Luxembourg, a window over the world

© Allen & Overy LLP 2012 1

Luxembourg, a window over the world

January 2012Nicolas Fermaud (Associate in charge of the Russia-Luxembourg Desk)


Contents

I. Why Luxembourg?

II. A&O Luxembourg

III. Investment Funds

IV. Taxation

V. ICM

VI. SPF

VII. IP/IT


Founding member of the European Union and the EUR Zone

“Neutrality” given its size Central location in Western

Europe/Access to Europe Political & economic stability Business friendly environment Favourable tax situation/predictable

tax planning Regulatory safety/high standards Competitive operating costs (income

tax and national insurance) Highly skilled multi-lingual workforce

Source: Luxembourg public (August 2011) & Eurostat (April 2011)

Population: 511,840

GDP per capita: EUR 58,792

Public debt: 18.4% of GDP

Unemployment rate: 5.9%

Employment in the financial sector: 42,615

Banks: about 150

Insurance companies: about 100

Investment and other financial sector

professionals: 270

Fund administrators: 70

Management companies: 357

Investment Fund Industry: 2nd in the world

in terms of AuM

Luxembourg

I. Why Luxembourg ?


I. Why Luxembourg?Innovative & collaborative approach between

government, regulator & finance industryRapid transposition of EU directivesFully developed infrastructure of financial

services and support functionsMore than 20 years experience in global fund

distributionFlexible legal and tax frameworkPredictability of tax and regulatory planning (tax

ruling practice, grand-fathering)Tradition of customised and pragmatic financial

regulationPlatform and hub for structuring international

investments of corporates, SWFs and PE Funds

EXPERIENCE

INNOVATION

INTEGRITY

STABILITY

SERVICE QUALITY

NEUTRALITY


Specific regulatory frameworks for:

Alternative investment funds

Venture capital and PE funds

Specialized investment funds for institutional investors

International pension funds

Covered bonds

Securitization vehicles

Vehicles for managing family wealth

I. Why Luxembourg?


Only Grand Duchy in the world

Independent since 1839

Constitutional monarchy governed by Minister

Jean-Claude Juncker

Political & economic stability based on a

culture of consensus

Ratings agency Standard & Poors have

confirmed Luxembourg’s long term AAA rating

“Neutrality” given its size

Business friendly environment

I. Why Luxembourg ?


Luxembourg and Russia1 2

Major Russian companies with presence in Luxembourg include:

2009 : 1st foreign investor in Russia

3rd in all time investments

SistemaGPBEvrazRenovaAbsolut BankEvrofinance Mosnarbank

3 Major “Russian listings” include:

Vimpel-CommunicationsGazpromThe City of MoscowBank MoskvaThe Russian Federation

I. Why Luxembourg ?


Foreign Investors

Sistema

Gazprombank

Evraz

Renova

Absolut Bank

Success Stories - Home to major global players:

ICT sectorAmazonAOLDigital RivereBayiTunesNapsterPayPalSkype

Host country toEuropean Court of AuditorsEuropean Court of First InstanceEuropean Court of JusticeEuropean Investment BankEuropean Investment FundParliament Secretariat of the European

I. Why Luxembourg?


Contents

I. Why Luxembourg?

II. A&O Luxembourg


IV. Taxation

V. ICM

VI. SPF

VII. IP/IT


II. Allen & Overy Luxembourg

0

20

40

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80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Our Values: Excellence in everyone and everything

Dedication to clients

Working together as one global practice

Respecting and including every individual

Entrepreneurial spirit and energy

Helping our people to achieve their potential

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We deal with all types of domestic and cross-border transactions, from local matters to pivotal international transactions.

Luxembourg Law Firm of the Year IFLR European Awards 2007, 2009 & 2010


II. Allen & Overy Luxembourg - Awards Luxembourg Law Firm of the Year

IFLR European Awards 2007, 2009 & 2010 Luxembourg Tax Firm of the Year

ITR European Tax Awards 2010 & 2011 Law Firm of the Year for Benelux

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http://www.cc.lu/


Securiti-zation

SIFSICAR

UCIII

SoParFi

Less regulated

More regulated

Law of August 10, 1915

Law of February 13, 2007Law of

June 15, 2004

Less Flexible

More Flexible

Law of December 20, 2002

(Part II UCI)

Law of March 22, 2004

UCITSI

Law of December 20, 2002

(Part I UCITS)


SPF

Law of May 11, 2007

A vehicle for each investment profile


Contents

I. Why Luxembourg?

II. A&O Luxembourg


IV. Taxation

V. ICM

VI. SPF

VII. IP/IT


Worldwide Investment Fund Assets (Market share in %)

49%

30%

5%

5%

3%3%

3%2%

USAEuropeBrazilAustraliaCanadaJapanChinaOthers

Source: European Fund and Asset Management Association (EFAMA) – December 31, 2010Source: European Fund and Asset Management Association (EFAMA) – December 31, 2010

Luxembourg is the

2nd largest

investment fund

centre in the world

after the USA



27%

18%

14%

12%

10%

19%

Luxembourg

France

Germany

Ireland

UK

Others

The 5 largest investment fund domiciles in Europe (by AuM)

Source: European Fund and Asset Management Association (EFAMA) – December 31, 2010Source: European Fund and Asset Management Association (EFAMA) – December 31, 2010

Luxembourg is the 1st

place in the European

market in terms of net

sales and market

share



0

500

1000

1500

2000

2500

3000

3500

4000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Net assets under management - EUR billion Number of investment funds

Source: CSSF/ALFI

Investment funds in Luxembourg - a rapidly growing industry



Luxembourg has

a competitive

advantage over

off-shore

jurisdictions

Loss of attractiveness of off-shore jurisdictions: Cayman, BVIs, Channel Islands, Mauritius, Cyprus

Upcoming regulatory changes (eg, increasing transparency requirements)

Increasing concern about investor protection

Tax efficiency – no double tax treaties, outside economic blocs, anti-tax haven legislation

A changing world for fund managers



Re-domiciliation from end 2007 to end 2009

19

Countries of origin

Cayman islands;

50%

BVI; 8%

Guernsey; 8%

Bermuda; 6%

Ireland; 6%

Luxembourg; 6%

Bahamas; 3%

Germany; 3%Jersey; 3%Mauritius; 3%

Netherlands; 3% UK; 50%

Target countries

Cayman islands;

11%

BVI; 3%

Guernsey; 8%

Ireland; 6%

Luxembourg; 31%

Jersey; 6%

Mauritius; 3%Malaysia; 3%

UK; 6%

Hong Kong; 17%

Channel Islands; 3%

France; 3%

Delaware; 3%

Over 30% of re-domiciliations of funds between 2007-2009 were to LuxembourgSource: PWC/Lipper



Investment Vehicles Comparison: Undeniable success of the UCITS flagship in cross-border distribution

0 10 20 30 40 50 60 70 80 90

Luxembourg

Ireland

UK

France

Belgium 76.2% of all UCITS registered in at least 3 countries are

Luxembourg funds

Source: CSSF/ALFI



Regulated vehicles

FUNDS SICAR

UCITS Part II UCIs SIF


Initial decisions

A wide range of investment vehicles adapted to your investment strategy

Target investors

Target investment policy

Tax

Regulation

Structures available


UCITS (2010 Act) Part II UCIs (2010 Act) SICARs (2004 Act) SIFs (2007 Act)

Public distribution (including retail investors)

Public distribution (including retail investors)

Well-informed investors Well-informed investors

UCITS passport No UCITS passport (possibility to benefit from AIFMD passport)

No UCITS passport (possibility to benefit from AIFMD passport)

No UCITS passport (possibility to benefit from AIFMD passport)

Open-ended Closed-ended or open-ended

Closed-ended or open-ended

Closed-ended or open-ended

Supervision by CSSF

Structuring flexibility

First decision - Target investors



Second decision – Target investment policy


Investment in transferable securities, money market instruments, bank deposits, funds and derivatives

Unrestricted range of assets

Risk capital onlyPrivate equity / venture capital only


High level diversification requirement

Medium level diversification requirement

No diversification requirement

Low level diversification requirement

Supervision by CSSF

Structuring flexibility



2010 Act – Part I (UCITS) 2010 Act – Part II UCIs 2007 Act (SIFs) 2004 Act (SICARs)





Second decision – Target investment policy (contd)UCITS (2010 Act) Part II UCIs (2010 Act) SICARs (2004 Act) SIFs (2007 Act)

Stringent risk diversification requirements-100% in TS/MMIs / max 10% with the same body(5/10/40 rule)- 100% in deposits / max 20% with the same body- 100% in UCITS / max 20% with the same body- Max 30% in other UCIs (investing in eligible assets) / max 20% with the same body-Derivatives: look through principle, counterparty risk and exposure limit

Borrowings limited to 10% of the NAV (not for investment purposes)

20% maximum concentration ratio

No risk diversification requirement

30% maximum concentration ratio








Third decision – Tax


No corporate taxation or wealth tax

Annual subscription tax: 0.05% of NAV which could be reduced to 0.01%-Monetary funds-ETFs-Certain funds of funds

Taxation similar to UCITS

Fully taxable entity, but

•exemption of income and capital gains from investment in securities

•exempt from wealth tax

•in principle, can claim treaty protection

No corporate taxation or wealth tax

Annual subscription tax: 0.01% of NAV

No WHT on distributions to investors










Fourth decision – Regulation


Substance requirements

• Appointment of a management company OR• Self-managed

EU passport for management companies

High level substance requirement will be introduced by AIFMD



Promotorship requirement

Promotorship requirement

No promotorship requirement

No promotorship requirement



Multiple compartments (umbrella funds)

Set up and service providers

FCP / SICAV structure

Key structuring aspects you should consider

Setting up an Investment VehicleIII. Investment Funds


Multiple ring-fenced compartments• Compartments are fully segregated (i.e. no risk of cross-contamination)• Each compartment may display specific features

Initial decisions – umbrella funds

Target A Target B

Umbrella fund

Compartment A(closed-ended)

Compartment B(open-ended)

Investment manager A

Investors A Investors

B2

Class B2 shares

Investors B1

Class B1 shares



FCP SICAV

•No legal personality

•Managed by a regulated management company

•Tax transparent from a Luxembourg perspective

•Not subject to Luxembourg company law

•No decision making power to unitholders

•Legal personality

•Managed by a board of director

(or separate general partner)

•Fiscally opaque

•Derogations to Luxembourg company law (e.g., variable capital, no restrictions on dividend distributions, redemption of shares, etc.)

•Shareholders have the right to vote

Contractual fund (FCP) vs. Investment company (SICAV)



Management company

CustodianSICAV

Board of directors

Administration Investment management

Distribution

FCP

Distribution Investment management

Administration

Administrative agent

Distributor

LUXEMBOURG

ABROADInvestment

Manager/Adviser

Contractual fund (FCP) vs. Investment company (SICAV)



AIFMDAlternative Investment Fund Managers Directive



Key objectives of the AIFMDIII. Investment Funds

► Extend appropriate regulation and oversight to all actors and activities that embed systemic risks

► Improve financial stability ► Ensure that the Alternative Investment Fund Managers (AIFMs) are

subject to a regulatory framework ► Increase transparency towards regulators and investors, and public

accountability for the actions of AIFMs► Enhance investor protection ► Develop the EU internal market in the area of alternative

investment, i.e., passports enabling AIFMs to offer their management services and market their AIF throughout the EU

► Direct regulation of AIFMs► Indirect regulation of AIFs► Creation of a European market for alternative investments via

passports for management and marketing activities

Key objectives

What does the AIFMD regulate?


Key definitionsIII. Investment Funds

An Alternative Investment Fund (AIF) is any collective investment undertaking:

• which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors

• that does not require authorisation under UCITS

An Alternative Investment Fund Manager (AIFM) is any legal person whose regular business is managing one or more AIF

• Where the AIF is internally managed and does not appoint an external AIFM, the AIF is the AIFM

• ‘Managing’ means always at a minimum Portfolio Management and Risk Management, but may in addition also include e.g. administration


AIFMD scopeIII. Investment Funds



4

3

2

1

Scenario

• Full directive applies , except depositary requirement

• Cooperation arrangements must be in place

• The non EU country may not be listed by the FATF

NPPR2013 - 2018

2015

2013

2013

2013

Date

• Full directive applies, except depositary and annual report requirements


NoneYESNon EUNon EUEU

YES

YES

YES

In Scope

Possible access to passport

None

Passport

Marketing EU

AIFM AIF Investors Requirements

EU EU EU Full directive applies

EU EU Non EU Full directive applies

EU Non EU EU

• Full directive applies • Cooperation arrangements must

be in place• A tax agreement must be signed• The non EU country may not be

listed by the FATF

AIFMD scope matrix



• NoneNoneNONon EUNon EU

Non EU4

• Same requirements as for Scenario 2 above


2015

• Same requirements as for Scenario 2 aboveNPPR2013 -

2018YESEUNon

EUNon EU3

2

1

Scenario

• Obligation to comply only with transparency and controlling interests provisions


• The non EU country may not be listed by the FATF

NPPR2013 - 2018

2015

2015

Date

YES

YES

In Scope


None

Marketing EUAIFM AIF Investors Requirements

Non EU EU Non EU

• Full directive applies• Appointment of a Member State of

Reference and of a legal representative • Cooperation arrangements must be in

place• A tax agreement must be signed• The non EU country may not be listed by

the FATF

Non EU EU EU

• Full directive applies • Appointment of a Member State of

Reference and of a legal representative• Cooperation arrangements must be in

place • A tax agreement must be signed• The non EU country may not be listed by

the FATF


Contents

I. Why Luxembourg?

II. A&O Luxembourg


IV. Taxation

V. ICM

VI. SPF

VII. IP/IT


64 DTT in force today22 DTT in negotiation

Source: Luxembourg For Finance - Septembre 2011

IV. TaxationA. Double Tax Treaties network


What is a SOPARFI

Taxation Corporate taxation at 28.80% (Lux-City)

Wealth tax at 0.5% on net value of assets

15% WHT on dividend distributions

Interest vs debt financing Interest payments are tax deductible

In principle no WHT on interest payments

Dividend distributions subject to 15% WHT (subject to treaty protection and domestic participation exemption)

Dividend distributions are in general not tax deductible

Basics of Luxembourg tax lawIV. Taxation


Corporations

Thin capitalisation 15% equity / 85% debt (arm’s lenght ratio applied by tax administration)

If not respected, excessive interest payments may be requalified as dividends (15% WHT) and are not deductible



Participation exemption

Conditions Subsidiary / investor and Lux HoldCo must be fully

taxable companies

Subsidiary / investor must be a Luxco, a company falling under the scope of the Parent-Subsidiary directive, or be established in a country which has entered into a DTC with Luxembourg

Investor / Lux HoldCo must hold at least 10% (or acquisition value of EUR 1.2 Mio) during at least 12 months

Lux HoldCo

Dividend

EU / treaty company

No taxation of dividend income

EU / treaty company

DividendNo WHT

10%12 months

10%12 months



Participation exemption

Tax treatment No WHT on dividend distributions from subsidiary if

subsidiary is a Luxco or an EU company falling within scope of Parent-Subsidiary Directive

No taxation of dividend income at level of Lux HoldCo if subsidiary is EU company or established in a treaty country

No WHT on dividend distributions to the investor if Luxco or EU company falling with scope of EU Parent-Subsidiary Directive

New: No WHT to investor if company established in a treaty country

Lux HoldCo

Dividend

EU / treaty company

No taxation of dividend income

EU / treaty company

DividendNo WHT

10%12 months

10%12 months



Capital gains exemption No taxation of capital gains if transfer of participation in

subsidiary

Conditions Subsidiary must be a fully taxable company

Subsidiary must be a Luxco, a company falling under the scope of the Parent-Subsidiary directive, or be established in a treaty country

Lux HoldCo must hold at least 10% (or acquisition value of EUR 6 Mio) during at least 12 months

Recapture of acquisition value adjustments and costs if deducted in previous years

Lux HoldCo

EU / treaty company

10%12 months

Purchaser

Transfer

No taxation on capital gains

taxation



Financing company Back-to-back financing

Loan flows from investor to Subsidiary (flow through loan)

Lux HoldCo needs to retain adequate spread (arm’s length principle)

Spread is taxable

No thin capitalisation rules apply

Lux HoldCo

Subsidiary

Investor

FTL

Loan

Interest

Interest

TaxableSpread



85/15 structure

Adapted to Luxembourg thin cap requirements

85% interest bearing loans

15% equity / interest free loans

No WHT on interest payments

15% WHT on dividends (may be reduced under applicable DTC)

Suitable when low annual returns

Lux HoldCo

Investor

Target

15%Equity & IFL

85% IBL

Dividends Interest

Basic holding structuresIV. Taxation


Financing 1% equity

99% flow through loans (FTL) / profit participating loans (PPL) or profit participating preferred equity certificates (PECs)

Similar to back-to-back loan

Loans are limited recourse

PECs may be considered as equity in certain jurisdictions, whereas as debt instrument in Luxembourg (i.e., hybrid structure!)

Lux HoldCo

Lux SubHoldCo

Investor

1% equity

1% equity

99% FTL

99% PPL

The double holding structureIV. Taxation


Profit extraction

At the level of SubHoldCo99% via PPL (no WHT / tax deductible)

Remaining 1% = taxable (at 28.80%)

And distributed via dividends (no WHT)

At the level of HoldCo

100% via FTL (no WHT / tax deductible)

Minus annual taxable spread (at 28.80%)

Rest via Dividends (15% WHT)

Lux HoldCo

Lux SubHoldCo

Investor

DividendsInterest100% of the profits minus annual spread

DividendsInterest99% of the profits



Scalable Unlimited investors via multiple share classes

and tracking loans

Unlimited targets: simply add new SubHoldCo

Increase / decrease of investment

Lux HoldCo

Lux SubHoldCo

Investor

Target 1

Investor

Lux SubHoldCo

Target 1

Class Ashares

Class Bshares



Exit Target and SubHoldCo will be liquidated

Liquidation bonus exempt from WHT

Reimbursement of PPL at level of HoldCo

Share buy-back at level of HoldCo

HoldCo still operational for other investments

Lux HoldCo

Lux SubHoldCo

Investor

Target 1

Investor

Lux SubHoldCo

Target 1

LiquidationBonus

LiquidationBonus

PPL reimbursement+ share buy-back



Contents

I. Why Luxembourg?

II. A&O Luxembourg


IV. Taxation

V. ICM

VI. SPF

VII. IP/IT


Luxembourg Stock Exchange

V. ICM


V. ICM (International Capital Market)

Luxembourg Stock Exchange - an international listing centre

3,500 issuers from 105 countries

45,000 securities listed

64 sovereign states and

11 supranational institutions

More than 750 new

quotation lines/month on average

Approximately 90% of issues are EMTN programmes

Listing in 54 different currencies

61.26%61.26%

0.36%0.36%

9.30%9.30%

0.77%0.77%15.81%15.81%

12.50%12.50%

Issuers by region


Quotation lines (as at 30 Sept 2010)

Bonds 29,764

Warrants 7,332

Shares/GDRs 324Domestic 34Foreign 290

Investment Funds 7,254Domestic 7,101Foreign 153

Total 44,674

V. ICM

Strong listing activity

Luxembourg Stock Exchange41.79%

Irish StockExchange24.03%

DeutscheBörse

17.48%

London Stock Exchange

8.57%

Euronext4.95%

Others3.19%

Leader in the listing of international bonds

Luxembourg Stock Exchange


Markets operated:

A. European regulated market “BdL Market”

since May 1929

B. Exchange regulated market “EURO MTF”

since July 2005

Luxembourg Stock Exchange Markets

V. ICMLuxembourg Stock Exchange


A. The main regulated market named ‘Bourse de Luxembourg’On the EU list of regulated markets held by the European CommissionEligible for investment according to EU rules and for Eurosystem collateral requirementsEasy procedure for cross offers of securities (simple notification in accordance with the provisions of the Prospectus Directive)The CSSF (Financial sector supervisor) is in charge of the approval of prospectuses.The Exchange deals with the listing applicationCombination of a listing fee plus a maintenance fee (annual fee)The fees cover three elements: the official listing, the admission to trading and the access to the trading system.



It is a Multilateral Trading facility (MTF) as defined in Article 4 (15) of the MiFID Directive and is not a regulated market on the list of EU regulated markets. Its name is a direct reference to this new category of market recognised in EU legislation

The Luxembourg Stock Exchange is responsible for the approval of prospectuses prior a listing of securities on the ‘Euro MTF’ market (Art 61 of the Luxembourg Law on prospectuses).

Contents of the prospectus defined by reference to the repealed 80/390/EEC Directive (Listing Particulars Directive). See Part II and the annexes of the rules and regulation of the LuxSE. Aternatively, the use of the schedules contained in the European Commission Regulation 809/2004 is possible.

Prohibition of market abuse (insider dealing and market manipulation) contained in the Luxembourg Law on Market Abuse

Out of scope of the Transparency Directive

B. The Euro MTF Market



Less stringent requirements for financial reporting and auditing in the case of non EU issuers (Prospectus and Transparency Directive requirements, 8th company law Directive)

No obligation to determine a home competent authority for debt securities with individual denomination of less than 1 000 Euros (non EU Issuers)

Lack of financial statements for SPV

One stop shop for the listing and the approval of the documentation

Eurobond tax exemption agreed by UK tax authorities

Eligibility to the Eurosystem operation (ECB)

Eligible market for investments done by UCITS

B. The Euro MTF Market – Main advantages



Condition: Prospectus Directive compliant prospectusProspectus must be approved by the Competent Authority of the country

where the securities will be listed In Luxembourg:

• CSSF – competent for the prospectus approval• language regime generally in English. Luxembourg accepts 4 languages• Luxembourg Stock Exchange competent for the admission to trading• The application for admission must be signed and filed by the applicant or

by any other person duly authorised to intervene for this purpose by the applicant (Issuer, listing agent, law firm, lead manager,...)

Admission to Regulated Markets in Europe



Investment Structuring

V. ICM


Repackaging of Equity - Holding model

Group Parent

Company

Group Company

LuxCo

LuxSeCo (in principle not appropriate)

Group Company

100% equity100% equity

100% equity

V. ICMInvestment structuring (Debt / Equity)


LuxCo

LuxSeCo (in principle possible)

Fund/Company(as, for example, German KG,

UCIT, LP, REIT, etc.)

InvestorInvestor

equity/debtequity/debt

equity

Repackaging of Equity - Investment model



Group Parent

Company

Group Company

LuxCo

LuxSeCo (in principle not appropriate)

Group Company

loan

equity/debt

loan

Intragroup financing - Standard model



Group Parent

Company

Group Company Group CompanyLuxCo

LuxSeCo

Investor (restrictions if LuxSeCo used)

•LuxCo/LuxSeCo issues securities + .•LuxCo/LuxSeCo uses issue proceeds to acquire loan (portfolio of loans) from Group Company + .•After acquisition, LuxCo/LuxSeCo is lender under the loan.•Payments received under loans will be used to make the payments due under the equity/debt securities issued by LuxCo or LuxSeCo.

equity equityequity

equity/debt securities

loan

€€

€€

€1

1 2

23

3

4

4

Intragroup financing - Repackaging of loans



Financial institutionsbalance sheet cleaning

BankLuxCo

LuxSeCo

Investor

Swap

Counterparty

•LuxCo/LuxSeCo issues bonds .•LuxCo/LuxSeCo uses issue proceeds to acquire a pool of + .•Payments received under pool of assets are paid to the Swap Counterparty(which may be the Bank) under a swap entered into by LuxCo/LuxSeCo to hedge its payment obligations under the bonds + .•Swap Counterparty pays to LuxCo/LuxSeCo the sums that LuxCo/LuxSeComust pay under the Bonds .•In the case of a default by the Swap Counterparty, the swap is terminated and payments under the pool of assets are paid by LuxCo/LuxSeCo to Investor rather than to Swap Counterparty).•At maturity, pool of assets realised (at pre-agreed price under swap or at market value) and sale proceeds used to redeem the bonds.

pool of assets

swap payment (payments underpool of assets)

swap payment (payments dueunder bonds)

€

€ vs bonds

1

1

2

2 3

4 5

3

6

4swap

6

5



Structured note issuance

65

LuxCo

LuxSeCo

Swap

Counterparty

Investor

INDEXCollateral (for swap)

• LuxCo/LuxSeCo issues index linked bonds • LuxCo/LuxSeCo enters into swap that provides LuxCo/LuxSeCo with monies payable under the bonds (amount payable under the bonds is determined by performance of index) + .• Issue proceeds will be invested in collateral. The cash flows under the Collateral and realisation proceeds will be paid under the swap to Swap Counterparty. In case of default of Swap Counterparty, swap is terminated and cash flow under Collateral and realisation proceeds of Collateral will be paid directly to Investor (rather than the Swap Counterparty).This considerably reduces credit risk that investors are taking on Swap Counterparty.

€ vs bonds(index linked)

swap

1

1

32

3 4

2

4



Securitisation

V. ICM


V. ICMIssue vehicles – Securitisation Act 2004

ecuritisation Act 2004 expressly recognises:Limited recourseSubordinationNon-petitionCompartmentalisation

V is a fully taxable company but all commitments are deductible expenses (→ tax neutrality); no subscription tax; in principle no withholding tax; SV qualifies as taxable person for VAT

S

S

uxembourg securitisation vehicles (SV) are governed by Securitisation Act 2004

L


No restriction as to eligible investors for an SV

Any type of risks or assets may be securitised by an SV (→ no risk diversification requirement)

SV may issue all types of securities (equity, notes, certificates, etc); financing by way of loans possible in certain circumstances

Rating agencies are comfortable with the Securitisation Act 2004 regime

Issue vehicles – Large FlexibilityV. ICM


SV is subject to the supervision of the CSSF only if it issues securities to the public on ongoing basis (→ light regulation)

Luxembourg custodian only needed if SV is regulated

Accounts are reviewed by a statutory auditor (réviseur d’entreprises agréé)

SV is not required to publish a prospectus unless Prospectus Act 2005 applies (public offers; listings)

Issue vehicles - SupervisionV. ICM


SV may attract a broad range of investors

1 SV is a suitable vehicle for simple and

complex transactions

2Securitisation is important feature to procure

financing to corporates and banks3

Issue vehicles - ConclusionV. ICM


bankruptcy remoteness

true sale

compartments (segregation of assets and ring fencing)

limited recourse (by operation of law)

subordination

no seizure of assets

no petition

To that effect, the Securitisation Act 2004 contains, and recognises the enforceability of, provisions on

V. ICMSecuritisation vehicles


The Luxembourg act dated 22 March 2004 relating to securitisation, as amended (the Securitisation Act 2004)

covers all types of securitisation transactions

covers all types of assets

aims at isolating the securitised assets within a specific estate (patrimoine) and shifting the risks relating to these assets to the investors and creditors

Securitisation vehicles - Legal frameworkV. ICM


Securitisation vehicles - what can be securitised ?

any risks relating to (i) receivables, (ii) moveable or immoveable assets or (iii) obligations assumed by third parties or inherent to all or part of the activities carried out by third parties

by way of illustration (any assets which produce a regular and predictable flow of funds)

residential and commercial mortgage loans, corporate loans, credit card receivables or trade receivables

V. ICM


debt securities and equity securities (→constraints)

rights and claims relating to financial contracts (such as rights under derivative agreements; rights in respect of synthetic transactions where there is no transfer of assets but where

risks are transferred under, e.g., a credit default swap)

rights and claims relating to operating businesses (such as airports, private hospitals, water utilities, pubs or forests → whole or partial business securitisations)

risks relating to insurance policies (→ impact of Directive 2005/68/EC relating to reinsurance)

V. ICMSecuritisation vehicles - what can be securitised ?


through the issue of securities (valeurs mobilières) the value or return of which depends on the securitised assets

securities means any kind of (i) debt securities and (ii) equity securities including shares (→ constraints) and beneficiary shares

V. ICMSecuritisation vehicles - how are securitisations financed?


Securitisation vehicles - who can securitize assets?

76

choice between a securitisation company and a securitisation fund managed by a management company

securitisation undertakings must be located in Luxembourg:

for a securitisation company, the registered office must be situated in Luxembourg

for a securitisation fund, the registered office of the management company of the fund must be situated in Luxembourg

possibility to use a two-tier structure comprising an issuing vehicle and an acquisition vehicle

V. ICM


public limitedliability company

(société anonyme)

private limited liability company

(société à responsabilitélimitée (→ constraints))

partnership limited by shares

(société en commandite par actions)

co-operative societyorganised as a

société anonyme

A securitisation company may take the form of a:



Securitisation undertakings will be regulated and must obtain an authorisation (agrément) from the CSSF if they issue securities to the public on a continuous basis (→ if these two conditions are not met cumulatively, the securitisation undertaking will be unregulated and the CSSF will not be competent)

Regulated securitisation undertakings



This implies:

Securities issued to the public

absence of legal definition

different notion as that used under the Prospectus Directive

CSSF guidance → two (rebuttable) presumptions:

- professional investors (→ MiFID)

- minimum denomination of EUR125,000



Securities issued on a continuous basis

absence of legal definition

CSSF guidance → more than three issues to the public per calendar year



Unregulated securitisation undertakings

license requirement does not exist where the securitisation undertaking does not issue securities to the public on an ongoing basis

benefit from all the provisions of the Securitisation Act 2004

must appoint one or more external auditors



Securitisation transactions that are subject to the Securitisation Act 2004 do not constitute contracts of insurance (→ safe harbour provisions, among other things, for credit derivative transactions and for the assumption of risks relating to insurance policies)

Safe harbour - no insurance contract


Securitisation of financial assets, intellectual property, private equity, real estate, ....


Contents

I. Why Luxembourg?

II. A&O Luxembourg


IV. Taxation

V. ICM

VI. SPF

VII. IP/IT


Few FactsPrivate investors or entity acting exclusively on behalf

of private patrimony or intermediaries acting on a fiduciary basis on behalf of the private investors

SPF will take the form of a stock corporationNo regulation. Activity and investment restrictions (non

involvement in the business of the subsidiaries, no intra-group financing activity, no public issue of securities, no flotation on a stock market, no direct holding in real estate)

TaxationGeneral tax exemption from CIT / MBT / NWTAnnual subscription tax of 0.25% (min EUR 100 / max

EUR 125.000) Tax-free dividend distributions to investors

VI. SPFTrading platform

Tax efficient repatriation

SPF

Any Stock exchange

listed company

Nasdaqlisted

companies

RTSlisted

companies

Beneficiary


Contents

I. Why Luxembourg?

II. A&O Luxembourg


IV. Taxation

V. ICM

VI. SPF

VII. IP/IT


80% exemption on net income and capital gains deriving from certain IP rights

Exemption from wealth tax

Eligible IP rights: patents, trademarks, designs, models, domain names and software copyrights

2009 IP Legislation offers:

VII. IP/IT

Infrastructure support in IP management, seed funding, logistics and industry collaborations


Nicolas FermaudAssociate – in charge of the Russia-Luxembourg DeskAllen & Overy+ 7 495 662 [email protected]

These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an

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