s e c u r i t i s at i o n i n l u x e m b o u r g

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 legislation and official pronouncements deal ing with securitisation. The recipient must not act on the basis of this publi c ation without seeking par ticular 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
about luxembourg about atoZ about securitisation 6 6 6 7 10 10 12 14 15 15 15 16 16 17 18 19 21 21 21 23 24 25

1. securitisation in general
1.1. ove rvi e W o f t h e se cu ri t i sat i o n proce s s
the originator. the investor

1. 2. luxe m bou rg l aW o n se cu ri t i sat i o n - ge n e r al

Definition of securitisation securitisation vehicles risks securitiseD financing fiDuciary representative representation of investors anD creDitors representation of the securitisation vehicle

2. legal anD regul atory frameWork

2.1. se cu ri t i sat i o n ve h i cle
legal forms, share capital anD legal reserve regulatory oversight accounts anD auDitor language of Documents

2. 2. le gal prot e ct i o n o f i nve s tors

bankruptcy-remoteness of the securitisation vehicle ring-fencing anD limiteD recourse provisions assignment of claims

26 26 26 27 28 28 28 29 31 31 31 34 34 35 35 36 36 38

2. 3. f i D uci ary re pre se n tat ive

legal forms, share capital anD legal reserve regulatory oversight accounts anD auDitor

3. ta x aspects
3.1. se cu ri t i sat i o n ve h i cle
income anD net Worth taxes vat other tax aspects

3. 2. f i D uci ary re pre se n tat ive

income anD net Worth taxes vat other tax aspects

4. conclusion

foreWorD
constant commitment to the devel as other factors such as a highly qualified and multilingual workforce, makes Luxembourg an attractive international financial centre that has reached overall leadership in some of its segments.

about luxe m bou rg

opment of the financial activities in Luxembourg by creating a flexible and innovative legal framework that

The GrandDuchy 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 office and the European Court of Auditors. Luxembourg is a constitutional mon archy. Members of Luxembourg parliament are elected every five 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 6

takes into consideration the needs and expectations of both the local and more importantly the international financial 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 finally the law introducing a partial exemption on royalty income (2008).

about atoZ

ATOZ is a highend independent advi sory firm offering a comprehensive and integrated range of tax and financial advisory services. Atoz offers a full range of tax and financial 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

The governments and the authori ties flexible approach combined with their willingness to listen to the con cerns of the financial sector, as well

Tax Firm of the Year in 2006, 2007, 2008 and 2009 at the European Tax Awards organized by International Tax Review.

ATOZ is a founding member of TAXAND, the first independent global tax alliance. TAXAND was founded in 2005 by a respected, entrepreneurial group of tax firms 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 grown to become a well coordinated world wide team of leading experts with complementary skills and experience all working together to fulfil 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 threequarters of TAXANDs member firms are listed in the International Tax Reviews World Tax Guide, the worlds comprehen sive directory of leading tax firms. 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.

differentiation : the cash flows generated by the pool of assets are redirected to support payments to instruments

about se cu ri t i sat i o n

issued by the securitisation vehicle to the capital markets. The instruments issued by

Securitisation can be defined as any financing process by which an entity (originator) transfers one or more assets or risks to a dedicated vehicle (Securitisation vehicle) in exchange for cash, as the securitisation vehicle is financed 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 flow producing but illiquid assets are pooled together into an investment vehicle (i.e. securitisation).

the securitisation vehicle do not all need to show the same characteristics. By allocating to each 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 riskreturn maturity characteristics of a different investor. Even after the recent financial crisis, skilled securitisation is here to stay as only securitisation allows to satisfy the needs of a growing class of sophisti cated investors.

From a Luxembourg point of view, the Law on securitisation dated March 22nd 2004 created a specific 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 financial 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 : flexibility ; investor protection ; tax neutrality. Consequently, this new law provides a response to the markets needs and has begun to feature prominently in the European securitisation market. 8

Law dated July 27th, 2003 replacing the law dated

July 19th, 1983.

2

Law dated November 21st, 1997.

1. securitisation in general
appointed to safeguard the

1.1. ove rvi e W o f t h e se cu ri t i sat i o n proce s s

investors interest; Rating Agencies confer a rating to the securities issued by the securitisation vehicle.

A securitisation transaction com monly involves the following parties : An entity called the originator, that either sells assets to a securitisation 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 10 Cash flows generated by the assets/ risks transferred to the securitisation vehicle, are redirected to support payments to the investors.

Parties involved

i nve s tors

au D i tor

f i D uci ary re pre se n tat ive

3. Return / yield 1. Investment 4. Repayment of principal

Rating conferred

SECURITISATION VEHICLE

ori g i nator
2. Purchase price

r at i ng age n cy

4. Sales proceeds

3. Income

Risk valued

a s se t s / ri sks
2. Transfer of underlying

a s se t s / ri sks

Synthetic securitisation may be defined 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

increased shareholders

The reason for this is that the rating of the instruments issued by the securitisation 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 often used : over collateralisation, excess spreads, reserve funds, letters of credit ...

t h e o ri g i nator

equity. Offbalance sheet treatment of existing assets is of course only an

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 originators assets while the assets transferred are taken off the originators balance sheet. As a result, the originator disposes of liquid assets, which may be used to finance further investments, or to repay debt, without having taken on further debt or having 12

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 creditors. 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 rating of the originator.

A higherrated debt instrument commands lower interest rates and is thus cheaper to finance. This lower cost of financing may be facilitated by the originator retaining the most junior class of instruments issued by the securitisation vehicle. The residual interest or equity generally bears most, but not all, the risk involved in the transaction, and is often

referred to as the first loss piece. In return, the residual interest will be granted the right to all excess cash flow generated by the securitisation vehicle. It is worth pointing out that the advantages of a securitisation diminish to the extent that the originators 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 riskreturnmaturity characteristics of different investors. Thus, securitisation can 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 institutions balance sheet, regulatory capital is released, which can then be deployed for other purposes or returned to shareholders. 13

The credit risk is thus borne to a large

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 reflected by the different returns on each class of instruments. Certain structures feature a predeter 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 def ined 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, trade receivables etc).

t h e i nve s to r

extent by the junior classes of securi ties issued. In return, the junior classes would attract a higher yield. The result

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 first be allo cated to the most subordinated class of instruments. Senior tranches would only be affected by losses once the principal of the subordinated classes or tranches had been fully used up. 14

is the creation of multiple securities with different credit ratings that reflect 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 first 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 first class to face a possible default, and is thus called the first loss piece. While it is important to note that the quality of the underlying asset pool mainly drives the credit rating, the loss

assets to be securitised as well as to

1. 2. luxe m bou rg l aW o n se cu ri t i sat i o n - ge n e r al

se cu ri t i sat i o n ve h i cle s

issuing entities that specialise in issu ing transferable securities to cover the financing of securitisation transactions.

The law defines securitisation vehi

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 flexible approach when interacting with other local or foreign securitisation vehicles.

Definition of se cu ri t i sat i o n

cles as vehicles which carry out securitisation in full, or

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.

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 financing 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 15

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.

on risk either by acquiring assets, guaranteeing 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 securitisation4). In the latter case, the Luxembourg law specifically provides that secu ritisation transactions cannot be recast as insurance transactions for legal or Luxembourg tax purposes.

Trade receivables, mortgage 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.

ri sks se cu ri t i se D

Future c laims or iginat ing f rom present or future contracts may also be assigned to a securitisation vehi

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 16

cle, provided that the claim may be sufficiently identified 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 flows can be securi tised such as : The assumption of risk must be financed through the issuance of securities. FINANCING

Securities within the meaning of the law are defined as financial instruments that are likely to be traded on a mar ket and which are freely transferable (i.e. not subject to specific formalities which would make them comparable to a contract assignment).

The fiduciary representative can be either a foreign entit y 5 or a Luxembourg corporation. Luxembourg law only applies to fiduciary represent atives that have their statutory seat in Luxembourg. The framework for fiduciary represent

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.

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

f i D uci ary re pre se n tat ive

activities of the fiduciary representative is based on legal instruments that already

4

In a synthetic transaction, the originator does not

In order to further improve the efficiency and the legal security of the securitisa tion transaction, the Luxembourg law created a new category of regulated professional of the financial sector, the fiduciary representative, whose role and functions can be compared to those of a trustee in AngloSaxon jurisdictions.

exist and are used under Luxembourg legislation, i.e. the agency agreement and the fiduciary agreement;

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 creditlinked notes.
5

Luxembourg has ratified 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.

17

The fiduciary 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.

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

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.

re pre se n tat i o n o f i nve s to rs an D cre D i to rs

in court, without being required to disclose its principals identity. Furthermore no investor or creditor can

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 18

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

liable for damages caused by the third

re pre se n tat i o n o f t h e se cu ri t i sat i o n ve h i cle

party unless the representative was not authorized to delegate or the agent chosen was notoriously incapable or insolvent.

The law allows for the securitisation vehicle to assign to the fiduciary 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 fiduciary repre sentative to ensure that the agreements concluded by the securitisation vehicle are managed to the best interest of the investors and creditors. The fiduciary representative can del egate to a third party the exercise of rights and actions assigned to it by the securitisation vehicle. The fidu ciary representative cannot be held 19

2. legal anD regul atory frameWork

A cooperative company 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. The articles of incorporation of these companies may allow 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. A securitisation company is not The securitisation company must be set up under one of the following legal forms : A public limited company (socit anonyme); A partnership limited by shares (socit en commandite par action); A private limited company (socit responsabilit limite) ; In accordance with Luxembourg commercial company law, the corporate securitisation vehicle is 21 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. the board of directors to create one or more compartments each corresponding to a segregated part of the companys asset portfolio. A securitisation fund can choose to be governed by the legal regime of fiduciary contract (fiducie) or co-ownership (coproprit). In both cases, the securitisation fund would have no legal personality. This implies that it must be managed by a management company.

2.1. securiti sation vehicle

organised as a public limited company (socit cooprative organise comme socit

legal forms, share capital anD legal reserve

anonyme).

A securitisation fund created under the legal regime of a fiduciary contract is governed by the law on trusts and fiduciary contracts .
6

the general provisions of the Luxembourg Civil Code. Under this regime, the investors would 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. r.l.,

S.C.A., etc), and may manage more than one fund. This latter provision may provide for economies of scale, since the same management company may incorporate multiple securitisation funds each having the form of a multicompartment 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.

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 coownership is governed by 22

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 creditors point of view.

securitisation law, neither do related Luxembourg laws nor European Directives provide any clear definition8. 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

re gu l ato ry ove rs i gh t

munication as well as the technique used to distribute the said securities. Nevertheless, issues to professional

Luxembourg law dated 27 July 2003 on trusts and

fiduciary contracts.
7 In

practice, the CSSF accepts to review

Only securitisation vehicles engaged in the continuous issuance of secu rities to the public are subject to prior authorisation and regulation 7 of the CSSF. The term continuous issuance is not explicitly defined in the Luxembourg

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.

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 defines securities issued in a continuous or repeated manner as issues on tap or at least two separate issues of securities of a similar type and/or class over a period of 12 months.

23

Consequently, Luxembourg securitisa tion entities are subject to authorisation if the following conditions are met simultaneously : 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.

The incorporation documents of the vehicle (i.e. articles of incorporation for corporate vehicle and 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

Finally, regulated vehicles are not subject to specific publication requirements.

accou nt s an D au D i tor

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 accordance with 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 filed with the commercial register in

Thus, a oneoff 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 :

company in the case of a securitisation fund) must demonstrate that it is suitably organised and financially sound so as to be in position to fulfil 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.

24

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 tors report and any qualification must be reproduced in full in each annual report. The auditor must report to the man agers of the vehicle and, in the case of a regulated vehicle, also to the CSSF, any irregularities and errors of which he has become aware while carrying out the audit.

auditor (commissaire aux comptes), but must appoint an independent auditor (rviseur dentreprises).

l anguage o f Docum e nt s

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 officially registered.

Law dated December 20th, 2002. FCP = Fonds Commun de Placement, an

Unlike a normal Luxembourg company, the corporate securitisation vehicle is not required to appoint a statutory

10

unincorporated coownership similar to the unit trust in the UK or to the mutual funds in the US.

25

to the transfer of legal ownership

NONPETITION 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 confirms the validity and enforceability of these provisions, and consequently enhances the securitisation vehicles protection.

2. 2. le gal prot e ct i o n o f i nve s to rs

of assets, make it difficult for the liq uidators to recover assets that were previously sold to the securitisation vehicle. The transfer of ownership

Luxembourg law does not provide for any specific 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.

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 overcollateralization). In the case of a bankruptcy of a

ban kru p tcy- re mote n e s s o f t h e se cu ri t i sat i o n ve h i cle

servicer to whom the securitisation vehicle has delegated the recovery of assets, the law confirms that the securitisation vehicle has the right to receive full payment, before the liq

ri ng - fe n ci ng an D li m i te D re cou rse provi s i o n s

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 26

uidation proceedings of the servicer are opened.

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 (prorata to their shareholding/inter est) are granted a preferential right to the securitised assets. However, the law specifies 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 effect be used as a multiissuing 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 specific collateral and provide for different risk, yield and maturities. The law confirms that subordina tion clauses may be used, whereby investors 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. The assignment of the claim becomes legally valid and enforceable towards third par ties by the mere signa ture of the assignment, without any 27 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 files for bank ruptcy, claims that have been assigned before the bankruptcy are excluded from the liquidation assets. 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.

a s s i gn m e nt o f cl a i m s

notification formalities and irrespective of any provision that this claim may be repurchased at a later date. The assigned 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 debtors payment. This is therefore a point of international law that must be analysed on a case by case basis. A public limited company (socit anonyme); or A partnership limited by shares (socit en commandite par action); or A private limited company (socit responsabilit limite) ; 28 The exercise of the functions of fidu 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 :

Furthermore, the fiduciary repre

2. 3. f i D uci ary re pre se ntat ive

sentative 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

le gal f orm s, share capi tal an D le gal re se rve

to 10% of the share capital.

re gu l atory ove rs i ght

A fiduciary representative is a profes sional of the financial 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 fiduciary representative. These shareholders, together with the directors of the fiduciary repre sentative, are required to evidence their good professional reputation. Moreover, the persons in charge of the

management of the fiduciary 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.

accou n t s an D au D i to r

The annual accounts of a fiduciary representative must be prepared in accordance with the generally accepted accounting principles as pro vided by the Luxembourg commercial company law. As for all Luxembourg professionals of the financial sector, the fiduciary 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 influence on the management of the fiduciary representative.
13

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

29

3. ta x aspects
The tax treatment of the securiti sation vehicle depends upon the legal 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 FCP .
14

3.1. securiti sation vehicle

i n com e an D n e t Wort h ta xe s

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 close to 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 distribution
14

Law dated December 20th, 2002.

31

has been decided by a general share holder meeting15. Dividends paid by a securitisation company are requalified in Luxembourg as interest for fiscal 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 requalification, 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 definition of interest as provided by article 4 of the said Directive. 32

Due to the fact that the company is fully subject to tax, it should be enti tled to benefit from the double tax treaties concluded by Luxembourg. To this effect, Luxembourg tax authori ties will issue Luxembourg residence certificates. This can be of importance : firstly, 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 financing transaction 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 the vehicles behalf. A securitisation company is not sub ject to any debttoequity 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 securitisation fund 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 will be subject to Luxembourg corporate income tax and to municipal business tax on its worldwide profits. 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 profits amounts to 28.59%. These rates apply to all kinds of income .
18

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 profits to its shareholders at any moment in the future. Any profit carried forward could be subject to tax.
16 Council

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

taxation of savings income in the form of interest payments.

17 The

point is not entirely clear as some authors

consider that the securitisation fund is to be considered as a pool of assets gathered into a patrimoine daffectation. In such a case, the tax status would be the same as for a securitisation company.
18 The

The management company 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 dif ference between the total assets of the company and its third party liabilities .
19

management company of a fund created

under the law on fiduciary 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 be 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 five years. The reduction of the net worth tax amounts to one fifth of the constituted reserve but may not exceed the corporate income tax due for the period for which the reduction is requested.

33

The following points are nevertheless

vat

worth pointing out: Sub-contracted management

ot h e r ta x a spe ct s

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 daytoday management of securitisation vehi cles is exempt. 34

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 to be taxable in Luxembourg where they either benefit 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 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 aircraft or vessels registered in the Luxembourg shipping register. In case of voluntary registration, a flat rate registration duty of EUR 12 is due. An annual registration tax of EUR 2.650 is due to the CSSF for regulated securitisation

vehicles 20. This amount is increased to EUR 5.000 per year for vehicles with multiple compartments.

The taxable income of a Luxembourg fiduciary representative is based on the annual financial statements prepared in accordance with the Luxembourg generally accepted accounting principles.

3. 2. f i D uci ary re pre se n tat ive

The Luxembourg fiduciary representa tive will also be subject to an annual net worth tax (NWT) at the rate of

i n com e an D n e t Wo rt h ta xe s

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

A Luxembourg f iduciar y repre sentative is subject to Luxembourg corporate income tax and to munici pal business tax on its worldwide income. 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 profits is 28.59%. These rates apply to all kinds of income.

base is the difference between the total assets and third party liabilities of the company 21.
20 Grand

Ducal Decree dated July 14th, 2004

(Mem. A 127).
21 It

is possible for the fiduciary representative to

reduce its net worth tax liability, provided it consti tutes a reserve to be kept in its accounts for five years. The reduction of the net worth tax amounts to one fifth of the constituted reserve but may not exceed the corporate income tax due for the period for which the reduction is requested.

35

vat

ot h e r ta x a spe ct s

In cases where the fiduciary 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 fiduciary 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 fiduciary representa tive may benefit from a VAT exemption or be subject to Luxembourg VAT. As a result, the fiduciary represent ative may have to register for VAT purposes and to file VAT returns.

Other tax issues for a fiduciary 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).

36

4. conclusion
These features mean the Luxembourg 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 field of structured finance. As a result, the law represents a wellbalanced compromise between flexibility of the securitisation vehicle on the one hand and investor pro tection on the other hand, whilst at the same time providing a tax neutral environment. law closely fits to the needs of the mar ket in terms of securitisation. It is worth noting that the first 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 financial markets.

38