An Attractive Financing Structure

On March 22nd 2004, Luxembourg introduced a new Securitisation Law, thus providing an extremely attractive legal, regulatory and tax framework for securitisation vehicles.

The primary objectives of this new law are to provide a high degree of flexibility, high investor protection, and legal certainty in a tax neutral environment. Here we explain some of the unique features and advantages of securitisation, and some of the parameters for eligibility:

• What is securitisation?
  
• Flexibility
  
• Types of securitisation vehicles
  
• Regulation of the securitisation vehicle
  
• Asset classes qualifying for securitisation
  
• Techniques used for securitising assets
  
• High investor protection
  
• Tax neutrality
  

What is securitisation for ?

Securitisation is a financing technique which consists in transferring a pool of assets (mainly financial assets in any form) from an originator to a special purpose vehicle which then issues debt backed by the assets transferred in and the payments derived there from.

Securitisation is mainly used in order to :

• more easily access to capital markets
  
• convert illiquid assets into cash/liquid ones
  
• transfer risk to third parties.
  

Flexibility

The Luxembourg law allows for a very high degree of flexibility regarding :

• The types of securitisation vehicles
  
• The regulation of the chosen vehicle
  
• The asset classes which may be securitised
  
• The techniques used for securitising assets.
  

Types of securitisation vehicles

A securitisation vehicle may take the form either

• of an entity with a legal personality of its own. As in most cases, securities are to be offered to the public, the legal entity should preferably take the form of a " société anonyme " (public limited company).
  
• of an entity without a legal personality of its own. In that case, the securitisation vehicle takes the form of a common fund organised either as a co-ownership or a trust. The securitisation vehicle not having a legal personality in its own right, the management of the vehicle requires legally the set up of a distinct management company.
  

Whatever the legal form chosen, the securitisation vehicle may present different compartments receiving different types of assets and financed through the issuing of distinct securities.

Regulation of the securitisation vehicle

A securitisation vehicle falls under the regulation of the CSSF as a supervisory body if the vehicle issues securities to the public on a regular basis. Regulation encompasses approval of articles of incorporation or management regulations, notification and acceptance of board members and proof of adequate organisation and resources. Assets lodged in a securitisation vehicle which take the form of transferable securities and cash must be held in custody with a Luxembourg bank. If the vehicle does not issue on a regular basis, it is not subject to CSSF regulation.

Asset classes qualifying for securitisation

The Luxembourg law provides for a unique flexibility as there are no restrictions regarding the types of assets which may be securitised. It is possible to securitise assets directly, whether tangible or intangible. It is also possible to securitise risks linked to the holding of assets, whether tangible or intangible.

Techniques used for securitising assets

The Luxembourg law is highly flexible regarding securitisation techniques used. Assets may be moved into the securitisation vehicle through effective change of ownership from the originator to the securitisation vehicle or through the sale of credit risk protection from the securitisation vehicle to the originator. The securitisation vehicle may be unique and simultaneously acquire assets and issue securities for financing the assets. The securitisation process may be achieved through a dual structure whereby the acquisition and the financing of assets is lodged in two different vehicles which may not necessarily be domiciled in the same jurisdiction.

High investor protection

Securitisation vehicles created under the law of Luxembourg provide for enhanced investor protection.

Investor protection is achieved through various mechanisms.

• The Luxembourg law allows for specific contractual provisions which ensure limited recourse, subordination of investor and creditor rights and protection of the securitisation vehicle from bankruptcy proceedings directed against its orginator.
  
• The bankruptcy remoteness of a securitisation vehicle is high as assets are protected from any insolvency risk of the securitisation vehicle, the originator, the service providers or the collateral.
  
• A fiduciary representative may be appointed and may be entrusted with the safeguarding of investors and creditors interests .
  
• Assets which take the form of securities and cash need to be held in custody with a Luxembourg bank .
  

Tax neutrality

Tax neutrality is one of the most attractive features of Luxembourg securitisation vehicles.

Effective taxation depends on the legal form the securitisation vehicle takes.

Securitisation vehicles organised as corporate entities are liable to

• Corporate income tax of maximum 30,38 % calculated on net accounting profit. Any other commitments i.e. to remunerate investors are fully tax-deductible.
  
• Capital contribution duty which is limited to EUR 1.250
  

They are not liable to

• Net worth tax
  
• Withholding tax on distributions.
  

As securitisation companies are fully taxable resident companies, double tax treaties in place do apply.

Securitisation vehicles organised as a common funds

Securitisation vehicles organised as common funds are not liable to

• corporate income tax
  
• contribution tax (taxe d'abonnement)
  
• withholding tax on distributions.
  

Management services provided by a management company are exempt from VAT.