CHEVALIER & SCIALES

securitization in luxembourg

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client memorandum banking & finance
 client memorandum securitization

summary

The Luxembourg law of 22 March 2004 on

Securitizations (the “Luxembourg Securitization
Law”) has laid the foundations for the legal,
regulatory and tax framework for Luxembourg
securitization vehicles. The main features and
advantages of the Luxembourg Securitization
Law are discussed hereafter. A securitization
is a type of structured financing in which a pool
of financial assets (such as loans, mortgages,
etc.) is transferred to a special purpose vehicle
(“SPV”) that then issues debt backed solely
by the assets (collateral) transferred and
payments derived from those assets. While the
benefits of securitization may vary for different
2 issuers and investors, the common advantage
of securitization is that it provides a lower cost
of capital, enables a company to convert illiquid
assets into cash and transfers the risks related
to some assets to third parties.

This publication has been prepared by the law firm Chevalier & Sciales and is for general guidance only. The contents
hereof are not intended to constitute legal advice and do not substitute for the consultation with legal counsel required
before any actual undertakings.

© 2010 Chevalier & Sciales

 client memorandum
i. key features
(a) definition
The definition of “securitization” is very broad
and encompasses all transactions whereby
a SPV acquires (true sale securitization) or
assumes (synthetic securitization) any risk
linked to an asset. This SPV is financed by
the issue of shares, bonds or other securities,
whose return value depends on the investment
risks.
(b) legal forms – share capital
The Luxembourg Securitization Law
distinguishes between securitization vehicles
that have either been set up under the form of
a company (securitization company) or under
the form of a fund (securitization fund) run by
a management company. The securitization
company must adopt one of the following
forms, namely (i) a company limited by shares
(société anonyme), (ii) a limited liability
company (société à responsabilité limitée),
(iii) a partnership limited by shares (société en
commandite par action) or (iv) a cooperative
company organized as a company limited by
shares (société cooperative organisée comme
société anonyme). A securitization company is
not subject to a specific minimum share capital.
The minimum share capital depends upon the
legal form and ranges between 12.500 euro (for
an S.à r.l.) to 31.000 euro (for an S.A.).
(c) supervision
There is no need to have the approval of
a Luxembourg administrative authority, for
example the Supervisory Commission of the
Financial Sector (“CSSF”), for securitization
vehicles issuing securities in a private placement
or making a single issue of securities or issue
on an irregular basis. However, securitization
vehicles which issue securities on a continuous
basis to the public must be authorized by
the CSSF. The following terms appear to be
understood as follows:
© 2010 Chevalier & Sciales
securitization
• “continuously” means more than three (3)
issues per year to the public. The number of
issues to consider is determined by the total
number of issues of all compartments of the
securitization undertaking.
• “to the public”: Concerning the issuance of
securities to the public, the CSSF has set down
the following criteria:
- Issues to professional clients within the
meaning of Annexe II to Directive 2004/39/EC
(MIFID) are not issues to the public;
- Issues whose denominations equal or exceed
EUR 125,000 are assumed not to be placed
with the public;
- The listing of an issue on a regulated or
alternative market does not ipso facto entail
that the issue is deemed to be placed with the
public;
- Issues distributed as private placements,
whatever their denomination, are not
considered as issues to the public. The CSSF
assesses whether the issue is to be considered
as a private placement on a case-by-case basis
according to the communication means and the
technique used to distribute the securities. 3
(d) asset classes
The Luxembourg Securitization Law allows
for the securitization of “risks related to the
ownership of all assets, whether movable,
tangible or intangible, as well as risks resulting
from commitments that were assumed by third
parties or that are inherent to all or part of the
activities undertaken by third parties”. As a
result, virtually all assets can be securitized
such as: mortgages, trade receivables,
commercial credits, current accounts, shares,
debenture loans, buildings, etc… Securitization
may be used in various situations. Some
potential applications could be:
• Securitization of a portfolio of securities
In order to cancel the negative consequences
of the risk inherent of holding securities
being accounted for on the balance sheet, a
company will transfer this portfolio at current
value to a securitization vehicle. This allows
companies to convert a portfolio of securities
 client memorandum
into liquid assets. The investors investing in
the securitization vehicle have the benefit of
acquiring a significant interest in a portfolio
of securities without having to bear the full
investment of this portfolio alone.
• Securitization as structure for intra group
financing activities
It enables a group company to find a financing
source within the securitization vehicle. Holders
of the securities of the securitization vehicle will
be paid profits owed to them on the financing
activity. Unlike normal Luxembourg companies,
there is no debt equity ratio that needs to be
maintained on a securitization vehicle. A
securitization vehicle can thus be financed
without having to maintain any minimum capital
requirement. This substantially reduces the
costs of financing.
ii. tax benefits and other
advantages
4
• No debt equity ratio: As above mentioned,
there is no debt-to-equity ratio obligation that
needs to be maintained for a securitization
vehicle. This is not the case when using a
common Luxembourg company (soparfi), where
there is a 85/15 debt equity ratio.
• Withholding tax: Interests and royalties
paid by securitization vehicles are not subject to
any withholding tax (except for the application
of the EU Savings Directive). Furthermore
payments made to holders of shares (for
instance dividends) of a SPV are not subject
to any withholding tax. This is an important
advantage in comparison with a common
Luxembourg company (soparfi) where there is
a 15% withholding tax on dividends.
• Deductibility of expenses and payments
to investors of the Luxembourg SPV: All
expenses related to the management of the
SPV are fully deductible and the payments
made to investors of the SPV (whether in the
form of interests or dividends) are further
fully deductible from the taxable basis of the
SPV. Therefore Luxembourg securitization
companies should not generate significant
© 2010 Chevalier & Sciales
securitization
taxable profits and should therefore to, a large
extent, be tax neutral. They will need to leave
a very small margin to be negotiated and
approved with the Luxembourg tax authorities
in a Luxembourg tax ruling.
• VAT exempt: The management of
securitization vehicles are exempt from VAT.
• No Luxembourg wealth tax: Securitization
vehicles are exempt from net wealth tax. This is
an important advantage as normal Luxembourg
companies (soparfi) are subject to a wealth tax
of 0,5 % on the net assets of the company.
• Benefit from Luxembourg’s double tax
treaty network: As securitization companies
are fully taxable companies, they can benefit
from Luxembourg’s double tax treaty network.
• Liquidation / tax exempt: The liquidation of
securitization companies is tax exempt.
• Registration tax: Any agreement executed
in the context of a securitization or any deed
related thereto is exempt from the registration
formality unless it relates to real estate situated
in Luxembourg, aircraft or vessels recorded
in a Luxembourg public register. In case of
voluntary registration, such agreements and
deeds are subject to a fixed registration duty
of 12 Euro. It is important to note that for the
registration of any agreement or deed relating
to a securitization, documents written in English
are accepted without the need for a translation
into French or German.
• Listing on the Luxembourg Stock
Exchange: The securities issued by a
Luxembourg securitization vehicle may be listed
on the Luxembourg Stock Exchange (either on
the Regulated Market as on the Euro MTF).
• Possibility to have segregated
compartments: The Luxembourg
securitization company can establish
segregated compartments. The Luxembourg
securitization vehicle constitutes one single
legal entity. However, each pool of assets may
be invested for the exclusive benefit of the
relevant shareholders of the compartment and
each compartment shall only be responsible
for the liabilities which are attributable to
such compartment. All the rights of investors
 client memorandum securitization

and creditors in relation to each compartment

are therefore limited to the assets of the
compartment. Each compartment will be
deemed to be a separate entity for the investors
and creditors of the relevant compartment.

iii. conclusion

The Luxembourg Securitization Law allows

Luxembourg to establish itself as a key
jurisdiction for securitization transactions.
Luxembourg legislators have created a tailored
framework for securitization transactions by
establishing a well balanced compromise
between flexibility of the securitization vehicle
on the one hand and investor protection on the
other hand whilst at the same time providing a
tax neutral environment.

© 2010 Chevalier & Sciales

 client memorandum securitization

for further information please contact:

olivier sciales , partner

Email: oliviersciales@cs-avocats.lu

rémi chevalier , partner

Email: remichevalier@cs-avocats.lu

www.cs-avocats.lu

CHEVALIER & SCIALES

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© 2010 Chevalier & Sciales