Case Studies

We have been mandated by an international Group, present in some 15 jurisdictions and active in the area of medicinal chemistry, to restructure its organisation of companies established all over the world. Some companies are created as a joint-venture, others are directly owned by the shareholders. The intra-group financing is realised without any global policy and according the needs, intellectual rights are sometimes held by some entities and others, which used them but don’t own them. We were able to provide our advices to:

1. recreate a corporate organisation chart, which insures an efficient and centralised company management in creating a Luxembourg holding company like a SOPARFI.

This Luxembourg holding company allows the holding of all the group’s shares, with a Board of Directors and an Investment Committee specifically composed with experts in medicinal  chemistry, independent from the Board of Directors in order to make recommendations to the latter.

The SOPARFI gives the ability to maximise the group benefits, avoiding the tax losses when centralising the management of treasury operations, particularly on the dividends issued from the several countries

2. create a cash management policy through the Group in setting up a company dedicated to this activity.

We firstly established guidance applicable to the Group for all the financing needs. When a company needs to have a cash advance, it can ask for a credit facility under several forms to this financing company.

We also issued rules on the determination of the interest rates applicable for the intra-group loans, which respects the international standards (OECD) and considers the risks taken by each party.

3. regroup the intellectual rights owned by the several entities into a Luxembourg IPR Company (“Intellectual Property Right Company”).

This enables to have a centralised management of the intellectual property, and to manage patents and rights in a common and homogeneous way.

This Luxembourg IPR Company receives now royalties from all the group entities and from the third parties which use IP rights in return for a globally investment in research and defence of the patent rights.

The IP Company maximises its revenues in benefitting from the tax exemption of 80% of the income received, as defined in the Article 50bis (LIR)Then we helped the Group in some acquisitions thanks to a more adapted size and structure.

Case Study A: Intellectual Property Rights

A foreign investor (being a company or a private individual) has developed or owns an IP Right, copyright on a software for example. He contributes this IP Right into a Luxembourg company. Generally the said company will be a Société à Responsabilité Limitée (S.à r.l) and no preliminary external valuation needs to be carried prior to incorporation.

The Luxembourg Company will be able to:

• acquire the software’s rights for 800 Euros (which will be amortised over 10 years);
• receive royalties of 200 Euros per year

Plus there will be associated legal and development costs for 20 Euros per year.

The tax situation of the Luxembourg IP company will become:

Therefore, the net income of 200 Euros would be taxed at a rate of 5,84% = 2,92% as at 2015.

Case Study B: Nexus Approach

In the current regime, a IP company can develop its IP, or acquire it from a third-party company, or have it develop by a subcontracting company.Nexus reduces benefits in the two last cases. So, just imagine…

Case 1: Current IP box regime

An IP Company creates its IP with its own researchers for EUR 1.000.000 (employee, material, legal costs, …). Then the company receives royalties for an amount of EUR 2.000.000 over the next years. The total amount is supposed to benefit from the tax exemption of 80% (EUR 2.000.000). The effective tax rate is then :

• Taxable income :2.000.000

• Corporate income tax rate in Luxembourg: +/- 29%

• Effective tax rate (20% of 29%) = around 6%

Case 2: Nexus approach

 An IP Company creates its IP with its own researchers for EUR  250.000 (employee, material, legal costs, …). But must rely on a third party company for an amount of  EUR  750.000 EUR for adjustments and other researches. This makes a total investment in the IP development of EUR 1.000.000 (250 000 + 750 000). Then  the company receives royalties for an amount of EUR  2.000.000 over the next years.

The “external part” of the development should be pro-rated  to benefit from the tax exemption of  80% (2.000.000):

• 250.000 / 1.000.000 = 1/4 is the part which is developed inside of the company

• 2.000.000 x ¼ = 500.000 EUR  can benefit from the tax exemption of  80% (an effective tax rate of 20% of 29%, around 6%)

• Whereas  ¾ x 2.000.000 = 1.500.000 EUR should be excluded from the benefits of the IP regime and thus be taxed at the normal corporation tax rate (+- 29%)

Case 3: Nexus approach following BEPS 5

An IP Company creates its IP with its own researchers for EUR  250.000 (employee, material, legal costs, …). But must rely on a third party company for an amount of  EUR  750.000 for adjustments and other researches. This makes a total investment in the IP development of EUR 1.000.000 (250 000 + 750 000). Then  the company receives royalties for an amount of EUR 2.000.000 over the next years. With the latest BEPS 5 agreements, it is allowed to increase the “qualified expenditures” by 30%.

The “external part” of the development of the IP should be pro-rated  to benefit from the tax exemption of  80% (2.000.000):

• 250.000 / 1.000.000 = 1/4 is the part which is developed inside of the company

• 2.000.000 x ¼ = 500.000 EUR x 1,3 = 650.000 EUR can benefit from the tax exemption of  80% (an effective tax rate of 20% of 29%, around 6%)

• Whereas the remaining 2.000.000 – 650.000= 1.350.000 EUR should be taxed at the normal corporation tax rate (29%)

NB. This is a simplified example which still need to be validated by a law and that should undergo some eventual changes.  It is therefore important that the part related to costs incurred for the creation of the IP is realised by the company itself and not outsourced to (group or external) entities.

Case Study 1

One of our clients is involved in portfolios management.

He suggests to develop a new portfolio management strategy that he would like to test before inviting public to subscribe for the fund he would set-up.

Many of his contacts, wealthy individuals, members of his family or friends are interested in subscribing shares in the vehicle managed by our client.

Our client incorporates a company – SARL type - with a capital of EUR 12.500 of which he is the sole manager and partner.

This SARL company creates conjointly with the first new shareholder (Limited Partnership) a Special Limited Partnership and becomes the manager of this SLP.

The SLP issues shares to the new shareholders (LPs).

A NAV is calculated once a month and the SARL company receives the management fees and performance fees on the assets management of the SLP.

On a tax point of view, the SLP is tax exempt as it is fiscally transparent.

The SARL company becomes an alternative fund manager (AIFM) but is not subject to the all the AIFM directive obligations as its total assets under management does not reach EUR 100 mios.

This structure is applicable to all projects related to alternative assets (shares, funds, credits, funds of funds, hedge funds, currencies, futures, derivatives, commodities, …)

The SLP can thus evolve to a Specialised Investment Fund (“SIF”) once its assets under management are enough to justify the costs of the fund.

Case Study 2

One of our clients is involved in real estate construction.

He has a real estate project which involves substantial capital investments. His several contacts, wealthy individuals, members of his family or friends are interested in subscribing for a real estate vehicle which would be managed by our client as he has sufficient expertise to successfully carry out this project.

Our client incorporates a SARL company with a capital of EUR 12.500 of which he is the sole manager and partner.

This SARL company and the first new shareholder (LP) decides to create a Special Limited Partnership. The SARL company becomes the manager of this SLP.

The SLP issues shares to the several shareholders (LPs).

A NAV is calculated once a year based on the status of the real estate project.

Though the SARL company is now an alternative fund manager (AIFM) it is not subject to follow all the obligations included in the AIFM Directive, as assets under management are less than EUR 100 mios.

This structure is applicable to any project related to alternatives assets, like real estate funds, private equity, venture capital, vulture fund, financial holding, ..

Finally, the SLP is able to evolve to a Specialised Investment Fund once its assets under management are enough important to justify costs incurred.

These institutions whish to sell their portfolio of receivables they are unable to recover from their clients. This is a burden for them in their balance sheet as these unrecoverable debts are to be provionned in their accountings and they are ready to sell their debt portfolios on a mass scale.

As a Corporate and Trust company, our client asks Creatrust to structure this acquisition he intends to get financed by pension funds and other Family Offices interested in investing their cash in a financial product, which will pay a regular coupon. Our client thus negotiates with the credit card issuers a contract by which the entity we helped him to create repurchases the receivables (aged of more than 30 days) for 40% of the value of the debts to be recovered.

After several years of activity, the institution ’s portfolio reaches a nominal amount of EUR 80 Mio, and the  purchase price of the debts has then been sold at a price of 80 x 40% = EUR 32 Mio by our client.

We incorporated for our client a Luxembourg management company, which has created a securitisation fund. This securitisation undertaking issues bonds with the following properties:

• Nominal EUR 33,000,000 (EUR 32 Mio for the purchase of the portfolio and EUR 1 Mio for the necessary cash to set up the process of the debts recovery)

• Quaterly coupons payable to the investors 

•  Variable return and linked to the debts recovery

• Maturity : 60 months (after that, non-recovered debts will be written off)

The Luxembourg Management Company (our client) is remunerated

•   by the investment management fee based on the total assets under management

• and a performance fee linked to the results realised on the recovery of the receivables

As the fund issues securities to qualified investors, it is not regulated by the CSSF (Commission de Surveillance du Secteur Financier). The fund is composed of several sub-funds intended to repeat the operation with other institutions, like car rental firms, commercial leasing companies, companies with a regular cash flow wanting to sell forward to investors whose risks are assumed against a return.

Our client will be the sole shareholder and sole director.

The S.à r.l.  will be provided the ability to create different compartments which are all segregated between each others and bankruptcy remote. (by the law – like in Sicav)

The S.à r.l.  will create a bond issuance program which will govern the issuance of debt instruments for the whole  S.à r.l. and also one term sheet applicable to each compartment/issuance will be drafted to describe each bond specifically.

 Each compartment will acquire one type of assets:

• the first compartment will acquire the receivables issued by Company A

• the second will acquire shares in Fund B,

• the third other mortgages… etc

And each compartment will issue a bond which is called Asset Backed Security (ABS) which value and yield are linked with the value of the underlying asset.

The caracteristics of the bonds will be:

• They will be issued at a nominal price equal to the value of each asset at the time of issuance

• The maturity of the bond will be in ten (10) years

• The interest coupons are payable every quarter or year and will bear a variable yield which will depend on 99% of the income generated by the compartment.

• The Issuer will have the right to redeem some of the bonds each year with 90 days notice

• There is a clause of limited recourse if after ten years the value of the compartment is lower than the nominal price (in case of losses)

The securitisation company is a taxable company under the Luxembourg law; the profits it generates are taxable however the commitments or payments it made to investors are tax deductible. Therefore only the margin which stays into the S.à r.l. remain taxable (subject to the minimum tax).

Our client's aim is to have the possibility to invest this cash in other assets. He contributes a major part of the collection in a securitisation fund, which will issue bond loans which will be subscribed by external investors.

Preliminary :

1. the management company (manco) is incorporated by our client, in which he is the shareholder and sole director

2. the manco sets up a securitisation fund (the fund) which can create several compartments undernief which are all bankruptcy remote (segregation)

3.  the manco drafts a bond issuance program (assets backed securities – ABS) which describes in general the whole project, the parties, the custody, auditor, etc.

4.  each ABS’ value and yield are directly linked with the content of the compartment (the collection)

5. for each compartment a term sheet is issued to reflect the particularities of the project (description of the underlying asset, interest rate of the ABS, maturity, amounts, etc)

For each project:

1. the originator (owner) contributes its asset (or collection) to a compartment of the Fund in exchange of which he receives a hundred of ABS, each representing 1pc of the value of the compartment,

2. the owner has now several possibilities:

• either he keeps the certificate to sell, donate, transfer, …

• either he finds some investors who are ready to buy some of the ABS which will either pay a regular income, a fixed yield of btw 8 to 12 % (eg)

• either the ABS are placed in pledge at a bank or a lender of any type which then control the outcome and may refinance the ABS buy lending money to the owner

   3. the management company may receive fees:

• on the issuance of the ABS (subscription fee)

• on the management of the project (management fee)

• on the placement of ABS to investors

• on the refinancing of ABS with banks or others

Rationale

Credit institutions, insurance companies and financing companies (Credit Card, Auto Loan etc…) carry a range of liabilities on their balance sheet. In order to reduce the strain on their balance sheet and improve their Tier1 capital adequacy, these risk carriers have used securitisation as an instrument to "sell" their risk. By securitising the risk associated with their loan portfolio, these institutions transform a liability into a financial instrument. The buyer of the financial instrument buys the risk and obtains the rewards associated with the revenue streams attached to this risk.

Types of Liabilities

The most common liabilities are linked to real-estate loan portfolios. By securitising the loan portfolio, the financial institution effectively sells it to third-parties. As opposed to traditional financing mechanisms, such as traditional bond issuance or bank loans, securitisation removes the liability from the institution's balance sheet.

This method can be used for other types of debt, for instance trade finance is another good example. In trade finance the buyer of the goods usually pays upon receipt of the goods. The seller of the goods, however, often makes substantial investments to produce and ship the goods. Trade finance compensates the seller ahead of receiving the proceeds of the buyer. This creates a liability which a credit institution can carry or sell to potential investors. Auto loans, credit card debt, advance payment of sales agent commissions - in essence all future payment or cash flows which are financed - can be packaged into a securitisation vehicle.

Functioning

Liabilities are usually grouped by nature in order to re-package them into a securitisation vehicle. Once the portfolio has been defined, the offering memorandum is drafted to define the underlying assets, the risks associated with future payment of the income and the remuneration of the investors. The most common structure is the issuance of bonds by the securitisation vehicle, with a fixed or variable coupon.

As for a normal bond issue, the securitisation vehicle can be submitted to a rating agency to obtain a credit rating and therefore help clients evaluate the risks associated with their investment.

Unlike  a bond which carries risks associated with the issuer's capacity to pay interest and principal, a securitisation vehicle carries two types of risk:

• Non-payment of income streams and principal by a range of often unknown debtors (for example home owners, credit card holders, car buyers).

• Fluctuating value of the principal, which typically serves as collateral to the bond holders (for example the value of the homes purchased with mortgage loans).

The range of applications is wide and the treatment of securitisation under Basel III will probably undergo changes in the future. However, securitisation remains a powerful, flexible and cost-effective alternative to traditional bond issuance and many other forms of financing.

The bonds issued by securitisation vehicles can be purchased by institutional and qualified investors and represent an attractive opportunity for higher yields in a low-interest environment.

Read also:

• Specialised investment fund

• Net asset value per share

• Three processes to subscribe in securities

Rationale

A securitisation undertaking established under the Luxembourg Law may securitise many types of underlying assets including the risks linked to any type of Financial Instruments by issuing shares/bonds which yield and value are linked with the Financial Instruments.

Over the last decades securitisation has become an interesting alternative to more traditional forms of financing, credit enhancement such as bank loans, debt issuance, etc.

Securitisation transfers the risk to the investors and effectively removes part or all of the risk from the promoter/originator and/or credit institution.

Types of Financial Instruments

Assuming that the securitisation undertaking is not creating its own risk, there are many categories of instruments which may be securitised, among which:

• Shares: this category includes any type of shares of companies, rights in Partnership, in personal or company of capital, shares in other undertaking, private equities, transparent or non entities.

•  Bonds: Any type of bonds can be securitised, the ones issued by companies, by any entities, funds or other SPVs, yielding a fixed or variable interest, notes linked with an underlying asset, participating bonds, etc. This can also include Structured Notes.

• Derivatives: Warrants, options, swaps, futures and any other types of derivative instruments or contract, being listed or not, over the counter, etc.

• Funds: This category includes any shares of funds, being a Sicav, a FCP, mutual fund, SPV, private equity fund, real estate fund, ETN/ETF, etc.

• Loans: Though a loan is not a Financial Instrument, if the conditions are known in advance and the subscription rights for bonds have only been transferred to the undertaking, the securitisation of (pre-existing) loans are also eligible. This would encompass the shareholders loans, current account, etc.

Functioning

The Securitisation Undertaking will acquire the risk or the rights on the Financial Instrument which will become the underlying assets.

The Securitisation Undertaking will then issue one or different securities which have a yield or a value directly linked with the underlying assets (i.e. Financial Instruments).

Investors

The Securitisation Undertaking may issue securities of different types, among which:

• Units : Equivalent to a share in the equity of the Securitisation Undertaking, it gives right to the dividend distributed and to the proceed of liquidation

• Certificates: Directly linked to the underlying asset

• Bonds: Debt instrument issued by the undertaking with a fixed or variable coupon which may be redeemable periodically or at the end of the securitization process.

Varia

The securitisation vehicle can either buy the asset or only securitise the risk associated with the Financial Instrument.

The Securitisation Undertaking must not at any time be involved in the management of a participation but only securitise the money flows generated by the underlying assets.

Read also:

• Specialised investment fund

• Net asset value per share

• Three processes to subscribe in securities

Rationale

Real-estate financing can take many forms. Over the last few years, securitisation has become an interesting alternative to more traditional forms of financing, such as bank loans and debt issuance. Securitisation transfers the risk to the investors and effectively removes part or all of the risk from the promoter and/or credit institution.

Investors may be interested in the opportunity of buying this risk for the following reasons:

• The risk is usually associated with an established project or real-estate scheme. As such, qualified and institutional investors have reasonable means in place to evaluate the risk associated with the securitisation vehicle.

• The promoter usually has to pay a higher coupon to remunerate potential investors and the risk/return trade-off for investors can prove interesting in a low interest environment.

Examples of Real-estate securitisation:

• Project financing: The securitisation vehicle issues securities (debt instruments or certificates) and uses the proceeds of such issuance to invest in a specific development project with the objective of selling this project in the relatively near future (usually within three years). The securitisation vehicle will receive the proceeds of the sale of the project over the coming three years or upon completion, and will pay an income to the security holders either based on fixed interest or variable interest or a combination of both.

• Real-estate financing: Existing real estate can be bought or refinanced using securitisation vehicles. This is usually done in order to replace bank financing if  existing credit lines are needed for new projects. The proceeds generated from rental payments generates the income stream for investors. Again the relatively stable coupon associated with this type of financing can be attractive to investors.

• Private Real-Estate: Private investors can transfer their investments by using a securitisation vehicle. The profit realised upon disposal of  real estate can be utilised to develop or buy more property. By using the securitisation vehicle similar to a fund, private investors are able to share the risk and potential returns associated with the target project. This allows investors to reduce their risk on a single project and spread the risk between them.

Functioning

Private real estate ownership, or financing for a family, typically takes the form of a real-estate securitisation fund in which family members own part of the real-estate portfolio through ownership of fund units or debt securities. These units can capitalise the income or pay-out dividends/interests. Institutions typically issue debt instruments from their securitisation vehicle to attract investors and pay a fixed or variable coupon.

The securitisation vehicle can either buy the asset, or securitise only the risk associated with the development or rental income of the real estate properties.

Read also:

• Specialised investment fund

• Net asset value per share

• Three processes to subscribe in securities

Rationale

Art collections are securitised, in order to divide ownership and the revenues between different parties while maintaining the art collection complete. By securitising the art collection, family members can own part of the collection without dismantling it. Family members can also donate or sell their ownership to other family members, while leaving the collection intact. In addition to owning part of the collection, the family members perceive the proceeds of any sale or lending activity, and participate to the extent of their ownership in the costs of maintaining and insuring the collection. Hence securitisation has become an ideal opportunity to maintain the collection over generations.

Art as an investment

Securitisation can also be used to make an art collection available to outside investors. The originator bundles the amounts invested into a securitisation fund and uses the invested amount to buy and sell artwork. Investors are thus able to benefit from the expertise of the originator in the art world and diversify their investment across a larger number of artworks.

Functioning

The art collection can be transferred to or bought by the securitisation vehicle. The securitisation vehicle issues securities which can be subject to certain restrictions as laid down in the offering memorandum. One restriction for example could be that securities can only be transferred to family members or outside persons without prior authorisation of the family board.

• Selling the art collection to the securitisation fund: The art collection is sold to the securitisation vehicle if one or several investors have liquidity which they wish to invest. In practice the investors, in this case family members, buy the securities of the securitisation vehicle. The securitisation vehicle receives the payment and buys the artwork. As the artwork is bought, there is payment of the purchase price to the current owners. This solution is particularly attractive if the current owners wish to receive the cash in their current domicile and if the cash is paid to more than one owner. This solution is also attractive if the investor(s) wish to exchange their current liquidity for ownership certificates.

• Transferring art to the securitisation fund: The transfer to the fund in exchange for certificates can be organised if no cash transaction is required or desired. This is often the case in smaller family structures. As the current owner receives the certificates, these can then be handed over to the other family members immediately or over time.

Read also:

• Specialised investment fund

• Net asset value per share

• Three processes to subscribe in securities

Rationale

Large Corporate, Credit institutions, insurance companies and financing companies (Originator) may carry a range of assets in their balance sheet which comprises a fleet of real assets like cars, vans, boats, planes, … but also any other transportation means or machines.

In order to reduce the strain on their balance sheet and improve their Tier capital adequacy, these risk carriers use securitisation as an instrument to transfer and “sell” their risk to the market.

How?

By securitising the risk associated with these assets, these institutions transform them into a financial instrument which is then bought by investors.

A Special Purpose Vehicle (SPV) is setup in Luxembourg and buys the fleet of assets.

The SPV then obtains the rewards associated with the revenue streams attached to this fleet.

Types of Fleet : 

• Cars, taxis, motorbikes, bicycles,

• Boats, ships, yacht,

• Planes, aircraft, carriers,

• Machines, electric panels, factories,

• Transportation means of any kind like trucks, lorries, vans,

• Billboards for advertisements,

• Any type of hard or movable assets which generate an income or need a financing

Types of Liabilities :

The most common liabilities are notes linked to value of the assets and the income they generate. By securitising a fleet, the Originator effectively sells it to third-parties. As opposed to traditional financing mechanisms such as traditional bond issuance or bank loans, securitisation removes the liability from the balance sheet of the Originator.

This can also be via a synthetic securitization by which the assets remain in the balance sheet of the Originator but the SPV will by contract (like a swap) take all the risks linked with the fleet or linked to the income derived by the fleet.

The SPV can issue several types of securities to finance the securitisation transaction:

• Units : shares of the SPV

• Notes, Bonds issued by the SPV which yield a fixed interest rate generated by the income derived from the rental of the fleet for instance

• Certificate : asset backed securities which value and yield are variable and linked with the value of the fleet and the income it produces

These securities can be either sold to investors like institutional investors, investment funds, hedge fund, pension schemes, Qualified Investors, High Net Worth Individuals or Family Office. These represent an attractive opportunity for higher yields in a low-interest environment.

In essence all future payments or cash flows which are financed can be packaged into a securitisation vehicle.

Functioning

The Fleet is usually grouped by nature in order to re-package them into a securitisation vehicle. Once the portfolio has been defined, the offering memorandum is drafted to define the underlying assets, the risks associated with future payment of the income and the remuneration of the investors. The most common structure is the issuance of bonds by the securitisation vehicle, with a fixed or variable coupon.

Like for a normal bond issue, the securitisation vehicle can be submitted to a rating agency to obtain a credit rating and help clients evaluate the risks associated with their investment. Contrary to a bond, which carries the risks associated with the issuers’ capacity of payment of interest and principal, the securitisation issue carries two types of risk:

• The risk of non-payment of the income streams and principal by a range of often unknown debtors (car owners, credit risk on the corporate who use the fleet, etc).

• The risk on the value of the fleet itself which usually serves as collateral to the bond holders, e.g. the value of the fleet at maturity.

The range of applications is wide. The securitisation techniques remain a powerful, flexible and cost-effective alternative to traditional bond issuance and many other forms of financing.

For information on securitisation in general, please request our brochure: Securitisation in Luxembourg

Read also:

• Specialised investment fund

• Net asset value per share

• Three processes to subscribe in securities

Rationale

A wrapper is commonly used by an investor, a trust, a family or a promoter to structure a pool of assets into one single security.

It can be useful to hold several type of assets by subscribing one single certificate instead of holding or subscribing different securities.

A promoter might use a wrapper to structure a pool of assets or create an index which is linked to various assets.

An asset manager can place several type of asset into the wrapper to create an investment solution for investor by virtue of which they receive one single bond or note which underlying assets are diversified and may include risky and safe assets at the same time or assets and a protection of capital.

A HNWI or a family office might place whole or part of his assets into a wrapper and use it to transfer his wealth to the next generation or place it into an Life Insurance Policy.

As long as the securitisation undertaking does “not create the risk” it can hold securities which are actively managed by a third party asset manager (Actively Managed Certificate).

Securitisation

A securitisation undertaking established under the Luxembourg Law may securitise many types of underlying assets including the risks linked to any type of Financial Instruments by issuing shares/bonds/certificate which yield and value are linked with the underlying assets. Over the last decades securitisation has become an interesting alternative to more traditional forms of financing, credit enhancement such as bank loans, debt issuance, funds, shares, etc.

Types of Financial Instruments to wrap : 

As mentioned above, assuming that the securitisation undertaking is not creating its own risk, there are many categories of instruments which may be securitised and placed into the wrapper among which:

• Shares: this category includes any type of shares of companies, rights in Partnership, in personal or company of capital, shares in other undertaking, private equities, transparent or non entities.

• Bonds: Any type of bonds can be securitised, the ones issued by companies, by any entities, funds or other SPVs, yielding a fixed or variable interest, notes linked with an underlying asset, participating bonds, etc. This can also include Structured Notes.

• Derivatives: Warrants, options, swaps, futures and any other types of derivative instruments or contract, being listed or not, over the counter, etc.

• Funds: This category includes any shares of funds, being a Sicav, a FCP, mutual fund, SPV, private equity fund, real estate fund, ETN/ETF, etc.

• Loans: Though a loan is not a Financial Instrument, if the conditions are known in advance and the subscription rights for bonds have only been transferred to the undertaking, the securitisation of (pre-existing) loans are also eligible. This would encompass the shareholders loans, current account, etc.

• But also any hard assets like : real estate, collectibles, art collections, cars, yacht, boat, planes, and any other right linked with these assets like usufruct, lease, agreement or other right like Intellectual properties.

Functioning

The Securitisation Undertaking will acquire the risk or the rights on the other assets which will become the underlying assets. The Securitisation Undertaking will then issue one or different securities which have a yield or a value directly linked with the underlying assets.

Investors

The Securitisation Undertaking may issue securities of different type among which:

• Units: Equivalent to a share in the equity of the Securitisation Undertaking, it gives right to the dividend distributed and to the proceed of liquidation

• Certificates: Directly linked to the underlying asset

• Bonds: Debt instrument issued by the undertaking with a fixed or variable coupon which may be redeemable periodically or at the end of the securitisation process.

Varia

The securitisation vehicle can either buy the asset or only securitise the risk associated with the underlying assets.

The Securitisation Undertaking must not at any time be involved in the management of a participation but only securitise the money flows generated by the underlying assets.

Read also:

• Specialised investment fund

• Net asset value per share

• Three processes to subscribe in securities

Rationale

Intellectual property and royalty management has become a Luxembourg specialty. Indeed Luxembourg is an extremely favourable legal and fiscal environment for artists, writers, companies, inventors and engineers to domicile their royalty income.

The rationale for securitisation lies in the opportunity of obtaining the NPV (net present value) of future income streams today; in transforming future income streams into an immediate cash flow.

Investors achieve this future income stream by buying securities issued by the securitisation vehicle and, therefore, ensuring the right to potential future returns. The beneficiary discounts the immediate payment in order to allow investors to obtain a yield, taking into consideration the uncertainty of receiving future income streams.

As such investors buy the future income streams, the yield and the risk associated with the returns.

Types of Intellectual Property

Below we have highlighted  a few examples securitisation and intellectual property, but the applications can be numerous:

1. Patents: A patent is a protected right to exclusive use of an invented item; such as a new machine or brand new product. Restricted over time, the inventor may wish to capitalise on his patent by selling it to a securitisation vehicle.

2. Brand, trademark: Companies and individuals can securitise the use of a brand or trademark, and separate it from the company/owner owning this brand or trademark. The company then rents the use of the brand and trademark from the securitisation vehicle. This also applies to web URLs, for example.

3. Artists' and writers' royalties: The royalties received can be securitised and  shared with investors, family members, or a closed group.

Functioning

In most cases the income derived from the securitisation of royalty income is recurrent; therefore investors will usually expect a regular coupon. Depending on the fiscal treatment of income as opposed to capital gain, the future value can also be capitalised and will provide investors with capital gain payments, i.e. dividends.

The securitisation vehicle buys the income associated with the intellectual property from the owner, either for a specific period or for an unlimited time. The securitisation vehicle issues shares or bonds to investors, who will receive capital gain or coupon income. The offering memorandum of the securitisation vehicle also defines the conditions under which investors can redeem their investments.

Securitisation vehicles are also used to share the revenue between the members of a band, group of inventors, etc. Each individual can thereby clearly identify his share in the income and also evenly participate in the costs associated with maintaining the flow of royalty income.

Read also:

• Specialised investment fund

• Net asset value per share

• Three processes to subscribe in securities

A 62 year old entrepreneur contacted us. In the past, he had created a company in the trading sector that he sold fifteen years ago to launch a consulting company in the same area. The latter has strongly grown up since the crisis of 2008, while our client expected a limited activity. He has now many international clients and is leading 150 employees based all around the world.

Our client has two sons eventually interested in the takeover of the company. He also has a daughter who is involved in the research area and not interested in her father’s business. Managers of the consulting company were thanked with the allocation of stock options and shares of the company.

 Our client, who was already a Creatrust client during the last trading company sale, wants our advice on:

1. the ongoing development of the consulting company

2. the transfer of this company, taking account of the family structure

3. the assets management and holding he already owns, their transfer, and

4. the governance within the family, his and the family’s rights protection, including those of his wife

1/ Concerning the company development:

Taking in account of the characteristics of the consulting company, employees based all over the world can be considered as a “permanent establishment” involving tax obligations in some countries, under certain conditions.

Our Corporate Department considered with our client the issue of the declaration of some company revenues in countries in which a consulting activity realised by the company employees directly to clients becomes a permanent establishment.

We also advised our client on the creation of a Holding company aiming at holding the company and creating subsidiaries instead of overseas permanent establishments.

2/ Transfer pricing between group companies for the know-how used by one or other companies was discussed and the company brand has been transferred to the Holding established in Luxembourg.

3/ Assets holding and management he already owns and their transfer:

Our client will create a Foundation, which will be the vehicle detaining the Holding company, which will itself hold the consulting companies. Our client will bring the proceeds of the sale of his first company and assets he inherited in the past. All these assets will be contributed to the Foundation.

Our client will appoint a Board of Directors, composed of himself, his lawyer and a chartered accountant. The Charter of the Foundation provides that beneficiaries are our client and his spouse until their decease. Children are mentioned as second beneficiaries, but only after their parents.

Our client creates a supervisory board of which is a member and appoints Creatrust as protector of the assets and of their destination. As a protector, we have been entrusted by our client to:

•  ensure that the wishes of the settlor are always upheld and the procedure of transfer to the next generation will be carefully applied in the future

• monitor the board of director’s activities

• act upon the settlor’s plan should the worst happen or any of the stated eventualities

The Foundation regulates the transfer of the company assets in harmony, without letting children intervene in the succession rules, avoiding arguments. All the assets are listed and allocated from the beginning by the founder who reserves the right to modify this list at any time.

4/ The governance within the family is sorted out due to the Foundation Board.

 Our client also asks us to take in charge the organisation of the periodic reporting on all the Foundation assets, using our Private Assets Consolidation tool. We thus create each month a reporting to the Board of the Foundation, allowing them to visualise at every moment:

• the several assets, their value, including investment funds in which the Foundation is invested, private equities and co-investments realised by our client over the years.

• sector and geographic exposure

• currency exposure allowing his financial advisers to hedge assets and their currency exposure

• private properties like buildings for private use, villas, a yacht under Charter, a private plane used by the Consulting company and for his own travels.

We are also in charge of making the several tax returns of these entities and providing the necessary reporting to each members of the family in order to allow them to fulfil tax obligations in the country where they hence are resident.

Case Study 1

A collector owned a collection consisting of thousands of antique objects of art. He was married twice and has three children from his first marriage and two others from his second marriage. His objective was to ensure that his collection would remain intact and not dispersed among his heirs in order to achieve the best valuation while also maintain the possibility of receiving a periodic income from the collection.

Creatrust helped the client to structure a Foundation to whom he donated the entire collection and the objects of art are now the property of the Foundation. While the donation is irrevocable, the client is able to remain very involved in the management of the Foundation and is a member of the Supervisory Board. This entity allowed him to nominate beneficiaries as well as modify the beneficiaries list and statutes of the Foundation during his

lifetime. As Managing Director of the Foundation the client was able to oversee the management of the Foundation enabling the collection to continue to benefit from his extensive experience.

Any gains realised by the Foundation from the collection will be distributed to the beneficiaries in order to generate an income for them during their lifetime, while also providing for an orderly succession and nomination of members to the Supervisory Board. Existing members included the client, two independent experts, a lawyer and an art advisor.

Case Study 2

A family with a child who was an emerging young artist, wished to provide sufficient capital to allow the child to:

a) develop his art;

b) create and build a collection; and

c) organise an art exhibition to launch his career. While wishing to fund the child’s artistic development, the family wanted to ensure the funds were not misused and to protect the young artist from misappropriation by third parties.

Creatrust helped the family to structure the funding arrangement through a Foundation in order to ensure the aim intended by the family was upheld.

The family structured the Foundation in such a way that a Board of Directors was named and a clear road map established, in order to achieve the young artist’s support without the capital being used for other purposes. The Foundation designated a Supervisory Board made up of family members to ensure that the Board of Directors’ mandate was correctly realised and a rule of succession for the Supervisory Board was predetermined.