Luxembourg

Author: | Published: 23 May 2005
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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 products.

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 the promoters.

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.

Timing

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 agreements.

Costs

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 €310.

Tax

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.

Treaties
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 SPV.

Luxembourg has a treaty network covering more than 40 countries. Furthermore, 12 new double tax treaties are now under negotiation.

Withholding tax
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 reduced.

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.

VAT
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.

Registration requirements
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 fixed duty.

Regulation

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.

Luxembourg listing

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 appointed.

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.

Conclusion

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 advice.

About the authors

Charles Roemers

Clifford Chance

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

Clifford Chance

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.