What is It About?
Securitization Agreement Luxembourg enables the transferor (fund or company or special purpose vehicle – SPV) to acquire or assume risks linked to receivables, to any type of assets or to any commitment assumed by third
parties or linked to activities executed by third parties. The securitization legal entity acquires or assumes such risk by issuing any type of securities the value and yields of which are linked to these securitized assets.
The Legal Framework
Securitization funds are not legal entities. They are managed by a management company. They are set up in the form of a fiduciary estate separate from the management company, which must be a Luxembourg resident (Sàrl or SA, i.e. a private or public limited company). Assets and liabilities of such fund must be separate from those of the management company. A securitization fund may be made up of several sub-funds, which are independent from one another.
Securitization companies must be incorporated under the form of 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 organized as a public limited company (société cooperative organisée comme une société anonyme). Articles of incorporation of a securitization company may authorize its board of directors/ managers to set up one or several departments which would each relate to a distinct part of its assets and liabilities. Departments allow for a separation of management, liabilities, recourse and liquidation. The minimum capital of a securitization company is the standard minimum for commercial companies (EUR 12,500 or EUR 31,000).
Managing Risk Through Securitization
Cash flow producing liquid assets can be pooled together into an investment vehicle through the use of securitization (SPV). Cash flows generated by the pool of assets are then redirected to support payments to instruments issued bythe securitization vehicle to capital markets.
Using securitization, companies or individuals are able
to separate some assets from their wealth, place them with a Luxembourg securitization vehicle and thus avoid having to undertake the risk of holding or managing such assets. Investors therefore finance the securitization vehicle by issuing securities. This way they are the ones bearing risks in connection with the assets held by that entity.
Tax Treatment of a Securitization Company in Luxembourg
A securitization company is subject to tax in Luxembourg under the standard corporate taxrate (i.e. the aggregate rate of 28.59% in Luxembourg City). In practice however taxable profit is likely to be close to zero due to the fact that most of securitization companies’ income is immediately repaid to investors. The law provides that any commitment (interest or dividends) to investors is considered to be a deductible expense. In Luxembourg dividends paid by a securitization company are qualified as interest for fiscal purposes. However a dividend payment will not be subject to withholding tax under the provisions of the EU Savings Directive. Due to the fact that the company is fully subject to tax, it should, in principle, be entitled to benefit from the double tax treaties’ network of Luxembourg.
A securitization company is not subject to any debt to equity ratio and is exempt from Luxembourg net wealth tax. Please note that securitization vehicles cannot claim exemption related to collection of dividends or capital gains on participations. In addition capital contributions will only be subject to a flat capital duty of EUR 1,250. A securitization company will be exempt from annual net wealth tax of 0.5%.
The State where the branch is established, i.e. here in Luxembourg; may request a full examination of all the financial accounts of the company in case of control by the tax authorities.
Why Hance Law ?
Hance Law is experienced with the legal, collateral, financial and operational issues that arise in the development of the new transaction structures, as well as with Uniform Commercial Code, insolvency, substantive nonconsolidation and tax opinions delivered in connection with securitization transactions.
As valued legal advisors, we understand our client’s businesses and realize the practical effect of our legal advice. Drawing on our exceptional command of the myrid legal and business issues involved in each transaction, we are in a position to legal protect our clients when financing.
We represent issuers, underwriters, placement agents, investment banks, institutional investors, financial guarantors, insurance companies, bank conduits, liquidity banks, investment funds, CDOs, sellers and trustees in securitizing and financing assets and in issuing and investing in various structures in both the public and private markets. We have significant expertise in the documentation and negotiation of various types of domestic and cross-border financings, including numerous types of asset securitizations and other asset-backed transactions such as commercial paper conduit securitizations, single and multi-asset securitizations, as well as all kinds of structured facilities. Our lawyers have experience of all the main techniques used to securitize assets including true sale structures, CMBS, secured loan structures, master trusts, receivables trusts, synthetic securitizations, asset backed commercial paper conduits and repackaging vehicles.