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Luxembourg Securitisation Vehicles
STRUCTURED FINANCE
Luxembourg has since a long time 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.
3Luxembourg Securitisation Vehicles
Luxembourg Securitisation VehiclesThe 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:
(i) securitisation undertakings that carry out the
securitisation in full (i.e. they acquire the securitised
risks and issue the corresponding securities);
(ii) securitisation undertakings that essentially participate
in the securitisation transaction by assuming all or part
of the securitised risks (i.e. the acquisition vehicles);
and
(iii) 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.
5Luxembourg Securitisation Vehicles
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 coopérative
organisée comme une société anonyme). The minimum
share capital for a société anonyme and a société à
responsabilité limitée is respectively EUR 30,000 and
EUR 12,000.
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. 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.
6
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 in
specific circumstances 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 an 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. According to figures recently
published, the LuxSE has over 3,500 asset-backed
securities listed on its two markets issued by more than
650 issuers from more than 37 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.
7Luxembourg Securitisation Vehicles
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
(the 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 with 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. According to the Securitisation
FAQ, financial information relating to each compartment
must be clearly identifiable and the approved independent
auditor (réviseur d’entreprises agréé) must assess the
proper drawing up of the annual accounts in light of the fair
view principle both at the level of the SV as a whole and
separately at the level of each compartment.
Reporting obligations
Both regulated and unregulated SVs qualify as
financial vehicle corporations engaged in securitisation
transactions and 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. In order to induce a
timely registration and proper reporting, the BCL recently
indicated in its Circular Letter dated 24 May 2016 that
a database for non-compliance with Circular 2014/236
will be set up by the BCL in view of better monitoring
defaulting SVs.
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. The Luxembourg Parliament voted the law of
15 March 2016 on OTC derivatives, central counterparties
and trade repositories, aiming at ensuring the effective
implementation of EMIR and granting sanctioning powers
to the CSSF in order to guarantee the correct application
of rules and requirements deriving from EMIR.
9Luxembourg Securitisation Vehicles
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 AIFM Law. 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 the AIFM
Law. The same applies to SVs issuing structured products
that primarily offer a synthetic exposure to assets other than
loans (non-credit-related assets) and where the credit risk
transfer is only ancillary.
Independently from their potential qualification as SSPE
(for the purpose of the AIFMD), SVs which only issue debt
instruments should not, pursuant to the Securitisation
FAQ, constitute alternative investment funds (AIFs) for the
purpose of the AIFM Law. Similarly, irrespective of the fact
whether SVs qualify as SSPE for the purpose of the AIFMD,
it is the view of the CSSF that SVs which are not managed
in accordance within a “defined investment policy” (within
the meaning of the AIFM Law) do not constitute AIFs.
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 2017, the CIT
rate is 20.33% (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
27.08% for the fiscal year 2017 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 2017, 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 4,815. If not, the minimum NWT charge
10
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 4,815.
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 Luxembourg legal environment provides for an enviable
regime for the structuring of securitisation transactions.
With its flexible, lightly regulated and tax efficient regime,
the framework shaped under the Securitisation Law has
contributed to the success of Luxembourg as a key player
in structured finance. A wide range of attractive vehicles
is available for multiple actors to carry out securitisations
and structured finance transactions through Luxembourg.
In addition, the diversity in terms of financing techniques
and eligible assets under the Securitisation Law is making
Luxembourg a prime location for securitisation transactions,
whose success is repeatedly confirmed over the years.
11Luxembourg Securitisation Vehicles
About Loyens & Loeff
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Contact information
Vassiliyan Zanev
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Arnaud Barchman Wuytiers van Vliet
T+352 466 230 311
Loyens & Loeff Luxembourg S.à r.l.
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