Securitization is a process of financing in which an originator transfers one or more assets or risks to a Securitization Vehicle in exchange for cash. The securitization vehicle is funded by the issuance of securities backed by the transferred assets (collateral) and the revenue generated by those assets.
The Luxembourg law on securitization, as revised (the Securitisation Law), which governs Luxembourg securitization vehicles (SVs), has been in force for more than fifteen years and has become a core component of Luxembourg’s success as a leading center for securitization and structured finance transactions.
In Luxembourg, securitization is a technique that allows the transferor (fund, company, or specialized vehicle – SPV) to acquire or assume risks related to receivables, any form of asset, or any commitment assumed by third parties or linked to operations carried out by third parties. The securitization legal entity obtains or bears such risk by issuing securities whose value and yields are tied to the securitized assets.
Securitization allows cash flow producing illiquid assets to be aggregated together into an investment vehicle (SPV). The cash flows produced by the asset pool are instead redirected to support payments to capital markets instruments issued by the securitization vehicle.
Companies or individuals can use securitization to separate some assets from their wealth, put them in a Luxembourg securitization vehicle, and eliminate the risk of retaining or managing such assets. Investors accordingly finance the securitization vehicle by issuing securities. As a result, they carry the risks associated with the assets held by that entity.
Securitization funds really aren’t legal entities. They are handled by a management company. They are established as a separate fiduciary estate from the management firm, which has to be a Luxembourg resident (Sàrl or SA, i.e. a private or public limited company). Such fund’s assets and liabilities must be distinct from those of the management company. A securitization fund could be composed of many sub-funds that are unrelated to one another.
Securitization companies should be incorporated as a public limited company (société anonyme), a partnership limited by shares (société en commandite par actions), a private limited liability company (société à responsabilité limitée), or a cooperative company organised as a public limited company (société cooperative organisée comme une société anonyme).
Articles of incorporation of a securitization company may enable its board of directors/ managers to establish one or even several Compartments which would each correspond to a distinct part of its assets and liabilities. Compartments actually enable for separation of management, liabilities, recourse, and liquidation. A securitization company’s minimum capital is the same as the normal minimum for commercial companies (EUR 12,500 or EUR 31,000).
There are two types of securitization vehicles in Luxembourg.
- A securitization corporation, which is a corporate entity formed before a notary public.
- A securitization fund, that is a contractually constituted unincorporated joint ownership of assets among its unitholders.
Each vehicle can be broken down into sub-fund, with its own assets and liabilities that are legally distinct from those of other sub-funds.
Underlying assets obtained by Luxembourg securitization undertakings involve receivables of any category (loans, client receivables, commercial receivables, short or long term notes), cash flows connected to receivables, contracts, commitments, risks related to contracts, futures realization, movable assets of any sort, shares, bonds real estate, intellectual property rights.
TAX ASPECTS OF A SECURITIZATION COMPANY
In Luxembourg, a securitization company is taxed at the usual corporate tax rate (i.e. the aggregate rate of 24.94 percent in Luxembourg City). In fact, however, the taxable profit is almost certainly close to zero because the majority of securitization companies’ income is quickly refunded to investors.
According to the law, any commitment (interest or dividends) to investors is regarded as a deductible expense.
Dividends paid by a securitization company in Luxembourg are qualified as interest for tax purposes. A securitization company is not subjected to a debt-to-equity ratio and is not liable to the Luxembourg net wealth tax.
SV in the form of a company has the following tax advantages:
- Tax neutrality.
- SVs are subject to corporate income tax. However, their taxable basis along with income from securitized vehicles is lowered by payments of interests or dividends made to securities holders. As a result, their taxable basis seems to be nil or very much close to it.
- There is also no withholding tax on dividend distributions, payment on fund units as well as interest payments on debt securities.
- Eligibility for the Luxembourg double tax treaties network subject to prior approval with the Luxembourg tax authorities.
- Double tax treaties benefit for Luxembourg securitization vehicle
Securitization vehicles can take advantage of any double tax treaties concluded by Luxembourg. It is a favourable tax regime with double taxation treaties (DTT) between Luxembourg and more than 70 other jurisdictions. For certain type of transactions such as securitization, tax neutrality is attained by the Securitization Law
- Net wealth tax (the NWT)
Moreover, an SV company is subject to a nominal annual net wealth tax (the NWT). For the fiscal year 2020, if the payout of fixed financial assets, transferable securities and cash at bank of the SV company surpasses 90% of its overall gross assets as well as EUR 350,000, the minimum NWT charge would be held at EUR 4,815. Otherwise, the minimum NWT fee would range from EUR 535 to EUR 32,100, depending on the total gross assets of the SV company. Since an SV company’s assets are typically composed of at least 90% financial sort of assets, the annual minimum tax should not exceed EUR 4,815.
TAX ASPECTS OF A SECURITIZATION FUND
Securitization funds are taxed by Luxembourg legislation for a Luxembourg FCP (Fonds Commun de placement). Distributions of income to investors are eligible for deduction from a securitization company tax base. Income distributions to investors are exempt from withholding tax on Luxembourg dividends.
For residents, the Luxembourg tax administration normally considers that transactions at the fund level are disregarded, and income is only recognized when units are sold and a payout is issued by the fund.
Non-residents are normally exempt from Luxembourg tax on fund income and capital gains.
ADMINISTRATION AND ACCOUNTING
A securitization company needs to actually prepare its accounts according to general Luxembourg accounting standards.
A securitization fund must be managed by a management firm (a commercial firm with a unique legal personality). A securitization fund can be broken down into sub-funds, each of which can be liquidated independently. A securitization fund is subject to the very same accounting rules as they apply to Luxembourg collective investment funds. Accounts of a securitization SPV should be audited by an auditor certified by the CSSF in both circumstances.
A securitization vehicle needs to be approved and supervised by the CSSF if it issues securities to the public constantly. Such an SPV should indeed entrust its liquid assets and securities to a custodian, which has to be a Luxembourg bank.
If you require more information on the securitization vehicle in Luxembourg, please contact our financial consultants, who can assist you in establishing a company based on your business interests.
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