Luxembourg created in 2004 a pragmatic legal and tax regime putting in place a flexible and secure securitisation framework, allowing the securitisation of a virtually unlimited range of risks, through different forms of vehicles in a tax efficient manner. Luxembourg securitisation vehicles may be either regulated or unregulated. Luxembourg has since then become one of the principal jurisdictions for the domiciling of securitisation vehicles (SV).
The flexibility that has developed in market practice under the statutory framework provided by the Luxembourg Securitisation Law 2004 (Securitisation Law) and the regulatory guidance issued by the Luxembourg Financial Sector Supervisory Authority (CSSF) last summer in the form of published Q&A has lead to market usage of SVs which covers a range of activities from (i) regulated, continuously offered securities to the public, through (ii) institutional capital raising to (iii) private, unregulated securities-issuing investment vehicles.
By way of context, an industry survey in 2012 indicated that of the 890 or so Luxembourg SVs then in existence, only about 30 were regulated vehicles (ie vehicles authorised to issue securities to the public on a continuous basis). Another useful data point is that 43% were private LuxCos, 55% public LuxCos and about 2% incorporated limited partnerships issuing shares. There are also a negligible number of SVs set up as securitisation funds.
The Luxembourg SV is used for a diverse range of economic purposes. Thus Luxembourg SVs include structures that would be recognised as classic capital markets structures set up with view to bankruptcy remoteness, taking either a true sale assignment or synthetic exposure to a portfolio of numerous assets, secured to a fiduciary for the benefit of securities' holders whose proceeds of issue financed the original portfolio acquisition. However, it is also the case that the range of SVs in existence includes more private vehicles, issuing securities whose value or yield is dependent on the performance of one or a number of portfolio assets. This is accepted market practice.
The following are a sample of key points relating to SVs set up as the latter.
Luxembourg SVs must be set up to (a) undertake, acquire or assume (directly or indirectly) risks relating to receivables, claims, assets or obligations owed by third parties or inherent in the activities of third parties and (cumulatively) (b) issue securities whose value or yield derives from exposure to those risks.
Luxembourg SVs can be constituted as private limited companies (Sàrl) (or alternatively as public companies (SA), incorporated limited partnerships issuing shares (SCA) or as contractual securitisation funds (fonds commun de placement) managed by an independent management company. The general Luxembourg companies law will continue to apply to SV's set up as companies (except in relation to the very limited changes required by the Securitisation Law, the most pertinent of which are summarised in this note). Its constitutional and / or securities issuance documents must provide that it is subject to the provisions of the Securitisation Law.
There is statutory recognition of contractual limited recourse, non-petition and subordination (ie tranching) of the securities issued by Luxembourg SVs. It is not obligatory to issue different securities' tranches, it is merely enabled for those SVs whose business model is to do so. Compartmentalised ring-fencing is recognised, again this is not mandatory but merely available.
There are no restrictions on eligible investors under Luxembourg law, clearly the securities' laws applicable to investors in their own jurisdictions will need to be taken into account. Provided the SV does not (a) offer its securities to the public and, cumulatively, (b) does not do so on a continuous basis, it does not need to be regulated under Luxembourg law. Conversely, if it were to both (a) offer securities to the public and (b) to do so on a continuous basis, it would need be regulated by the CSSF.
For unregulated SVs, no application to the CSSF is required, there is no regulatory requirement to appoint a regulated administrator, manager or custodian, nor is there any regulator oversight of documents or approval of board members. All SVs (including unregulated ones) must appoint a regulator-approved independent auditor, ie a recognised accountancy firm.
There is no prescription as to the characteristics of the securities to be issued by the SV, simply that their yield or value must derive from the securitised risks. The securities issued may be secured or unsecured, provided their value or yield is effectively ring-fenced to performance of the underlying portfolio.
There are no portfolio diversification requirements, SVs can hold single asset portfolios where appropriate.
The SV can either be self-managed or can appoint a third party servicer. Whether internally or externally managed, the management role should limit itself to the passive monitoring and administration of portfolio performance and securities (re)payment.
The SV is prohibited from assigning its (portfolio) assets other than in accordance with its constitutional documents and / or granting security interests over them (or issuing guarantees) other than for the purpose (if applicable) of securing the obligations attaching to the securities issued to its investors.
It is not necessary for an unregulated Luxembourg SV to issue any form of private placement memorandum / prospectus / offer document, provided the issue of securities falls within one of the exemptions under the Luxembourg Prospectus Law implementing the EU Prospectus Directive - which for an unregulated SV, would often overlap closely with the Securitisation Law's approach to offers to the public in any event.
Offers to the public
In relation to Luxembourg SVs, securities issues are not considered to be offered to the public if either:
- they are issued only to professional clients (as defined in the MiFID Directive); or
- they are issued only on a private placement basis; or
- the securities denominations are equal to at least Euro 125,000.
Stock exchange listing does not alone constitute an offer to the public. In determining whether an issuance constitutes an offer to the public, a look through basis will be applied in relation to any intermediate offering / distribution mechanism.
An offer will be made on a "continuous" basis if more than 3 issues of securities are made per year.
The SV tax framework is designed to provide very substantial (ie almost entire) tax neutrality, subject only to a minimum tax charge in Luxembourg. The current, minimum flat tax charge is set at Euro 3,210 per annum provided the SV's balance sheet is constituted by at least 90% of eligible financial assets and cash-at-bank (as will certainly be the case for most SVs).
This very substantial tax neutrality arises because, although an SV is subject to the generally applicable corporate tax rate of approximately 30% on its taxable base, that base (which includes all portfolio income received by it) is subject to the deduction of all interest, dividends and other distributions made to the holders of the SV's issued securities. Thus, subject to the minimum tax referred to above, the SV's taxable base may be almost entirely reduced by profit participating securities issuance.
No thin capitalisation rules apply to Luxembourg SVs. In contrast, Luxembourg investment holding companies (SOPARFIs) are subject to thin capitalisation rules. These are based on the internationally recognised 85:15 debt - equity ratio, although in practice the 15% may be constituted as 1% equity and 14% interest-free shareholder loan. The non-applicability of this thin capitalisation rule to Luxembourg SVs can result in greater efficiencies for SVs over SOPARFIs.
SV's can benefit from the Luxembourg double tax treaty network (if relevant).
None of the following apply to Luxembourg SVs: withholding tax (subject to any EU Savings Tax Directive application in the case of private individual investors); registration tax; capital or stamp duties (except a fixed Euro 75 fee on incorporation and any amendments to articles for SVs set up as companies; VAT on management services to a SV (the exact services should be carefully reviewed in each case); net worth tax; annual subscription tax; annual regulatory charges for unregulated SVs.
An unregulated SV meeting the criteria above can therefore provide a very efficient platform for passive investment holding financed by profit participating, unsecured securities where this is appropriate to client requirements.