer of any right pertaining
to real estate situated in
Luxembourg as well as aircraftor vessels registered in the
Luxembourg shipping register.
In case of voluntary registration,
a at rate registration duty of
EUR 12 is due.
• An annual registration tax of
EUR 2.650 is due to the CSSF
for regulated securitisation
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35
vehicles20. This amount is
increased to EUR 5.000 per
year for vehicles with multiplecompartments.
3.2. f iDuciary
representative
income anD net Worth
taxes
A Luxembourg fiduciary repre-
sentative is subject to Luxembourg
corporate income tax and to munici-
pal business tax on its worldwideincome. The nominal rate of these
taxes is 21.84% for corporate income
tax (including the 4% employment sur-
charge) and 6.75% for the municipal
business tax (City of Luxembourg). As
a result, the effective rate of tax on
prots is 28.59%. These rates apply
to all kinds of income.
The taxable income of a Luxembourg
fiduciary representative is based
on the annual nancial statementsprepared in accordance with the
Luxembourg generally accepted
accounting principles.
The Luxembourg duciary representa-
tive will also be subject to an annual
net worth tax (“NWT”) at the rate of
0.5%. This tax is levied annually on
the adjusted net asset value of the
company as at January 1st of the tax
year. Broadly speaking, the taxable
base is the difference between the
total assets and third party liabilities
of the company21.
20 Grand Ducal Decree dated July 14th, 2004
(Mem. A 127).
21 It is possible for the duciar y representative to
reduce its net worth tax liabilit y, provided it consti-
tutes a reserve to be kept in its accounts for ve
years. The reduction of the net worth tax amounts
to one fth of the constituted reser ve but may not
exceed the corporate income tax due for the period
for which the reduction is requested.
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36
vat
In cases where the duciary repre -
sentative acts in an independent way
towards the investors or towards the
securitization vehicle and receives
a consideration for the services it
renders, the duciary representative
should be considered as a taxable per-
son for VAT purposes.
Depending on the terms of the agree-
ment between the parties, the services
rendered by the duciary representa-
tive may benet from a VAT exemption
or be subject to Luxembourg VAT. As a result, the duciary represent-
ative may have to register for VAT
purposes and to file VAT returns.
other tax aspects
Other tax issues for a duciary repre-
sentative include :
• An annual registration tax of
EUR 1.000 is due to the CSSF
by a fiduciary representative22.
22 Please see Grand Ducal Decree dated February
23rd, 2008 (Mem. A 27).
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38
The law on securitisation has allowed
Luxembourg to establish itself as a key
jurisdiction for securitisation transac-
tions.
Luxembourg legislators have created
a tailored framework for securiti-
sation transactions. They have done
this by drawing upon current prac-
tice in Luxembourg, the most recent
foreign legislation, as well as the expe-
rience of practitioners in the eld of
structured nance.
As a result, the law represents a
well-balanced compromise between
exibility of the securitisation vehicleon the one hand and investor pro-
tection on the other hand, whilst at
the same time providing a tax neutral
environment.
These features mean the Luxembourg
law closely ts to the needs of the mar -
ket in terms of securitisation. It is worth
noting that the rst regulated securi-
tisation vehicles have been launched
only few months after the entry into
force of the law, and that the law has
attracted a great deal of attention not
only in Luxembourg, but also on inter-
national nancial markets.
4. conclusion
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