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Saturday, 20th April 2024 |
| New securisation law opens up opportunities in Luxembourg |
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| Luxembourg legislation has created a number of different approaches to dealing with securitisation vehicles. Tax, trust and accountancy specialists Fidomes S?rl outline the opportunities offered by Luxembourg within the context of securitisation. |
The law of 22 March 2004 lays down the legal framework that allows securitisation vehicles to be created in Luxembourg. The scope of application of the securitisation law varies widely, as it is now possible to securitise numerous types of assets, risks, income or activity by means of this vehicle. Securitisation is accessible to everyone and to all types of investors (corporate, private or institutional).
Two types of securitisation vehicles are offered by the Luxembourg market to investors and financial services providers, as a securisation company or a securitisation fund. Securitisation funds made up of one or several fiduciary estates are subject to trust and fiduciary contract law, and are administered by a management company.
The assets and the liabilities of the fund must be separate from those of the management company. The fund may be made up of several sub-funds that are independent from each other.
Securitisation companies must take the form of a public limited company, a partnership limited by shares, a private limited liability company or a cooperative company organised as a public limited company. The board of directors can set up one or several sub-funds which would each relate to a distinct part of its assets and liabilities.
Luxembourg's specificities
When incorporated as a company, the securitisation vehicle is totally taxable on all profits resulting from the underlying activity carried out within it. Therefore all of this income (interest, received dividends, profits, gain, appreciation…) is taxable in full and makes up the positive part of the tax base.
All of the expenses related to management of the underlying activity are however deductible from this base. The balance of these two amounts makes up what can be called the tax base prior to allocation; this is the gross profit to be paid to investors.
All payments allocated to investors - holders of securities, shares, bonds or certificates issued by the securitisation vehicle - are deducted from this tax base. Whatever their designation, these payments are actually deemed to be interest paid to investors.
On the whole, the securitisation vehicle is taxable on the balance of what it actually keeps for itself, according to the usual rules for establishing the tax base for Luxembourg companies (increase of reserves).
It is to be noted that securitisation vehicles cannot claim exemption related to the collection of dividends or capital gains on these same participations. This is in no way a SOPARFI (Luxembourg investment company), although one could be used in tandem with the securitisation vehicle.
Debt ratio
It is useful to indicate that the debt of the securitisation vehicle is not limited or restricted by law. This means that the securitisation vehicle can therefore be financed without having to immobilise a minimum capital and that gearing resulting from interest fees can be used more efficiently.
Withholding tax - deduction at source
Interest paid by securitisation vehicles is not subject to any withholding tax. Payments allocated to holders of shares, bonds, securities or certificates issued by the securitisation vehicle are not subject to any withholding tax, neither are royalties paid by the securitisation vehicle. Dividends paid to holders of financing securities of the securitisation vehicle - as long as these give entitlement to a proportion of the net income of the securitised asset - are not subject to any deductions at source.
Taxable basis of securitisation funds
When securitisation vehicles are incorporated as funds, there is no taxation on any profit made by the fund. As regards withholding tax and taxation of income generated abroad: it can be incorporated as a co-ownership, and in this case, each investor is taxable on the part of income he owns personally.
Parent-subsidiary Directive and the securitisation vehicle
The securitisation vehicle does not benefit from Art 166 LIR. This means that it cannot be exempted on dividends it receives from other Luxembourg or foreign companies even if these meet taxation conditions. In addition, exemptions of capital gains on these same participations are not exempted from corporate tax either. These restrictions concerning exemptions, very common in the framework of Luxembourg Investment Companies (SOPARFI), are not surprising.
Insofar as these gains would be exempted from the tax base while payments to security holders would be totally deductible, the result would indeed amount to a negative tax base (in the framework of income from participation).
Securitisation funds can in no way take advantage of the Parent-subsidiary Directive, as the fund is not considered as a resident company under the terms of the Directive.
However, it does appear that a securitisation company, a company with taxable capital - the registered office of which is located in the European Union - should be able to benefit from advantages of the Parent-subsidiary Directive and thus from reduction/exemption it provides (like other double treaties). As for the Royalties Interests Directive, we are of the opinion that the same line of reasoning can be applied to this case.
Regulated and non-regulated entities
As long as securitisation vehicles do not continuously issue stocks and bonds aimed at the general public, they do not have to be regulated by the CSSF (local bank commission). This is also true for their management companies.
Securitisation vehicles that continuously issue stocks and bonds aimed at the general public (regulated securitisation vehicles) are to obtain approval from the 'Commission de Surveillance du Secteur Financier' (CSSF) to carry out their activities. The following terms appear to have to be understood as follows:
Continuously: issues more than once per calendar quarter (four times per year).
Aimed at the general public: either by public advertising or by investors who invest less than €125,000 per person.
VAT and the securitisation vehicle
Management transactions of the securitisation vehicle are exempt from any VAT. This provision is significant insofar as securitisation transactions do not generally come under the scope of VAT application. The opposite would have generated significant indirect tax fees for the vehicle since it would have been unable to recover the VAT that it would have been charged by its managers.
The securitisation law provides for total exemption of subscription tax for securitisation vehicles. Article 90 of the law also provides for total exemption of wealth tax for securitisation vehicles.
This provision is significant, as securitisation transactions can concern significant amounts of the assets of a transferring natural person or entity and the wealth tax would mean heavy fees for the securitisation vehicle and external investors. |
This article was written by the funds department of Fidomes S?rl.
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