As a member state of the EU and as a OECD country,
Luxembourg is attractive as a location for special purpose
vehicles for European and non-European investors. The
combination of a solid legal framework, a pragmatic stock
exchange and a favourable and stable tax treatment create an
attractive environment in which to launch innovative
Meanwhile, a new law on securitization passed on March 9
2004 will enable the use of new securitization structures,
while formally confirming the validity of limited recourse,
non-petition and segregation provisions. This new law is
entering into force on April 2 2004.
Under the new law, only those securitization vehicles that
issue securities to the public on a continuous basis, require
the approval of the Commission de Surveillance du Secteur
Financier (CSSF), the regulator of the financial industry.
For securitization vehicles, which do not require a licence,
the new law does not introduce new requirements that would
adversely affect the securitization business, but creates a
more favourable and secure environment for the investors and
Incorporation and structuring
Securitization vehicles are typically set up as special
purpose vehicles in the form of a public limited company
(société anonyme) with a minimum share
capital of €31,000.
A local service provider normally provides management and
administrative services to the SPV.
The SPV can use its capital to finance its set-up costs
(notarial fees, publication fees and 1% capital duty) as well
as fees charged for management and administrative services
provided by the service provider.
The SPV will preferably and typically be an orphan company
whose shares are held directly by two Dutch foundations.
Under the new law, the SPV can also be set up as a
securitization fund under a contractual arrangement,
without legal personality, under which the assets of the
securitization fund would be managed by a company with a
registered office in Luxembourg. The assets of the fund can be
held as co-ownership or on a fiduciary basis.
The new law also provides for an SPV or a securitization
fund to have several compartments, thereby achieving the legal
segregation of assets, which creates increased security for
multiple issuance vehicles.
The setting up of the SPV is generally finalized within
three to five days after the promoters have agreed on the
shareholder structure (including the incorporation of the Dutch
foundations) and have appointed the local trust company.
This short timing allows for a quick entry into and
execution of forward purchase agreements or warehousing
Main costs in relation to the incorporation of SPVs are the
notarial fees and the 1% capital duty (capped at €1,250).
Notarial fees normally amount to €2,500 and capital duty
due on the minimum share capital mentioned above amounts to
Corporate taxation of the SPV
SPVs do not have the benefit of any special tax regime
but are fully taxable corporate bodies. The Luxembourg tax
authorities will however enter into advance pricing agreements
that allow the parties to rely on a fixed commercial margin and
thus on pre-determined tax costs. The effective margin will
depend on the particulars of each case. Under the new law,
dividend distribution will however also be tax deductible.
Under the new law, securitization funds are exempt from any
income tax. Furthermore, unlike the regulated collective
investment funds, securitization funds are not subject to
subscription tax either.
Since the SPV is a fully taxable entity, it benefits
from the double tax treaties entered into by Luxembourg. As a
consequence, a tax residency certificate may be obtained from
the Luxembourg tax authorities confirming the tax status of the
Luxembourg has a treaty network covering more than 40
countries. Furthermore, 12 new double tax treaties are now
As a result of the Luxembourg treaty network, there is
usually no withholding tax on payments made to the SPV under
the assets held by it, or the tax is at least substantially
There is no withholding tax in Luxembourg on interest
payments except for interest paid on profit participating
bonds. Under the new law, neither interest payments nor
dividend payments will be subject to withholding taxes.
However, it should be noted that, on June 3 2003 the EU
Council of Economic and Finance Ministers adopted a new
directive regarding the taxation of savings income. The
directive is scheduled to be applied by member states from
January 1 2005. Pursuant to this directive, in certain
circumstances, a withholding or deduction would be imposed on a
payment of interest or other similar income if: (1) the
beneficial owner of the income were an individual tax resident
in an EU member state other than Luxembourg; (2) the paying
agent were established in Luxembourg (or in another member
state applying the withholding tax regime); and (3) the
individual does not request that the required disclosure of
information be carried out, nor do they produce an appropriate
certificate obtained from the tax authorities of their state of
residence confirming that the authorities are aware of the
payment due. In other words, interest paid to individuals
(only) will be subject to withholding taxes soon, but only to
the extent they do not apply for the regime applicable in all
other EU member states.
Under the new law, fees paid by an SPV or a
securitization fund in relation to the management of their
assets will be exempt from VAT in Luxembourg.
Under the new law, a general exemption of registration
is granted in respect of any agreements concluded in relation
with a securitization. To the extent any such agreement would
nevertheless be registered in Luxembourg, and to the extent
such documents are drafted in English, their registration no
longer requires a translation into French or German.
Furthermore, the registration is only subject to a nominal
The SPV is generally not subject to licensing requirements.
This remains true also if the notes bear early amortization
features or if repayment of the notes is possible during the
first two years of the life of the securities. Furthermore,
there are no reporting requirements to any Luxembourg
authorities (except certain reports to the Luxembourg Central
Bank for statistical purposes).
The new law provides that only SPVs or securitization funds
offering securities on a continuous basis to the public are
subject to CSSF approval.
If securities are offered to the public in or from
Luxembourg, a public offering prospectus needs to be drawn up
and approved by the CSSF. The offering would generally be
considered to be public if marketing material is dispatched to
the public in Luxembourg or if a high number of Luxembourg
retail clients are targeted. However, the listing of the
securities on the Luxembourg Stock Exchange does not in itself
trigger a public offering in Luxembourg.
To obtain a listing, a listing prospectus must be prepared
in accordance with Luxembourg law of Stock Exchange. Circular
Letter 98/7 issued by the Commissariat aux Bourses (the
supervisory authority of the Luxembourg Stock Exchange prior to
the CSSF) contains clear provisions regarding information to be
contained in listing prospectuses for asset-backed or credit
linked securities. Derogations may be granted on a case-by-case
basis. Preference shares and hybrid bond products are listed in
the category of bonds and the rules and regulations for listing
bonds are applicable which is generally considered by market
participants to be an advantage.
For securities to be listed on the Luxembourg Stock
Exchange, a Luxembourg listing and paying agent must be
Location of assets
The assets of a Luxembourg SPV do not have to be located in
Luxembourg. The assets may be managed by a collateral manager
located either in or outside Luxembourg.
If the assets are located or deemed to be located in
Luxembourg, the perfection of a security interest over those
assets and the enforcement of that security interest must
comply with Luxembourg law requirements, even if the contract
governing the security interest is subject to a foreign law. In
practice, the charged assets of a Luxembourg SPV are generally
located outside Luxembourg.
The main reason for issuers to incorporate an SPV or set up
a securitization fund in Luxembourg is the combination of a
solid legal framework, a pragmatic stock exchange and
favourable tax treatment.
This memorandum does not cover every aspect of
securitization. It is not designed to provide legal or other
About the authors
Charles Roemers is a partner in Clifford Chance. Charles
joined Clifford Chance's Luxembourg office in 2000 and has
worked since then in the Luxembourg office's Securitization,
Tax and Corporate Groups. He is specialized in international
tax planning, in particular, the setting up and implementation
of international financing structures.
Charles received his law degree from Free University of
Brussels in 1989 (cum laude).
Christine Casanova joined Clifford Chance's Luxembourg
office in 2001 and has worked since this time in the Luxembourg
office's Securitization and Tax Groups. She is specialized in
international tax planning.
Christine received her law degree from University Paris II
Pantheon - Assas of Paris in 1999.