The Luxembourg Securitization Vehicle: effective tool to structure investment and debts

Unlocking the Potential of Securitization in Luxembourg

In the ever-evolving landscape of financial instruments, Luxembourg securitization vehicles (SVs) have emerged as robust entities, playing a pivotal role in diversifying investment portfolios. These legally owned vehicles, established by companies and their subsidiaries, utilize capital, sales, and liquid assets to create third-party investment opportunities while safeguarding the parent company against credit risks.

The Rise of Luxembourg Securitization Vehicles

Over the years, Luxembourg-based companies have recognized the strategic importance of securitization vehicles (SVs) in their financial operations. This trend is exemplified by the escalating popularity of these vehicles within the region. Luxembourg’s reputation as a financial powerhouse is further reinforced by its thriving securitization and financial transactions sector. Recent reports indicate the registration of approximately 1000 SVs, with expectations of further growth in the near future.

The Legal Landscape of Securitization in Luxembourg

In Luxembourg, securitization encompasses two fundamental aspects: liabilities and assets of third parties and the establishment of classic market capital structures. Liabilities and assets involve financial instruments held by third parties or owned directly by the company, guaranteeing both the principal amount and return on these financial claims.

On the other hand, classic market capital structures, secured by SVs, insulate them from bankruptcy risks. These structures are often rooted in tangible assets or portfolios engineered to ensure security. However, single-asset portfolios are generally considered less risky than those entailing third-party liabilities, given the inherent liquidity and volatility associated with different assets in securitization.

The implementation of transactions is contingent upon a meticulous analysis of structural possibilities. Recent amendments in the legal framework have granted SVs greater flexibility in acquiring assets, both directly and indirectly, with significant leeway in the process.

Securitization Vehicle Funding Sources

Securitization vehicles in Luxembourg encompass a diverse range of financial assets, including market shares and equity bonds, securing them against various risks pertaining to returns. Debt securities constitute a substantial portion of the financial instruments employed by SVs, significantly reducing the risk of bankruptcy and subjecting them to foreign legislation that determines investment security.

The Euro Multilateral Trading Facility (Euro MTF) and the Luxembourg Stock Exchange, part of the European regulated market, provide platforms for trading these financial instruments, both domestically and internationally. Furthermore, SVs can access funding through borrowing or intra-group financing, broadening their financial resources and eliminating the restrictions that were previously in place.

Investor Opportunities in Luxembourg

Investing in Luxembourg securitization vehicles (SVs) enjoys a flexible and unrestricted environment, with eligible investors not subject to any legal limitations. However, foreign investors must be cognizant of the financial instrument legislation applicable to them. This flexibility has contributed to the attractiveness of Luxembourg as a hub for SVs.

Setting Up a Securitization Vehicle in Luxembourg

Establishing an SV (securitization vehicle) in Luxembourg offers multiple avenues, including limited liability companies (Sàrl), public limited companies (SA), co-operative companies (SCOA), co-ownership of assets, general partnerships (SNC), simplified limited or special partnerships (SCS or SCSp), and incorporated partnerships issuing shares (SCA). While corporations represent the majority of Luxembourg SVs, some investors may prefer the adaptable structure offered by partnerships.

The Securitization Law permits the creation of separated compartments within an SV, ensuring distinct separation of assets and liabilities associated with each compartment. This segregation grants investors and creditors specific rights and claims limited to the assets of the respective compartment, affording a higher level of protection. Additionally, this amendment allows for more autonomy in financial statement authorization and profit distribution within each compartment.

Regulation and Reporting Obligations

The regulatory environment for SVs in Luxembourg predominantly leans towards non-regulation. SVs are subject to regulation only if they offer financial instruments to the public on a continuous basis. However, the mere listing of an SV on a stock exchange does not automatically imply readiness for public offering. The classification as a public offering depends on the nature of the intermediary involved in distribution.

Compliance with reporting obligations is crucial to ensure transparency and regulatory adherence.

Tax Regime for Luxembourg SVs

Luxembourg’s tax framework for SVs is a multifaceted landscape encompassing various taxes and considerations:

1. Corporate Income Tax (CIT): Luxembourg SVs set up as companies are subject to CIT, with a standard rate of 18.19%, including a 7% solidarity surcharge. However, effective tax planning can mitigate this tax liability through deductions for interest, dividends, and other payments to security holders or creditors.
2. Net Wealth Tax (NWT): SVs with a substantial proportion (90% or more) of eligible financial assets and bank cash on their balance sheet may be subject to an annual minimum NWT of 4,815 euros. SVs not meeting this criteria may face varying NWT rates based on their total gross assets.
3. Tax Transparent Vehicles: Some SV structures operate as tax-transparent vehicles, with investors bearing the tax liability on generated income rather than the SV itself.
4. Transfer Pricing Laws: Luxembourg’s transfer pricing laws, particularly Article 56 and 56 bis of the Luxembourg Income Tax Law, introduce specific requirements for SVs, impacting their tax considerations and treaty arrangements.
5. Regulation Impact: Regulatory developments, such as the Anti-Tax Avoidance Directive (ATAD) and its amendments (ATAD I and II), as well as the Multilateral Instrument (MLI), influence the tax landscape for SVs, necessitating careful compliance and planning.

Navigating Luxembourg’s Tax Regime

Despite the intricate tax regime, Luxembourg’s SVs benefit from certain advantages, including exemptions from debt-to-equity ratios, which are not explicitly defined in the tax legislation. This flexibility allows SVs to optimize their tax structures effectively.

For investment holding operations, an 85/15 debt-to-equity ratio serves as a safe harbor for SOPARFIs, resulting in potential efficiency gains for SVs when compared to other financial structures. Additionally, Luxembourg’s extensive network of double tax treaties grants SVs access to EU Directives and EU regulations.

Regulatory Challenges and Global Context

Luxembourg’s SVs must grapple with evolving international regulations, including the Principal Purpose Test (PPT), Limitation of Benefits (LOB) measures, and the impact of the Multilateral Instrument (MLI). These developments seek to maintain a balance between international tax compliance and the adaptability required to sustain Luxembourg’s allure as a destination for securitization transactions.

Elements influencing the successful implementation of PPT include political stability, a skilled multilingual workforce, credible asset securitization guidelines, and an extensive network of double tax treaties. This confluence of factors ensures that SVs meet the criteria for treaty benefits while maintaining flexibility in their operations.

Transfer Pricing and Beyond

The Luxembourg tax authorities have intensified their focus on related-party transactions due to evolving transfer pricing laws. While these developments may have limited practical implications for SVs, they underscore the importance of compliance and treaty considerations.

In conclusion, Luxembourg SVs play a pivotal role in diversifying investment opportunities, leveraging a robust legal framework and flexible tax regime. While navigating the intricate web of regulations and international tax dynamics presents challenges, it also offers opportunities for innovative solutions and strategic financial planning. As Luxembourg continues to adapt to evolving global standards, SVs remain a vital component of the financial landscape, offering investors a secure and versatile platform for securitization transactions.

For assistance in establishing your securitization vehicle in Luxembourg and navigating the complexities of its legal and tax framework, contact Damalion Luxembourg. Our entrepreneurial mindset and expertise will help you unlock the full potential of your business model, ensuring sustainable value creation.

Contact your Damalion expert today to register your securitization vehicle and embark on a journey of financial innovation. 

The Luxembourg Securitization Vehicle (SV) — an effective tool to structure investment and debts: eligible assets, compartments, issuance formats, supervision thresholds, tax neutrality, and an advisor-led roadmap from scoping to first issuance.

For asset managers, originators, family offices, private equity, venture-backed corporates and institutional investors • Damalion facilitates scoping, set-up and provider coordination (AIFM/portfolio adviser, corporate services, depositary where needed). Regulatory position and acceptance remain at the authorities’ and service providers’ discretion.

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Why use a Luxembourg SV?

Luxembourg securitization allows you to isolate risks and cash flows in ring-fenced compartments, issue notes or fund units to investors, and achieve tax neutrality when structured correctly. Choose a fund or company form, decide supervised vs. non-supervised based on continuous public issuance, and map the asset pool, waterfall and service stack early. We facilitate transaction design and documentation so counterparties can review efficiently.

Core documents and design choices

• Constitutive docs: articles/management regs; compartment terms; issuance resolution.
• Offering docs: subscription/IM or termsheet, risk factors, use of proceeds, investor eligibility.
• Transaction docs: assignment/receivables sale, loan agreements, guarantees, hedging (ISDA) if applicable.
• Service stack: corporate administrator, paying/issuing agent, registrar, (AIFM and depositary if AIF), auditor, legal counsel.
• Operating model: asset onboarding, cash waterfall priorities, triggers, reporting frequency and KPIs.
• Tax & accounting: substance, transfer pricing where relevant, VAT and withholding analysis, audit plan.

SV options at a glance

Topic	Company-form SV (SA/SARL/SCA)	Fund-form SV (FCP)
Legal personality	Yes (separate legal entity)	No (co-ownership managed by a management company)
Compartments	Yes, statutory ring-fencing	Yes, ring-fenced pools
Supervision	Non-supervised unless issuing to the public on a continuous basis	Same principle; AIFM/Depositary if qualifying as an AIF
Instruments issued	Debt securities, notes, preferred shares	Units and/or notes depending on set-up
Typical use cases	Loans/receivables, real assets, NPLs, private debt, trade finance	Investor-pool strategies with fund-like distribution

Advisor-led implementation — step by step

1. Scoping & feasibility. Define asset class, investor profile, issuance format, supervised vs. non-supervised, and service stack.
2. Entity set-up. Choose legal form, draft constitutive docs, open bank/securities accounts, register compartments.
3. Transaction build. Prepare assignment/loan docs, term sheets, waterfall, reporting pack, and risk disclosures.
4. Placement & onboarding. Execute subscriptions/issuances, KYC/AML, appoint agents, finalize paying/settlement flows.
5. Go-live & monitoring. First asset onboarding, cash waterfall execution, periodic NAV/valuation and investor reports.

Costs, timing and thresholds

• One-off: incorporation/launch, legal, documentation, listing (if any).
• Ongoing: corporate admin, accounting/audit, agents, AIFM/depositary if applicable.
• Timeline from complete pack to first issuance: typically a few weeks, faster for simple compartments.

Related reading

• The Luxembourg Securitization Vehicle — effective tool to structure investment and debts
• More on securitization
• Luxembourg RAIF overview
• Register your company in Luxembourg

Frequently asked questions

Who can set up a securitization vehicle in Luxembourg?

Any lawful person or company can set one up, if they pass checks on identity, source of funds, and lawful purpose.

Do I need a license to create a securitization vehicle?

Most vehicles do not need a license if they do not sell notes to the public on a steady, ongoing basis. If they plan to do so, the financial regulator of Luxembourg may require approval.

What assets can the vehicle hold?

Loans, claims, rents, royalties, and other rights that create cash flow. The assets must be lawful and clearly described in the documents.

Can I keep different projects separate?

Yes. You can create separate pools inside one vehicle. Each pool has its own assets, debts, and costs, and is kept separate from the others.

Who is in charge of the vehicle?

Directors or managers run it. They must act with care, follow the law, follow the vehicle documents, and avoid conflicts of interest.

Do I need a deposit bank or a trustee?

You will need service firms such as a corporate administrator, an account bank, and a paying or issuing agent. A depositary or fund manager is needed only if the structure is set up as an investment fund under the law.

Can I sell notes to the public?

Yes, but public offers can trigger extra rules and may require approval by the financial regulator of Luxembourg or by other national bodies where the notes are sold.

Can I list the notes on a stock exchange?

Yes. Listing is common to reach more investors. Listing adds disclosure, ongoing reports, and fees.

How are taxes handled?

The aim is that income paid to investors can be deducted from income of the vehicle, so the vehicle pays little or no profit tax. You must get tax advice for your exact case and follow all rules on substance and pricing between related parties.

What investor warnings must I give?

You must give clear, fair, and not misleading risk warnings. These include credit risk, market risk, interest rate risk, currency risk, and liquidity risk. Use plain language.

What anti money laundering rules apply?

You must check the identity of investors and key parties, check source of funds, screen for sanctions, and keep records. You must report any suspicious activity to the proper body.

How are conflicts of interest handled?

Conflicts must be told in advance and managed. Directors and service firms should not put their own interest ahead of the investors or the vehicle. Follow the steps set in the documents.

What happens if a pool cannot pay?

Investors in that pool bear the loss as set out in the cash flow rules. Other pools and the company’s own assets are not used to cover that loss, unless the documents say so.

What records and reports are required?

Accurate accounts, bank statements, and reports to investors on a set schedule. If the notes are listed, stock exchange rules add more reports.

Can small or retail investors invest?

Most of the time these vehicles are for professional or well informed investors. If you target small or retail investors, strict rules on public offers, advice, and marketing will apply, and you may need extra approvals.