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Why Luxembourg securitization is the best in Europe

by | Sep 15, 2022 | Corporate Structuring

Luxembourg securitization

What is Securitisation? 

Securitisation is the method of taking assets that deliver a revenue stream, along with their attributed risks, packaging them in a special purpose vehicle (SPV), and then selling securities in the SPV to interested investors who earn dividends/interest and repayment of the principal amount on an agreed date. 

Securitisation is often used to monetize illiquid assets, lower funding costs or repackage financial assets, and to adjust risk. 

You may read our Damalion guide about Luxembourg securitization.

The bill modernising the Luxembourg Securitisation Law 

Over the past years, the Luxembourg law dated 22 March 2004 on securitisation (the “Securitisation Law”) has validated a successful framework for a wide variety of securitisation, repackaging, and financing transactions. 

It has established a reliable and investor-friendly legal and tax framework for securitisation transactions carried out by Luxembourg SVs promoting a high degree of flexibility. 

On 9 February 2022, The Luxembourg Parliament (Chambre des Députés) passed a new bill modifying the Securitisation Law. 

The primary takeaways from the new Bill are summarised in the following paragraphs: 

  • Financing the Securitisation Vehicle (SV): The financing of a transaction is no longer restricted to securities but is open to any financial instrument, as long as the repayable amount depends on the securitised risks. The purpose of this is to put the Securitisation Law in line with the European Securitisation Regulation, which doesn’t require financing solely in the form of securities. 
  • Certain accounting issues related to the compartments have been solved: The Securitisation Law allows multi-compartments SVs that are financed by equity, to authorize the balance sheet and the profit and loss statement of each compartment by virtue of the votes of such compartment’s shareholders only, given that such option is included in their articles of association. Also, the articles of association of an SV may provide that profits, distributable reserves, and mandatory legal reserves of a compartment, are specified on a separate basis and without reference to the financial situation of the SV in general. 
  • New legal forms for SVs: Catching up with the growths in the Luxembourg companies law, the new Securitisation Law introduces additional corporate structures available for the SVs: unlimited companies (sociétés en nom collectif) (SENC), common limited partnerships (sociétés en commandite simple) (SCS), special limited partnerships (sociétés en commandite spéciale)(SCSp) and simplified public limited liability companies (sociétés par actions simplifiées) (SAS). 

The need of audit for Luxembourg securitization structures

All SVs (including SVs in the form of a common limited partnership (société en commandite simple), a special limited partnership (société en commandite spéciale), and an unlimited company (société en nom collectif) have to formulate and publish annual accounts, in each case to be audited by one or more authorized Luxembourg independent auditors (réviseurs d’entreprises agréés). 

  • Clarification on supervision by the Luxembourg regulator (CSSF): The Modernised Securitisation Law ascertains that an SV must be subject to CSSF supervision, when it issues to the public on a continuous basis, in accordance with the current interpretation given by the CSSF in its FAQs. The threshold of denomination for public issuances is proposed to be reduced from EUR 125,000 to EUR 100,000 (to correspond with the Prospectus Regulation exemption). Thus, only SVs issuing more than three times per year securities to the public with a denomination below EUR 100,000 to non-professional investors would need to be approved by the CSSF. A non-respect of application for authorization by the CSSF in such cases is now also subject to penalties. 
  • Direct and indirect holding of assets: The Modernised Securitisation Law elucidates that an SV may hold, directly and indirectly, the securitised assets. This means, for instance, that the direct holding of real estate by an SV would be explicitly permitted. 
  • More flexibility around passive management: With The Modernised Securitisation Law, active management will be allowed for SVs for risks linked to bonds, loans, or other debt instruments, except if the financing instruments are issued to the public. This should enable Luxembourg to attract more CDO/CLO structures that have historically been set up in other jurisdictions. 
  • Legal subordination: The Modernised Securitisation Law aims at implementing a formal legal set of subordination rules applicable to financial instruments issued by an SV. 

By virtue of law, 

  • shares and partnership interests will be subordinated to other financial instruments issued by the SV, 
  • shares and partnership interests will be subordinated to beneficiary shares issued by the SV, 
  • beneficiary shares will be subordinated to debt financial instruments issued by the SV, and 
  • variable floating rate financial instruments will be subordinated to fixed-rate financial instruments issued by the SV. 

However, there will be room for flexibility as the set of subordination rules can be overridden in the constitutional documents or issuance documents. 

  • A more flexible framework for the security interests granted by an SV is introduced: For years, financing arrangements involving an SV were impeded by the prohibition put on the SV to grant security interests, unless they were granted for its own obligations or in favor of its investors. A structure where the secured debt was incurred at the level of the parent or a subsidiary of the SV was bound to run into some complications. The new law introduces a degree of flexibility, which allows an SV to secure the obligations of other persons, and not only its own, as long as such obligations are associated with the securitisation transaction. The sanction of nullity for the non-compliant transaction has also been eliminated. 
  • Clarification on securitisation funds: The Modernised Securitisation Law further explains that securitisation funds (and their liquidation) have to be registered with the Luxembourg business register, with current securitisation funds having to register within six months after entering into force of the Draft Bill. 
  • Tax: The Modernised Securitisation Law does not directly include any specific tax measure regarding SVs, which benefit already under the Securitisation Law from a very appealing tax regime. Indeed, SVs established as corporate vehicles may be able to fully deduct from their taxable base commitments or distributions made to shareholders or investors without triggering any Luxembourg withholding tax, irrespective of the location of the shareholders and investors. Moreover, as SVs established as corporate vehicles are fully taxable, they may be eligible to double tax treaty access and EU directives. Finally, management services to SVs may principally rely on a VAT exemption. 

In light of the above, Luxembourg has been able to establish itself as a primary center for securitisation transactions, and given the wide array of flexible and investment-friendly provisions, it is highly likely to continue to be successful in this respect in the future. 

To register your securitization vehicle in Luxembourg, please contact your Damalion expert now. 

Damalion – Luxembourg

Why Luxembourg securitization is the best in Europe — strong law, flexible structures, clear CSSF scope, and investor-oriented tax rules

For originators, asset managers, private credit funds, family offices, private equity and corporates. Professional overview of the Luxembourg securitization regime in plain legal language.

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Overview

Luxembourg offers a mature securitization regime based on the Law of 22 March 2004 on securitization, as amended in 2022. The framework covers securitization companies and securitization funds, permits ring-fenced compartments, and allows financing through debt, equity or other financial instruments whose return depends on securitized risks.

Tax regime

  • Company-type securitization vehicles are fully taxable in Luxembourg corporate income tax and municipal business tax.
  • Distributions and commitments to investors that are linked to the securitized risks are generally deductible at the level of the vehicle if documented in the articles or issuance terms. This yields tax neutrality in practice.
  • Luxembourg does not levy withholding tax on interest paid by the vehicle. Payments on notes that qualify as debt are typically free from Luxembourg withholding tax.
  • Minimum net wealth tax applies according to Luxembourg rules. The amount depends on the vehicle’s balance sheet and composition.
  • Transfer pricing applies to all related-party arrangements, including servicing, funding, hedging and guarantees. Agreements and pricing should be at arm’s length with supporting files.

ATAD interest limitation (Article 168bis LITL)

  • Exceeding borrowing costs are deductible up to the higher of 30% of EBITDA or EUR 3,000,000 per tax year.
  • Stand-alone entity, grandfathering for pre-17 June 2016 loans (subject to modifications), public infrastructure, and financial undertakings exemptions may apply subject to conditions. Applicability to securitization vehicles must be assessed case by case.
  • Carry-forward and carry-back rules apply per Luxembourg law for unused interest capacity or exceeding borrowing costs, subject to limits.
  • The interest barrier must be assessed together with the vehicle’s deduction of investor-linked commitments to determine the tax base.

Hybrid mismatch and GAAR

  • ATAD 2 hybrid mismatch rules apply to payments involving associated enterprises or structured arrangements. Deduction denial or income inclusion may arise if a mismatch is created.
  • Luxembourg’s general anti-abuse rule applies. Transactions must reflect valid commercial reasons consistent with the securitization purpose and risk transfer.
  • Substance is required. Governance, decision-making and records should be commensurate with activities and risks.

Structures and instruments

Topic Key points
Forms SA, Sàrl, SAS, SCS, SCSp, SENC, or securitization funds.
Financing Debt, equity or other financial instruments whose return depends on securitized risks.
Ring-fencing Compartment assets and liabilities are segregated; cross-compartment guarantees are allowed if disclosed.
Ranking Statutory subordination may be adapted in the articles and issuance terms within legal limits.
Insolvency Documentation targets bankruptcy remoteness through ring-fencing, limited recourse and non-petition wording consistent with Luxembourg law.
Reporting Annual accounts and, where required, audit per Luxembourg rules; compartment information can be organized in the constitutional documents.

Practical cases of Luxembourg securitization

Luxembourg securitization vehicles enable international sponsors to transform illiquid assets into investable securities under a stable European framework. The following examples highlight how companies from various countries and sectors benefited from using Luxembourg’s legal, fiscal, and regulatory ecosystem.

# Country Industry (internal link) Example
1 Germany Residential Real Estate A German property developer transferred rental and sale proceeds from several housing projects into a Luxembourg securitization vehicle. This allowed the firm to refinance through professional investors, lower financing costs, and isolate project risks in legally distinct compartments.
2 France Commercial Real Estate A French logistics operator securitized long-term lease income from warehouses and offices through a Luxembourg structure. The transaction converted predictable cash flows into upfront capital and preserved tax efficiency through the vehicle’s neutral regime.
3 Italy Consumer Products An Italian manufacturer securitized trade receivables via a Luxembourg compartment issuing asset-backed notes. The deal improved liquidity, diversified funding, and reduced exposure to domestic banking constraints.
4 Spain Renewable Energy A Spanish solar company securitized revenues from long-term power purchase agreements. Through a Luxembourg vehicle, it attracted ESG investors, locked in stable funding, and ensured compliance with EU green-finance rules.
5 United Kingdom Banking & Capital Markets A UK fintech lender consolidated performing consumer loans into a CSSF-supervised Luxembourg securitization platform. The structure enabled access to EU institutional investors and improved regulatory capital ratios through true-sale risk transfer.
6 Switzerland Telecommunications & Media A Swiss streaming company securitized subscription revenues through a Luxembourg compartment. The project provided predictable funding for platform expansion while maintaining control over intellectual property and avoiding double taxation.
7 Netherlands Transport A Dutch aircraft leasing firm securitized lease receivables for its fleet using a Luxembourg vehicle. Investors subscribed to notes backed by lease payments, while the sponsor gained capital recycling and asset protection under a recognized EU regime.
8 United States Life Sciences A U.S. medtech group securitized royalty income from patented devices through Luxembourg. The arrangement gave investors direct access to recurring IP revenues and allowed the company to monetize assets without creating a European taxable presence.
9 Poland Industrial Manufacturing A Polish machinery producer securitized leasing contracts to free up working capital. Using Luxembourg compartments, it segregated operational risk, improved liquidity, and attracted long-term funding from EU investors.
10 Singapore Hospitality & Restaurants A Singapore-based hospitality group pooled franchise royalties from multiple brands into a Luxembourg securitization structure. The vehicle offered stable investor yields, simplified reporting, and reduced the group’s global financing costs.

Frequently asked questions

1) What is a Luxembourg securitization vehicle?
A vehicle constituted under the securitization law to acquire or assume risks and to finance itself by issuing instruments whose return depends on those risks.
2) Which legal forms are available?
Companies such as SA, Sàrl, SAS, SCS, SCSp, SENC and securitization funds. Choice depends on governance, investor base and listing needs.
3) When is CSSF authorization required?
When the vehicle issues to the public on a continuous basis. Private placements and issues to professional clients generally fall outside this trigger.
4) How is “to the public” assessed?
Issues with denominations at least EUR 100,000 and offers to professional clients are generally not considered public. Facts must be verified per transaction.
5) What is “continuous” issuance?
Generally more than three issues per year.
6) Can the vehicle hold assets directly?
Yes. Direct and indirect holding are allowed if aligned with the securitization purpose and properly documented.
7) Is active management allowed?
Permitted for risks linked to debt instruments where there is no public issuance. Otherwise restricted.
8) How does ring-fencing work?
Assets and liabilities are allocated to each compartment. Creditors of one compartment have recourse only to that compartment unless otherwise agreed.
9) How are payments ranked?
Legal subordination applies between equity, beneficiary shares and debt. The issuance terms may refine ranking within legal limits.
10) Are payments to investors deductible?
Commitments and returns linked to the securitized risks are generally deductible at vehicle level if specified in constitutional and issuance documents.
11) Does Luxembourg levy withholding tax on interest?
Luxembourg does not levy withholding tax on arm’s length interest. Payments on qualifying notes are typically made gross of Luxembourg withholding.
12) How does the 30% EBITDA rule apply?
Exceeding borrowing costs are deductible up to the higher of 30% of EBITDA or EUR 3,000,000 per year under Article 168bis LITL, subject to exemptions and carry rules.
13) Are there exemptions to the interest barrier?
Stand-alone entity, public infrastructure, financial undertakings and grandfathering for certain pre-17 June 2016 loans may apply, subject to strict conditions.
14) Do hybrid mismatch rules apply?
Yes. ATAD 2 rules may deny deductions or require inclusions where a mismatch arises with associated parties or through structured arrangements.
15) What substance is expected?
Effective management in Luxembourg, documented decision-making, and records consistent with the scale of activities and risks.
16) Are transfer pricing rules relevant?
Yes. All related-party transactions, including servicing, funding and guarantees, must follow arm’s length standards with supporting analysis.
17) Are listings required?
No. Listing is optional unless required by investors or transaction terms.
18) Are audits required?
Annual accounts are required and audits apply in line with Luxembourg law and the chosen form. Compartment disclosures can be organized in the articles.
19) Can the vehicle grant third-party security?
Yes, when the security supports obligations connected to the securitization transaction and this is disclosed.
20) Does GAAR apply?
Yes. The general anti-abuse rule applies. Arrangements must reflect valid commercial reasons consistent with economic reality.

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