Securitisation Undertakings

Under Luxembourg law, a securitisation vehicle can be constituted either as a company or a fund.

As of 9th February 2022, the Securitisation Law of 2004 has been amended and allows active management of Securitisation  vehicles as long as the securitised assets are debt instruments linked to private placement and consisting of repackaged debt.

This modification also provides Luxembourg Securitisation vehicles the ability to refinance existing debt by issuing  loans instead of securities  which was mandatory prior to the Law amendment.

A securitisation company must take the form of public limited company, a joint stock company, a private limited company or a cooperative with limited liability. It can create one or several compartments corresponding to a distinct part of its holding.

A securitisation fund has no legal personality and must be managed by a management company, which must be a commercial company. The fund is formed from one or several joint ownership organisations or one or several fiduciary estates. In the former case, the fund must be under a co-ownership regime, with the latter scenario being governed by trust and fiduciary contract legislation.

Furthermore, since the new Law has been passed,  securitisation funds will now have to register with the Luxembourg register of trade and companies and therefore will be able to benefit from an RCS registration number.

The main goal  for doing so is to facilitate certain administrative processes which require an RCS registration number but it will also provide an additional method for investors to identify the securitisation funds.

Securitisation funds will likewise have to publish their management regulations with the RCS.

 
Luxembourg law ensures the tax neutrality of securitisation vehicles. Securitisation funds are treated as investment funds and the investors are taxed according to the rules in force in their country of residence. These funds are exempt from tax, but cannot benefit from double tax treaties agreed by Luxembourg.

Securitisation companies are fully taxable, but payments carried out on the behalf of investors are fully tax deductible. Securitisation companies can benefit from EU directives and double tax treaties.

Securitisation organisations that continually issue transferable assets for the public must be approved and supervised by the financial sector supervisory authority, the CSSF.

Examples of assets acquired by a securitisation entity:

• Receivables, loans, mortgages, any future cash flow on sale of assets, current accounts

• Bonds, shares, financial instruments, derivatives, currencies, precious metal, etc

• Real Estate, planes, yachts, buildings, land, woods, plantations

• Bank cards, car rentals, commercial, legal or political risks, catastrophe risks

• Intellectual property, royalty income, future cash flow on activities, etc

A Securitisation company can be incorporated in the following forms:

• Public Company Limited by shares (SA or Société Anonyme)

• Private Company Limited by shares (SáRL or Société à Responsabilité Limitée)

• Limited Partnership  (Société en Commandite par Actions)

• Cooperative companies limited by shares (Société Coopérative fonctionnant comme une Société Anonyme)

Following the recent amendments to the Law on 9th February 2022, new corporate forms have become available for the Securtisation Company:

• Special limited partnership (société en commandite spéciale) (“SCSp”)
• Common limited partnership (société en commandite simple) (“SCS”)
• General corporate partnership (société en nom collectif) (“SNC”)
• Simplified joint stock company (société par actions simplifiée) (“SAS”)

A Securitisation Fund can be incorporated:

• as a stand-alone fund, which is a contract of co-ownership between the investors, and

• a management company which has a registered office in Luxembourg.

Both undertakings can be used as a Special Purpose Vehicle (SPV) and can be set up as an umbrella structure, with segregated compartments enabling the same vehicle to be used for different securitisation transactions.

The Law aims to clarify and broaden the way a securitisation undertaking may finance the acquisition of the underlying assets.

First aspect: Modification of the term “securities” by “financial instruments”

The main reason for this change is to avoid any uncertainty as to the type of securities that can be used to finance a securitisation transaction and this would extend the range of instruments that can be issued by the securitisation undertaking (other than securities) such as warrants, future, options, etc...

Second aspect : Possibility to be “fully financed” or “partially financed”

Securitisation undertakings can now be either fully financed or partially financed (in complement to the issuance of financial instruments) by credit facilities. This means that they do no longer need  be supplementary to the issuance of the securities, for either warehousing reasons or for short-term liquidity purposes.

By doing this, the legislator intend to create a broader definition of credit which would consist in any form of debt creating a reimbursement obligation for the securitisation undertaking.

With this amendment, Luxembourg law is aligned with the Securitisation Regulation which already permits financing through credit agreements.

The new amendments to the Law have been designed to offer more legal certainty as regards securitisation undertakings subject to the supervision of the CSSF by incorporating the existing guidance from the CSSF in the Securitisation Law, as follows:

• In agreement with the existing CSSF guidelines, an issuance of financial instruments will be deemed to be made “on a continuous basis” if the securitisation undertaking makes more than 3 issuances of financial instruments to the public within the same financial period. The Law further confirms that the number of issuance should take into consideration all the compartments rather than on a compartment-by- compartment basis.

• An issuance of financial instruments will be considered to be made “to the public”, if all 3 of the following criteria are met:

a) the issuance is not made to professional clients within the meaning of article 1(5) of the law of 5 April 1993 on the financial sector, as amended;

b) the denomination of the financial instruments is less than EUR 100,000 (this amount is aligned to the Prospectus Regulation); and

c) the issuance is not carried out by way of private placement (which must be assessed on a case-by-case basis according to the communication means and the technique used to distribute the financial instruments).

The Law is also clarifying specific accounting rules in regard to the compartments of a securitisation undertaking, it is important to mention that these rules only apply to compartments financed by equity.

For such compartments, and to the extent the constitutive documents contain a relevant provision to that effect, it is possible that the shareholders of the relevant compartment :

a.vote on the approval of the annual accounts of such compartment,

b.decide on the allocation to the legal reserve at the level of the compartment

c.determine the distributions of the profits and reserves without taking into account the whole financial situation of the securitisation undertaking

The aim of this new rule is to provide greater investor protection by separating the accounts of a compartment from the other compartments and also to clarify certain uncertainties that were previously existing on these topics.

Furthermore, should the securitisation undertaking take the form of an SNC, SCS or SCSp, it is now mandatory for the structure to draw up annual accounts and therefore it will not be possible anymore to benefit from available exemptions in that respect.

The law offers statutory protection on a number of standard securitisation issues, for example bankruptcy remoteness, true sale vs synthetic securitisation, ring fencing, non petition and limited recourse on the undertaking assets (receivables etc).

Securitisation undertakings (company or fund) are not regulated by the CSSF unless they issue shares or bonds to the public (less than EUR125,000) on a regular basis (once per civil quarter).

Both conditions are cumulative. This means that issuing securities in the public sphere once does not fall under the supervision of the CSSF.

Likewise, issuing securities to HNWIs, Family Offices, Institutional investors, or under a private placement is not deemed to be in the public sphere.

However, the appointment of an auditor is mandatory.

Luxembourg tax law attempts to achieve a regime of tax neutrality, as a securitisation vehicle should serve as a pass-through entity from the originator to the investors.

A Luxembourg Securitisation Company:

• is subject to normal corporation tax at 29.2%

• is not subject to wealth tax or incorporation duties on capital

• will have all profits realized by the securitisation considered as normal taxable income,

• However, all costs and commitments due to the undertaking shareholders and bondholders (or note holders) will be considered as tax deductible expenses. This means that only the remaining profits of the Luxembourg securitisation company will be considered as a taxable profit in Luxembourg.

Dividends, interest (whether variable or fixed), coupons, options, or any other financial advantages that a third party may receive from the securitisation company will be tax exempt, and will not suffer any withholding taxes in Luxembourg (subject to the EUSD in some cases and subject to ATAD 1).

A Luxembourg Securitisation Fund:

• is considered tax transparent (Fonds Commun de Placement) and is therefore not subject to any taxation in Luxembourg. (The fund is not taxable itself and there is no withholding tax on payment to share or bond holders).

• offers a profit to unitholders in the securitisation fund depending on their percentage of fund ownership.