Securitisation in Luxembourg

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securit i sat ion in l uxembourg



important

notice

This brochure is for informative purposes

only. The information and opinion it con-

tains are not intended to provide tax

and/or legal advice nor to be a substi-

tute for reading Luxembourg legislationand official pronouncements deal-

ing with securitisation. The recipient

must not act on the basis of this publi-

cation without seeking particular

professional advice. In particular, any

information regarding the tax treatment

of investment in Luxembourg securiti-

sation vehicles for foreign tax purposes

should be carefully analysed with tax

advisers of the concerned countries.

ATOZ S.A. can accept no responsibility

for loss to any person acting or refraining

from acting as a result on any material

in this brochure.

July 2009



table of contents

foreWorD 6

about luxembourg 6

about atoZ 6

about securitisation 7

1. securitisation in general 10

1.1. overvieW of the secur itisati on process 10

the originator. 12

the investor 141.2. luxembourg laW on securitisation - general 15

Definition of securitisation 15

securitisation vehicles 15

risks securitiseD 16

financing 16

fiDuciary representative 17

representation of investors anD creDitors 18

representation of the securitisation vehicle 19

2. legal anD regul atory frameWork 21

2.1. securitisation vehicle 21

legal forms, share capital anD legal reserve 21

regulatory oversight 23

accounts anD auDitor 24

language of Documents 25



2.2. legal protection of investors 26

bankruptcy-remoteness of the securitisation vehicle 26

ring-fencing anD limiteD recourse provisions 26

assignment of claims 27

2.3. f iDuciary representative 28

legal forms, share capital anD legal reserve 28

regulatory oversight 28

accounts anD auDitor 29

3. tax aspects 31

3.1. securitisation vehicle 31

income anD net Worth taxes 31

vat 34

other tax aspects 34

3.2. fiDuciary representative 35

income anD net Worth taxes 35

vat 36

other tax aspects 36

4. conclusion 38



6

about luxembourg

The Grand-Duchy of Luxembourg is

a small independent country of about

493.000 inhabitants located in the heart

of Europe. Luxembourg is a founding

member of the European Union and

is the host country of several EU insti-tutions, such as the European Court

of Justice, the European Investment

Bank, the European Investment Fund,

Euratom, the European Communities

Publication ofce and the European

Court of Auditors.

Luxembourg is a constitutional mon-

archy. Members of Luxembourg

parliament are elected every ve years.

The government is in most of the cases

the result of a coalition between the two

most representative political parties.

Over the years, successive Luxem-bourg governments have shown a

constant commitment to the devel-

opment of the nancial activities in

Luxembourg by creating a flexible

and innovative legal framework that

takes into consideration the needs

and expectations of both the local

and more importantly the international

nancial markets. This policy began in

the year 1929 with the creation of the

1929 holding company, and still conti-nues today as best shown by the early

transposition of the Investment Fund

Directives (1985, 2002) into national

law (1988, 2002), as well as by more

recent laws such as the law on SICAR

(2004), Securitization (2004), the

Specialised Investment Fund (2007),

the Private Wealth Management

Companies (SPF, 2007) and nally the

law introducing a partial exemption on

royalty income (2008).

The government’s and the authori-

ties’ exible approach combined with

their willingness to listen to the con-cerns of the nancial sector, as well

as other factors such as a highly

qualied and multilingual workforce,

makes Luxembourg an attractive

international nancial centre that has

reached overall leadership in some

of its segments.

about atoZ

ATOZ is a high-end independent advi-

sory rm offering a comprehensive and

integrated range of tax and nancial

advisory services. Atoz offers a full

range of tax and nancial advisory

services to international and local cli-

ents of various industry sectors through

a highly experienced team of 9 part-

ners and 100 professionals.

ATOZ has been named Luxembourg

‘Tax Firm of the Year’ in 2006, 2007,

2008 and 2009 at the European Tax

Awards organized by International TaxReview.

foreWorD

6



7

ATOZ is a founding member of

TAXAND, the rst independent global

tax alliance. TAXAND was founded in

2005 by a respected, entrepreneurial

group of tax rms with a common vision

for delivering seamless, responsive

service to local and international

clients, and advice that is both the-

oretically sound and practical to

implement. Our network has grownto become a well coordinated world-

wide team of leading experts with

complementary skills and experience

– all working together to full a com-

mon business plan geared to fuelling

our clients’ success by anticipating

and advising on the tax implications

associated with strategic business

decisions. More than three-quarters

of TAXAND’s member rms are listed

in the International Tax Review’s World

Tax Guide, the world’s comprehen-

sive directory of leading tax rms. The

preeminent network of TAXAND has

grown exponentially, and has now over 300 tax partners in 45 countries and

more than 2000 professionals serving

the global marketplace.

about securit isation

Securitisation can be dened as any

nancing process by which an entity

(originator) transfers one or moreassets or risks to a dedicated vehicle

(Securitisation vehicle) in exchange

for cash, as the securitisation vehicle

is nanced by the issuance of securi-

ties backed by the assets (collateral)

transferred and the income generated

by those assets.

Securitisation involves both a process

of integration and differentiation.

• integration : homogeneous,

cash ow producing but illiquid

assets are pooled together

into an investment vehicle (i.e.securitisation).

• dif ferentiation : the cash ows

generated by the pool of assets

are redirected to support

payments to instruments

issued by the securitisation

vehicle to the capital markets.

The instruments issued by

the securitisation vehicle do

not all need to show the same

characteristics. By allocating toeach instrument (or tranche) a

different priority of payment of

interest and principle as well as

a different rate of return, each

instrument (or tranche)

will satisfy the risk-return-

maturity characteristics of a

different investor.

Even after the recent nancial crisis,

skilled securitisation is here to stay as

only securitisation allows to satisfy the

needs of a growing class of sophisti-

cated investors.

7



88

From a Luxembourg point of view, the

Law on securitisation dated March 22nd

2004 created a specic legal and tax

framework for securitisation vehi-

cles. However, even before the law

was enacted, Luxembourg compa-

nies were engaged in securitisation

activities based notably on the law

on transfer of claims and assets to a

nancial institution1

or the law on mort-gage banks2.

The new Luxembourg law has been

designed while relying on local and

international expertise in securitisa-

tion. The main aspects of the law can

be summarized as follows :

• flexibi lity ;

• investor protection ;

• tax neutrality.

Consequently, this new law provides

a response to the market’s needs and

has begun to feature prominently inthe European securitisation market.

1 Law dated July 27th, 2003 replacing the law dated

July 19th, 1983.

2 Law dated November 21st, 1997.



10

1.1. overvieW of the

securit isation process

A securitisation transaction com-

monly involves the following part ies :

• An entity called the originator ,

that either sells assets to asecuritisation vehicle as a true

sale or that transfers the risk

to a securitisation vehicle (in

particular through a synthetic

transaction3);

• Investor subscribes for equity

and/or debt securities, which

are issued by the securitisation

vehicle as a private placement

or a public offering;

• A servicing entity (often the

originator) is, in most cases,

entrusted with the collection of

income streams;

• One or more fiduciary representatives may be

appointed to safeguard the

investors’ interest;

• Rating Agencies confer a

rating to the securities issued

by the securitisation vehicle.

Cash ows generated by the assets/

risks transferred to the securitisation

vehicle, are redirected to support

payments to the investors.

1. securitisation

in general



3 Synthetic securitisation may be dened as a

securitisation whose originator does not transfer

the assets . The securitisation vehicle assumes the

economic rights and risks relating to the underlying

assets by means of a package of agreements with

the originator and other parties.

11

Parties involved

SECURITISATION

VEHICLE

investors

assets / risks

originator

3. Return / yield

4. Repayment

of principal

3. Income

fiDuciary

representative1. Investment

assets / risks

2. Transfer of underlying

2. Purchaseprice

4. Salesproceeds

rating

agency

Risk valued

Rating conferred

auDitor



12

the origi nator

The advantages for an originator may

be summarised as follows :

• “Off-balance sheet” treatment

of existing assets

As long as the

securitisation transaction

is structured properly, the

initial cash and proceeds

of the transaction are

added to the originator’s

assets while the assets

transferred are taken off

the originator’s balance

sheet. As a result, the

originator disposes of

liquid assets, which may

be used to nance further

investments, or to repay

debt, without having takenon further debt or having

increased shareholder’s

equity. Off-balance sheet

treatment of existing

assets is of course only an

advantage to the originator

if further debt would not be

well accepted by existing

creditors, rating agencies

or regulators.

• Improved rating and lowered

financing costs

A properly structured

securitisation transaction

will result in the isolation of

the securitised assets from

the originator's c reditors.

The separation of good quality

assets from the originator's

business will most likely lead

to a better rating of the debt

instruments issued by the

securitisation vehicle, as

compared to the general ratingof the originator.

The reason for this is that

the rating of the instruments


vehicle is not influenced by any

extrinsic factors relating to the

originator, but depends solely

on the quality of the securitised

assets that were transferred.

Further credit enhancement

methods are of ten used :

over collateralisation, excess

spreads, reserve funds, letters

of credit ...

A higher-rated debt instrument

commands lower interest

rates and is thus cheaper to

nance. This lower cost of

nancing may be facilitated

by the originator retaining the

most junior class of instruments


vehicle. The residual interest

or equity generally bears most,

but not all, the risk involved inthe transaction, and is often



referred to as the rst loss

piece. In return, the residual

interest will be granted the

right to all excess cash ow

generated by the securitisation

vehicle.

It is worth pointing out that the

advantages of a securitisation

diminish to the extent that the

originator’s rating improves.

Indeed a high rating at the

level of the originator may

allow access to cheaper

funding via other means.

• Diversified sources of funding

As already mentioned, the

instruments issued by the

securitisation vehicle can

be tailored in order to meet

the risk-return-maturity

characteristics of different

investors. Thus, securitisationcan allow the originator to

attract investors who would

otherwise not invest money

with the originator.

• Lower capital requirements

for banks and insurance

companies

In order to limit the risk

of bankruptcy, regulatory

authorities require banks

and insurance companies

to hold capital, the amount

of which depends upon

the nature and size of the

risks assumed by the bank

or insurance company. By

removing securitisable assets

(and thus the risks associated

with such assets) from the

institution’s balance sheet,

regulatory capital is released,

which can then be deployed for

other purposes or returned to

shareholders.

13



14

the investor

The advantage to an investor lies in

the issuance of instruments with dif-

ferent characteristics. This process

of issuing debt with different char-

acteristics (or “tranching”) allows a

securitisation vehicle to tailor the risk

return and maturity characteristics of

the instruments, so as to best meet

the different investment strategies of

investors.

For instance, in order to concentrate

risk in a limited number of tranches, the

securitisation vehicle may issue two or

more classes of instruments and would

specify that losses in the underlying

portfolio of assets would rst be allo-

cated to the most subordinated class

of instruments. Senior tranches would

only be affected by losses once the

principal of the subordinated classesor tranches had been fully used up.

The credit risk is thus borne to a large

extent by the junior classes of securi-

ties issued. In return, the junior classes

would attract a higher yield. The result

is the creation of multiple securities

with different credit ratings that reect

the likelihood of receiving return and

principal on a timely basis.

The credit risk may be further reduced

for senior tranches by specifying that

it has priority of payment of inter-

est and principal over subordinated

classes. This implies that rst the sen-

ior tranches are fully paid back before

junior classes are reimbursed or even

receive payment of interest. As a result,

the senior classes have a shorter matu-

rity and thus a lower risk. The class of

the most junior ranked debt is the rst

class to face a possible default, and is

thus called the rst loss piece.

While it is important to note that the

quality of the underlying asset poolmainly drives the credit rating, the loss

protection, priority of payment granted

to senior classes as well as other credit

enhancement techniques, allows the

securitisation vehicle to issue securi-

ties with ratings ranging from AAA to

unrated. The different ratings are then

reected by the different returns on

each class of instruments.

Certain structures feature a pre-deter-

mined revolving period, during which

only interest payments are made to the

investors. Any other funds received

by the securitisation vehicle are rein-

vested in further assets which are

added to the asset pool. After the

completion of the revolving period,

the principal is returned to the

investors either over a defined

period of time or in a single payment.

These structures have the ability to

create securities with long average

lives that are backed by assets with

a short maturity (credit cards, tradereceivables etc).



15

1.2. luxembourg laW on

securit isation - general

Definit ion of

securit isation

The Luxembourg law dated March

22nd, 2004 defines securitisation

as an operation by which a securiti-

sation vehicle acquires or assumes

risks either directly or through another

entity . The risks incurred are the risks

attached to claims, other assets or

commitments that were assumed by

third parties or that are inherent to all

or part of the activities undertaken by

third parties.

The securitisation vehicle in turn

issues transferable securities whose

value or yield reflects these risks.

securit isation vehicles

The law denes securitisation vehi-

cles as

• vehicles which carry out

securitisation in full, or

• vehicles which participate in

securitisation transactions by

either assuming all or part of the

securitised risks - acquisition

vehicles, or by issuing securities

in order to ensure their nancing

- issuing vehicles

and whose articles of incorporation,

management regulations or issu-

ance documents provide that they are

subject to the provisions of the secu-

ritisation law.

This implies that the law equally

applies to acquisition entities that

limit their activity to acquiring risks or

assets to be securitised as well as to

issuing entities that specialise in issu-

ing transferable securities to cover the

nancing of securitisation transactions.

In order to fall within the provisions

of the present law, a securitisation

vehicle does not need to perform both

the acquisition function as well as the

issuing function.

This allows for a exible approach

when interacting with other local or

foreign securitisation vehicles.



16

Furthermore, the law does not require

all existing securitisation vehicles to

comply with the new law. Indeed,

securitisation vehicles, which had

been set up prior to the law dated

March 22nd, 2004, do not neces-

sarily need to be transformed in

order to fall within the scope of the

securitisation law. The law merely

provides for an opt in provision,

meaning that existing vehicles may

still be used without any change.

risks securit iseD

Luxembourg law allows for the securiti-

sation of “risks relating to the ownership

of all assets, whether movable or

immovable, tangible or intangible, as

well as risks resulting from commitments

that were assumed by third parties or

that are inherent to all or part of the

activities undertaken by third parties”.

The securitisation vehicle may take

on risk either by acquiring assets, guar-

anteeing commitments or by any other

manner . Thus, securitisation can be

accomplished either by transferring

the ownership of the underlying assets

(“true sale”), or by transferring risks

associated with assets only (“synthetic

securitisation”4).

In the latter case, the Luxembourg

law specically provides that secu-

ritisation transactions cannot be

recast as insurance transactions for

legal or Luxembourg tax purposes.

Future claims originating from

present or future contracts may also

be assigned to a securitisation vehi-

cle, provided that the claim may be

sufciently identied at the time of

the sale or at any other agreed upon

moment in time.

As a consequence, virtually all assets

of ascertainable value or generating

predictable cash ows can be securi-

tised such as :

• Trade receivables, mor tgage

loans, or credit card

receivables;

• Tangible (e.g. real estate),

intangible assets (e.g. airplane

leases, film rights);

• Whole or partial business

activities (i.e. risks linked to a

business activity).

The risks thus securitised may however

not be generated by the securitisation

vehicle itself, acting as an enterprise,

but may only result from asset claims

or obligations that were originally as-

sured by third parties or result from the

activities of third parties.

FINANCING

The assumption of risk must be

financed through the issuance of

securities.



Securities within the meaning of the

law are dened as nancial instruments

that are likely to be traded on a mar-

ket and which are freely transferable

(i.e. not subject to specic formalities

which would make them comparable

to a contract assignment).

Securities that are subject to foreign

law and recognised by the applicable

laws as transferable securities will be

considered appropriate for the pur-

pose of the present securitization law.

fiDuciary representative

In order to further improve the efciency

and the legal security of the securitisa-

tion transaction, the Luxembourg law

created a new category of regulated

“professional of the nancial sector”, the

duciary representative, whose role and

functions can be compared to those of

a trustee in Anglo-Saxon jurisdictions.

The fiduciary representative can

be either a foreign entity 5 or a

Luxembourg corporation. Luxembourg

law only applies to duciary represent-

atives that have their statutory seat in

Luxembourg.

The framework for duciary represent-

atives is based on two main pillars :

• The fiduciary representative

is subject to authorisation and

control of the Luxembourg

regulatory authority.

• The legal foundation for the

activities of the fiduciary

representative is based on

legal instruments that already

exist and are used under

Luxembourg legislation, i.e.

the agency agreement and the

fiduciary agreement;

17

4 In a synthetic transaction, the originator does not

transfer the assets off its books. The transfer of the

risk is realised through the use of a credit derivative

such as credit default swap, total return swap or

credit-linked notes.

5 Luxembourg has ratied The Hague Convention

on the Law applicable to Truts and on their

Recognition, by a law dated July 27th, 2003.

As a result, foreign trusts are recognized under

Luxembourg law.



18

The duciary representative may be

included in the securitisation struc-

ture at the initiative of the investors

and creditors or pursuant to the

articles of incorporation or manage-

ment regulations of the securitisation

vehicle itself.

representation of

investors anD creDitors

The law provides for two types of

representation, which in practice will

have similar effects in Luxembourg,

but may be treated differently in the

country of residence of the investors

and creditors.

• Agency representation

In this case the fiduciary

representative acts as agent

on behalf of the investors and/

or creditors who have chosen

to be represented by him. The

legal entitlement to the rights

entrusted to the representative

remain with the investors and/

or creditors.

Nevertheless, the fiduciary

representative may represent

the investors and/or creditors

in court, without being required

to disclose its principals’

identity. Furthermore no

investor or creditor can

exercise his rights individually,

if they have entrusted the

defense of their rights to a

fiduciary representative.

• Fiduciary representation

In this case the investors

and creditors transfer the

entitlement to their rights to

the fiduciary representative,

in accordance with the

Luxembourg law on trusts and

fiduciary contracts.

The fiduciary representative

exercises these rights for

an agreed period of time

after which the rights and

any income generated are

transferred back. The risk and

the benefit of ownership or of

entitlement to the rights thus

remains with the investors and

creditors.

The fiduciary representative

acts in its own name and on its

own behalf, but in the interest

of the investors and creditors.

In particular, the fiduciary

representative is entitled to

accept, hold and exercise all

guarantees and receive all

payments due to the investors.



representation of the

securit isation vehicle

The law allows for the securitisation

vehicle to assign to the duciary rep-

resentative all or part of its rights and

actions arising from a contract entered

into with a third party. The assignment

is effective against the other party to

the contract and towards all other third

parties, as from the date it has been

put in place.

This should enable a duciary repre-

sentative to ensure that the agreements

concluded by the securitisation vehicle

are managed to the best interest of the

investors and creditors.

The duciary representative can del-

egate to a third party the exercise of

rights and actions assigned to it by

the securitisation vehicle. The du-

ciary representative cannot be held

liable for damages caused by the third

party unless the representative was

not authorized to delegate or the agent

chosen was notoriously incapable or

insolvent.

19



21

2.1. securitisation vehicle

legal forms, share

capital anD legal reserve

The law distinguishes between securi-

tisation vehicles that have either been

set up under the form of a corporation

(“securitisation company”) or under the

form of a fund (“securitisation fund”)

run by a management company.

• The securitisation company

must be set up under one of

the following legal forms :

- A public limited company

(“société anonyme” );

- A partnership limited by shares

(“société en commandite par

action” );

- A private limited company (“société

à responsabilité limitée” ) ;

- A cooperative company

organised as a public limited

company (“société coopérativeorganisée comme société

anonyme” ).

The articles of incorporation

of these companies may allow

the board of directors to create

one or more compartments

each corresponding to

a segregated part of the

company’s asset portfolio.

A securitisation company is not

subject to a specific minimum

share capital. As a result,

the minimum share capital

depends upon the legal form

and ranges between EUR

12.500 and EUR 31.000.

In accordance with

Luxembourg commercial

company law, the corporate

securitisation vehicle is

required to allocate each year

5% of its profits to the creation

of a reserve (legal reserve)until the reserve has reached

an amount equal to 10% of the

share capital.

• A securitisation fund can

choose to be governed by

the legal regime of fiduciary

contract (“fiducie”) or

co-ownership (“copropriété”).

In both cases, the

securitisation fund would

have no legal personality.

This implies that it must be

managed by a management

company.

2. legal anD

regulatory

frameWork



22

A securitisation fund created

under the legal regime of a

fiduciary contract is governedby the law on trusts and

fiduciary contracts6.

In accordance with the

provision of this law, the

compartments of the fund

would consist of fiduciary

pool(s) of assets (“patrimoine

fiduciaire”) independent from

other compartments and from

the assets of the investors.

Under this regime, the

management company will be

the legal owner of the assets

(analogous to a trustee),

whereas the investors

(analogous to beneficiaries of

a trust) will have contractual

rights in respect of the assets

and income of the fund.

A securitisation fund created

under the legal regime of

co-ownership is governed by

the general provisions of the

Luxembourg Civil Code. Under

this regime, the investorswould have a direct ownership

in the assets of the fund and

the role of the management

company would be limited

to the mere management of

the assets. The management

company would have no legal

right to the assets under

management. In accordance

with the law of 2004, the

management company is

authorised to create distinct

compartments, that are

independent from one-

another.

Under both regimes, the

management company is a

commercial company (i.e.

must be set up under one of

the legal forms set forth by

article 2 of the law dated 10

august 1915 : S.A., S.à r.l.,

S.C.A., etc), and may manage

more than one fund. This

latter provision may providefor economies of scale,

since the same management

company may incorporate

multiple securitisation funds

each having the form of a

multi-compartment fund,

providing for different asset

types, segregation of assets

and accounting records.

A securitisation fund is not

subject to any requirements

in terms of minimum share

capital and legal reserve.

However, the management

company must meet the

minimum capital requirement

in accordance with the

company form chosen. The

required capital thus ranges

between EUR 12.500 and

EUR 31.000, depending on

the legal form chosen.



Both a securitization fund and a secu-

ritization company may create distinct

compartments as long as such com-partments are foreseen in the articles

of incorporation or in the manage-

ment rules.

A distinct part of the assets and liabili-

ties of a securitization vehicle is then

allocated to a compartment. Each

compartment is treated as a separate

entity from an investor but also from a

creditor’s point of view.

regulatory oversight

Only securitisation vehicles engaged

in the continuous issuance of secu-

rities to the public are subject to

prior authorisation and regulation7

of the CSSF.

The term “continuous issuance” is not

explicitly dened in the Luxembourg

securitisation law, neither do related

Luxembourg laws nor European

Directives provide any clear denition8

.

However the CSSF has indicated that

it would assume that securities are

issued on a continuous basis, where

more than three issues per year were

made to the public. In this context, the

CSSF made clear that it would asses

each issue on a case by case basis in

order to determine whether or not such

an issue is considered to be placed

with the public or not. Criteria used to

asses would include the areas of com-

munication as well as the technique

used to distribute the said securities.

Nevertheless, issues to professional

clients as well as issues whose denom-

inations are equal or exceed EURO

125.000 would be assessed to have

not been placed with the public.

23

6 Luxembourg law dated 27 July 2003 on trusts and

duciary contracts.

7 In practice, the CSSF accepts to review

applications before the incorporation of the

securitisation vehicle.

8 Directive 2003/71/EC on the prospectus to

be published when securities are offered to

the public or admitted to trading and amending

Directive 2001/34/EC denes “securities issued in

a continuous or repeated manner” as “issues on

tap or at least two separate issues of secur ities

of a similar type and/or class over a per iod of 12

months”.



24

Consequently, Luxembourg securitisa-

tion entities are subject to authorisation

if the following conditions are metsimultaneously :

• The vehicle issues securities

to the public; and

• The vehicle issues securities

on a continuous basis;

In all other cases, the entity is non-

regulated.

Thus, a one-off issuance of securities

(even in several tranches) to the pub-

lic as well as the continuous issuance

of securities through a private place-

ment may be carried out without prior

approval of the CSSF.

The authorisation of a securitisation

vehicle by the CSSF is subject to

the following being reviewed and/or

approved by the CSSF :

• The incorporation documents

of the vehicle (i.e. articles of

incorporation for corporate vehicleand management regulations

and articles of incorporation of

the management company for a

securitisation fund) ;

• The directors and key

shareholders of the company

(the management company in

case of a securitisation fund).

Moreover, the company (management

company in the case of a securitisation

fund) must demonstrate that it is suitably

organised and nancially sound so as

to be in position to full its obligations.

A regulated securitisation vehicle

must appoint a custodian bank that

has its legal seat in Luxembourg or

is a Luxembourg branch of a foreign

bank. The custodian bank will be

responsible for the custody of liquid

assets and of transferable securities

of the vehicle.

Finally, regulated vehicles are not subject

to specic publication requirements.

accounts anD auDitor

The annual accounts of a corporate

securitisation vehicle must be pre-

pared in accordance with the generally

accepted accounting principles as

provided by Luxembourg commercial

company law. Securitization vehicles

can however prepare their accounts

based on the International Financial

Reporting Standards (“IFRS”) upon

request to the CSSF. Securitisation

vehicles that are listed in accordancewith Directive 1606/2002 are obliged to

apply the IFRS. Annual accounts of a

securitisation fund are subject to simi-

lar accounting rules9 to those provided

for an investment fund (FCP10).

The annual accounts must be led

with the commercial register in



25

Luxembourg, in accordance with

the normal commercial company law

provisions.

The accounts of all securitisation

vehicles are audited by one or more

independent auditors designated by

the Board of the securitisation com-

pany, or by the management company

in case of a securitisation fund. For

a regulated vehicle, the auditor must

be authorised by the CSSF. The audi-

tor’s report and any qualication must

be reproduced in full in each annual

report.

The auditor must report to the man-

agers of the vehicle and, in thecase of a regulated vehicle, also

to the CSSF, any irregularities and

errors of which he has become aware

while carrying out the audit.

Unlike a normal Luxembourg company,

the corporate securitisation vehicle

is not required to appoint a statutory

auditor (commissaire aux comptes),

but must appoint an independent

auditor (réviseur d’entreprises).

language of Documents

English worded agreements and

related documents of a securitisation

transaction do not need to be trans-

lated into an official language (i.e.

French, German or Luxembourgish)

before being ofcially registered.

9 Law dated December 20th, 2002.

10 FCP = Fonds Commun de Placement, an

unincorporated co- ownership similar to the unit

trust in the UK or to the mutual funds in the US.



26

2.2. legal protection of

investors

Luxembourg law does not provide for

any specic limitations as to who is

authorised to invest in a securitisa-

tion vehicle. As a result, the vehicle

is open to all kind of investors and the

law provides for several investor pro-

tection mechanisms.

bankruptcy-remoteness

of the securit isation

vehicle

The law provides a high level of pro-

tection against the bankruptcy of all

parties involved in a securitisation

transaction.

In the case of a bankruptcy of the

originator, favourable rules in relation

to the transfer of legal ownership

of assets, make it difcult for the liq-

uidators to recover assets that werepreviously sold to the securitisation

vehicle. The transfer of ownership

to the securitisation vehicle is main-

tained even in the presence of a

commitment by the securitisation

vehicle to retransfer the assets to

the originator in the future (such pro-

visions are common in instances of

over-collateralization).

In the case of a bankruptcy of a

servicer to whom the securitisation

vehicle has delegated the recovery

of assets, the law conrms that the

securitisation vehicle has the right toreceive full payment, before the liq-

uidation proceedings of the servicer

are opened.

NON-PETITION CLAUSES

The law provides that the incorpo-ration documents may comprise

clauses, whereby investors and/or

creditors waive their rights to initi-

ate a bankruptcy proceeding against

the securitisation vehicle. The law

expressly conrms the validity and

enforceability of these provisions,

and consequently enhances the

securitisation vehicle’s protection.

ring-fencing anD

limiteD recourse

provisions

The law provides for a segregation

between the assets of the secu-

ritisation vehicle and those of the

investors. As a result, the obliga-

tions of the investors due to the

bankruptcy of the securitisation

vehicle cannot exceed the amount of



their investment in the securitisation

vehicle.

Moreover, the investors and creditors

(pro-rata to their shareholding/inter-

est) are granted a preferential right

to the securitised assets. However,

the law species that investors and

creditors may be limited in their

recourse to the assets of the secu-

ritisation vehicle. In cases where the

securitised assets were organised

into different classes/compartments,

the investors and creditors are lim-

ited in their recourse to the assets

allocated to the different classes/

compartments in which they invested.

The result of these provisions is the

following :

• As the assets of a given

compartment are exclusively

available to satisfy the claims

of the investors that invested in

that compartment or to satisfy

creditors whose claims relate

to this particular compartment,

a single entity may in effectbe used as a multi-issuing

vehicle, where one vehicle

may be used to host multiple

securitisation transactions.

• In the same vein, the law allows

the use of tracking securities

in the case of a securitisation

company. These tracking

securities or tranches may be

backed by specic collateral and

provide for different risk, yield

and maturities.

The law confirms that subordina-

tion clauses may be used, wherebyinvestors and creditors accept to sub-

ordinate the maturity or the collection

of their rights, to the payment of other

classes of investors and creditors and

to refrain from seizing the assets of

the undertaking. This provision is

crucial to the tranching of a securiti-

sation transaction.

assignment of claims

The assignment of claims to or

from the securitisation vehicle is

enforceable towards any other party.

This provision applies also in the

case of a liquidation (even partial

liquidation, i.e. liquidation of a com-

partment), bankruptcy and any other

situation of aggregation of claims.

The sale of a future claim becomes

enforceable towards third parties from

the moment the agreement was made

between the parties. This means that,

in case the assignor les for bank-ruptcy, claims that have been assigned

before the bankruptcy are excluded

from the liquidation assets.

The assignment of the claim becomes

legally valid and enforceable towards

third parties by the mere signa-

ture of the assignment, without any

27



28

notication formalities and irrespective

of any provision that this claim may

be repurchased at a later date. Theassigned debtor is validly discharged

from its payment obligations by pay-

ment to the assignor as long as it has

not become aware of the assignement

Nevertheless, in accordance with

International guidelines11, the law

of the country of the assignor (i.e.

the originator in our case) governs

the enforceability of the sale of the

claim towards the debtor, the rela-

tionship between the assignee and

the debtor as well as the discharging

effect of the debtor’s payment. This is

therefore a point of international lawthat must be analysed on a case by

case basis.

2.3. f iDuciary

representative

legal forms, share

capital anD legal

reserve

The exercise of the functions of du-

ciary representative is restricted to

corporations with a share capital and

equity of at least EUR 400.000. As

a result, the fiduciary representa-

tive should take either the form of :

• A public limited company(“société anonyme”); or

• A partnership limited by shares

(“société en commandite par

action”); or

• A private limited company

(“société à responsabilité

limitée”) ;

Furthermore, the fiduciary repre-

sentative is required to allocate each

year 5% of its prots to the creationof a reserve (legal reserve) until the

reserve has reached an amount equal

to 10% of the share capital.

regulatory oversight

A duciary representative is a profes -

sional of the nancial sector who must

be authorised by the relevant Minister

with responsibility for the CSSF.

The authorization by the CSSF

requires the disclosure of the iden-tity of all shareholders and associates

that have a qualifying sharehold-

ing12 in the duciary representative.

These shareholders, together with

the directors of the duciary repre-

sentative, are required to evidence

their good professional reputation.

Moreover, the persons in charge of the



29

management of the duciary repre-

sentative should demonstrate their

professional experience.

The fiduciary representative may

not conduct any activities outside its

core business except activities that

are accessory and ancillary thereto.

accounts anD auDitor

The annual accounts of a duciary

representative must be prepared

in accordance with the generally

accepted accounting principles as pro-

vided by the Luxembourg commercialcompany law.

As for all Luxembourg professionals

of the nancial sector, the duciary

representative is required to have its

annual accounts reviewed by an inde-

pendent auditor 13.

11 Article 22 of the UN Convention on the

Assignment of Receivables in International

Trade, dated December 12th, 2001 and signed by

Luxembourg on June 12th, 2002.

12 A qualifying participation is to be understood

as a participation, direct or indirect, representing

at least 10% of the share capital or voting rights,

or which generates a material inuence on the

management of the duciary representative.

13 Article 22 of the amended law dated April 5th, 1993.



31

3. tax aspects

The tax treatment of the securiti-

sation vehicle depends upon thelegal form under which it has been

established. A corporate securi-

tisation vehicle is subject to the

general provisions of Luxembourg

corporate income tax law, with some

exceptions set forth by the securiti-

sation law. Securitisation funds are

subject to the tax regime provided

by Luxembourg legislation for a

Luxembourg FCP14.

3.1. securitisation vehicle

income anD net Worth

taxes

SECURITISATION COMPANY

Corporate securitisation vehicles

are subject to tax in Luxembourg

at the standard corporate tax rate

(i.e. aggregate rate of 28,59% in the

Luxembourg commune). In practice

however, as most of their income is

immediately repaid to investors the

taxable profit is likely to be closeto nil.

The law provides that any commitment

(interest or dividends) to investors is

considered as a deductible expense.

A commitment to the shareholders

is considered to have been made as

soon as the “dividend” distribution14 Law dated December 20th, 2002.



32

has been decided by a general share-

holder meeting15. Dividends paid by a

securitisation company are requaliedin Luxembourg as interest for scal

purposes.

This has the following consequences :

• Distributions of income to

investors are fully deductible

from the tax base of the

securitisation company;

• Distributions of income to

investors are not subject

to Luxembourg dividend

withholding tax.

Notwithstanding the requalication,a dividend payment will not be sub-

ject to withholding tax in accordance

with the application of the provisions

of the EU Savings Directive16 as this

income is not covered by the denition

of interest as provided by article 4 of

the said Directive.

Due to the fact that the company is

fully subject to tax, it should be enti-

tled to benefit from the double taxtreaties concluded by Luxembourg.

To this effect, Luxembourg tax authori-

ties will issue Luxembourg residence

certicates.

This can be of importance :

• firstl y, in reducing or

eliminating any withholding

taxes in the jurisdiction where

the originator or debtor is

located. This can be the

case where an element of

the securitisation transaction

is treated as a financingtransaction and the related

interest potentially subject to

withholding tax.

• secondly, in reducing or

eliminating the risk that

the vehicle is deemed to

have a taxable presence or

‘permanent establishment’ in

another jurisdiction by virtue,

for example, of the servicing

activities carried out on thevehicle’s behalf.

A securitisation company is not sub-

ject to any debt-to-equity ratio. It is

therefore able to issue securities in

any form it wishes.

Finally, a securitisation company is

exempt from net worth tax.

SECURITISATION FUND AND

MANAGEMENT COMPANY

As for the FCP, it is commonly

admitted that the securitisationfund should be considered as tax

transparent entity17. As a result, its

investors and creditors are subject

to a similar tax treatment as if they

would invest directly in the underly-

ing assets.



The regime could be summarised as

follows :

• Withholding tax, if any, on

income from underlying

assets should be reduced in

accordance with the double tax

treaty between the country of

the debtor of the income and

the country of residence of

each investor;

• The securitisation fund is not

subject to corporate income

tax, municipal business tax

and net worth tax;

• There is no withholding tax

on distributions made by a

securitisation fund;• Double taxation at the level

of the investor will be avoided

under its own domestic tax

law or in accordance with the

double tax treaty between its

country of residence and the

country of residence of the

debtor of the underlying income;

The management company should be

considered as a corporation subject to

tax in Luxembourg. As a result, it willbe subject to Luxembourg corporate

income tax and to municipal business

tax on its worldwide prots. The nomi-

nal rate of these taxes is 21.84% for

corporate income tax (including a 4%

employment surcharge) and 6,75%

for the municipal business tax (City

of Luxembourg) so that the effec-

tive rate of tax on prots amounts to

28.59%. These rates apply to all kinds

of income18.

The management company will also

be subject to an annual net worth tax

(“NWT”) at the rate of 0.5%. This taxis levied annually on the adjusted

net asset value of the company as at

January 1st of the tax year. Broadly

speaking, the taxable base is the dif-

ference between the total assets of the

company and its third party liabilities19.

15 As a result, the income distributed would be

deductible for Luxembourg income tax purposes

during the tax year during which the decision is

taken by the securitisation vehicle to distribute

prots to its shareholders at any moment in the

future. Any prot carried forward could be subject

to tax.

16 Council Directive 2003/48/EC of June 3rd, on

taxation of savings income in the for m of interest

payments.

17The point is not entirely clear as some autho rs

consider that the securitisation fund is to be

considered as a pool of assets gathered into a

“patrimoine d’affectation”. In such a case, the tax

status would be the same as for a secur itisation

company.

18 The management company of a fund created

under the law on duciary contracts will not

be deemed to be owner of assets under its

management for tax purposes. This implies that

income from the funds would not b e taxed at its

level.

19 Please note that it is in principle possible for

the company to reduce its net worth tax liability,

provided it constitutes a reserve to be kept in its

accounts for ve years. The reduction of the net

worth tax amounts to one fth of the constituted

reserve but may not exceed the corporate income

tax due for the period for which the reduction is

requested.

33



34

vat

The securitisation law provides that

the management of securitisation vehi-

cles located in Luxembourg is exempt

from VAT.

A key element to the application of

this exemption is the term “manage-

ment”. The commentaries to the Law

indicate that the objective is to ensure

that management services towards a

securitisation vehicle are treated in

a similar way as to the management

services to undertakings for collective

investment (“UCI”).

The administrative practice applicable

to the management of UCI is relevant

for determining the VAT treatment of

services rendered to a securitisation

vehicle. As a result, the day-to-day

management of securitisation vehi-

cles is exempt.

The following points are nevertheless

worth pointing out:

• Sub-contracted management

services can only be exempt if

certain condition are met;

• Even if the management

services are exempt from VAT,

securitisation vehicles are in

principle considered as taxable

persons for VAT purposes. This

VAT status determines the place

of supply (place of taxation) of

certain services rendered to a

securitisation vehicle.

• In practice, most of the services

rendered to securitisation

vehicles will be deemed tobe taxable in Luxembourg

where they either benet from

a VAT exemption or from the

application of Luxembourg VAT

at the lowest rate possible (15%).

• Securitisation vehicles often

must register for VAT purposes

but cannot deduct input VAT.

other tax aspects

Other tax aspects of a securitisation

vehicle (corporate or fund) include :

• The securitisation fund is

not subject to an annual

subscription tax;

• Agreements or deeds relating

to securitisation transactions

need not be registered in

Luxembourg. However,

registration is required for the

transfer of any right pertaining

to real estate situated in

Luxembourg as well as aircraftor vessels registered in the

Luxembourg shipping register.

In case of voluntary registration,

a at rate registration duty of

EUR 12 is due.

• An annual registration tax of

EUR 2.650 is due to the CSSF

for regulated securitisation



35

vehicles20. This amount is

increased to EUR 5.000 per

year for vehicles with multiplecompartments.

3.2. f iDuciary

representative

income anD net Worth

taxes

A Luxembourg fiduciary repre-

sentative is subject to Luxembourg

corporate income tax and to munici-

pal business tax on its worldwideincome. The nominal rate of these

taxes is 21.84% for corporate income

tax (including the 4% employment sur-

charge) and 6.75% for the municipal

business tax (City of Luxembourg). As

a result, the effective rate of tax on

prots is 28.59%. These rates apply

to all kinds of income.

The taxable income of a Luxembourg

fiduciary representative is based

on the annual nancial statementsprepared in accordance with the

Luxembourg generally accepted

accounting principles.

The Luxembourg duciary representa-

tive will also be subject to an annual

net worth tax (“NWT”) at the rate of

0.5%. This tax is levied annually on

the adjusted net asset value of the

company as at January 1st of the tax

year. Broadly speaking, the taxable

base is the difference between the

total assets and third party liabilities

of the company21.

20 Grand Ducal Decree dated July 14th, 2004

(Mem. A 127).

21 It is possible for the duciar y representative to

reduce its net worth tax liabilit y, provided it consti-

tutes a reserve to be kept in its accounts for ve

years. The reduction of the net worth tax amounts

to one fth of the constituted reser ve but may not

exceed the corporate income tax due for the period

for which the reduction is requested.



36

vat

In cases where the duciary repre -

sentative acts in an independent way

towards the investors or towards the

securitization vehicle and receives

a consideration for the services it

renders, the duciary representative

should be considered as a taxable per-

son for VAT purposes.

Depending on the terms of the agree-

ment between the parties, the services

rendered by the duciary representa-

tive may benet from a VAT exemption

or be subject to Luxembourg VAT. As a result, the duciary represent-

ative may have to register for VAT

purposes and to file VAT returns.

other tax aspects

Other tax issues for a duciary repre-

sentative include :

• An annual registration tax of

EUR 1.000 is due to the CSSF

by a fiduciary representative22.

22 Please see Grand Ducal Decree dated February

23rd, 2008 (Mem. A 27).



38

The law on securitisation has allowed

Luxembourg to establish itself as a key

jurisdiction for securitisation transac-

tions.

Luxembourg legislators have created

a tailored framework for securiti-

sation transactions. They have done

this by drawing upon current prac-

tice in Luxembourg, the most recent

foreign legislation, as well as the expe-

rience of practitioners in the eld of

structured nance.

As a result, the law represents a

well-balanced compromise between

exibility of the securitisation vehicleon the one hand and investor pro-

tection on the other hand, whilst at

the same time providing a tax neutral

environment.

These features mean the Luxembourg

law closely ts to the needs of the mar -

ket in terms of securitisation. It is worth

noting that the rst regulated securi-

tisation vehicles have been launched

only few months after the entry into

force of the law, and that the law has

attracted a great deal of attention not

only in Luxembourg, but also on inter-

national nancial markets.

4. conclusion

Securitisation in Luxembourg

Documents

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