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On March 9 2004 a new law was approved in parliament that creates a complete and comprehensive legal framework for securitization transactions.

The law aims at: (i) allowing for a high degree of flexibility when structuring a securitization transaction through Luxembourg; (ii) ensuring a high level of investor protection and legal certainty; and (iii) ensuring tax neutral treatment of securitizations in Luxembourg.

It has an extensive scope, intended to cover all possible types of securitizations in the broadest sense of the word, ranging from the most complex structures to simple repackagings, regardless of the type of asset classes.

Specific securitization vehicles are provided for, which can be set up as a corporate entity or fund structure.

Within each securitization vehicle, fully segregated compartments can be created. Each compartment is treated as a separate entity, except if otherwise provided for in the articles of association of the securitization company or the management regulations of the securitization fund.

No authorization requirements apply to securitization vehicles. However, due to constraints imposed by EU law, securitization vehicles that issue securities on a continuous basis to the public are subject to authorization and supervision. The requirements for obtaining an authorization are not fundamentally different from the requirements that apply to undertakings for collective investment. Individual securitization transactions carried out by a regulated securitization vehicle are not subject to prior approval.

Certain transfer mechanisms for claims are enhanced and specific provisions aim at excluding the risk of true sale transactions being recharacterized.

To ensure bankruptcy remoteness, the law explicitly confirms the validity and the enforceability of non-petition provisions, subordination arrangements, limited recourse provisions, waterfall arrangements and non-attachment provisions.

A new category of financial sector professionals is created - the fiduciary representative - that, within a securitization transaction, not unlike a trustee, can, among other things, be entrusted with representing investors and preserving their rights. Special bankruptcy provisions do not affect collateral granted to the fiduciary representative for the benefit of investors and creditors in the transaction (for example, hardening periods or fraudulent conveyance).

A tax neutral treatment of securitization vehicles is provided for. Securitization companies are fully liable to corporate income tax and municipal business tax at an aggregate tax rate of a maximum 30.38%. However, any commitments a securitization company owes to investors and creditors are fully tax deductible. In practice, securitization companies will not realize any taxable profits and so will not pay income taxes because any income or gain is normally offset by a tax-deductible expense, but as they are fully liable to Luxembourg income tax on taxable profits (if any), they should normally benefit from tax treaty protection. Securitization vehicles organized as funds are per se income tax exempt, as are investment funds. But, unlike most investment funds, no subscription tax (taxe d'abonnement) is due.

Dividend distributions and interest payments made by securitization vehicles are withholding tax exempt (unless withholding tax must be levied in accordance with the EU Savings Directive, as from 2005 at the earliest).

Management services provided to a securitization vehicle are VAT exempt.

The law offers the possibility to create equity-funded vehicles without triggering the ad valorem duty, equity contributions to a securitization company being subject to a fixed duty yet to be determined but which will not exceed €1,250.

By Ari Gudmannsson

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