Luxembourg Investment Vehicles SV 2017 MILAN ROME LUXEMBOURG LONDON LUGANO DUBLIN SINGAPORE DUBAI April 2017
We are what we repeatedly do. Excellence, then, is not an act, but a habit. -Will Durant- 2 On a preliminary basis and for the sake of clarity, the details shared, are of a general nature and shall not be intended as a fully comprehensive tax/legal advice but rather as a preliminary overview. Although we attempt to provide you with precise and timely updates, there can be no guarantee that the information shared is accurate as of the date it is received or it will continue to be accurate in the future. If you wish to have a more specific advice on the same or on different matters, LEXTRAY is at your disposal, to provide you with any advice you may require in connection with the above.
> THE LUXEMBOURG ENVIRONMENT Luxembourg is the world s second largest investment funds domicile, and is the prime location for the pan-european and global distribution of investment funds under the UCITS brand. Initially designed as a global retail funds hub under the sole UCITS brand, Luxembourg has gradually opened up to the alternative asset classes, offering personalised structuring solutions through specialized investment vehicles. Structuring flexibility, investor protection and tax efficiency are the crucial elements that have inter alia helped to convince the investors, to shift their operations and investments to Luxembourg. In addition to such a fund-friendly environment, the constant work of the legislator to promote Luxembourg as a fully-regulated on shore location (see its stringent any money-laundering regulation) has greatly contributed to its business appeal. 3
Luxembourg Investment Vehicles / SV > SVs IN A NUTSHELL The purpose of this brochure is to provide you with a bird s eyes view of the legal framework, investment policies as well as the reporting and taxation particularities of the securitisation vehicles in Luxembourg ( SV ). We hope that you find it useful and that it meets your expectations. The Luxembourg law of 22 March 2004, defines securitization as the acquisition or assumption, directly or through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities, whose value or yield depends on such risks. A securitization transaction commonly involves the following parties: (i) an entity called the originator that either sells assets to a SV as a true sale or that transfers the risk to a SV (in particular through a synthetic transaction) ( Originator ); (ii) an investor that subscribes for equity and/or debt securities, which are issued by the SV as a private placement or a public offering ( Investor ). Cash flows generated by the assets/risks transferred to the SV are redirected to support payments to the Investors. Main advantages at the level of the Originator: (i) the assets transferred are taken off the Originator s balance sheet; (ii) a properly structured securitization transaction will result in the isolation of the securitized assets from the Originator s creditors which will most likely result in a better rating of the debt instruments issued by the SV as compared to the general rating of the Originator; (iii) diversification of the sources of funding. Main advantage at the level of the Investor: (i) tailoring the risk return and maturity characteristics of debt instruments in order to meet the different investment strategies of the Investors. 4
Luxembourg Investment Vehicles / SV > LEGAL FRAMEWORK The securitisation has been introduced by the Luxembourg Law of 22 March 2004 and has been amended several times since then and lastly by the law of 27 May 2016 ( Securitization Law ). > AUTHORISATION AND SUPERVISION Regarding the authorisation and supervision of SV, the Securitization Law differentiates between authorized and non-authorised entities. Authorised SV are authorised and supervised by the Luxembourg Supervisory Authority of the financial sector ( Commission de Surveillance du Secteur Financier or CSSF ) which is responsible for ensuring that they comply with the Securitization Law and fulfil their obligations. An Authorised SV is subject to mandatory CSSF supervision ( Authorised SV ) if it issues securities (i) to the public, (ii) on a continuous basis. These two conditions are cumulative for the Authorised SV. > ASSETS CLASSES Another aspect of the Securitization Law s flexibility, is the wide range of assets classes that qualify for securitization. The Securitization Law does not limit securitized assets. Under the Securitization Law, also risks may be securitized. The SV can assume these risks by acquiring the assets, guaranteeing the obligations or committing itself in any other way. 5
Luxembourg Investment Vehicles / SV > STRUCTURAL AND LEGAL ASPECT 1. LEGAL FORMS SV can be established either in a form of a corporation ( securitization company ) or in the form of a fund ( securitization fund ). A securitization company must be set up as a (i) public limited company ( société anonyme ), (ii) partnership limited by shares ( société en commandite par action ), (iii) private limited company ( société à responsabilité limitée ), (iv) cooperation company organized as a public limited company ( société coopérative organisée comme société anonyme ). An SV can also be organised in a contractual form as a securitization fund which does not have a legal personality. A securitization fund can either take the form of (i) a co-ownership of assets (co-propriété) where Investors will have a right in rem to a portion of the relevant securitized assets underlying their securities, and the role of the management company would be limited to the mere management of the assets, (ii) fiduciary property where the management company will hold the securitized assets as fiduciary property (which will be segregated from its other assets). The authorisation for the exercise of the activity of a fiduciary-representative can only be granted to Authorized SV stock companies having a share capital and own funds at least equal to 400,000 EUR. 2. UMBRELLA FORM The Securitisation Law provides for the option for SVs to create one or more compartments where each compartment will correspond to separate assets and liabilities and where each compartment will be segregated from the other compartments of the same undertaking as regards Investors and creditors rights effectively ring-fencing each compartment. This ring-fencing will also apply in case of liquidation. 3. CAPITAL REQUIREMENT AND OTHER ASPECTS A SV is not subject to a specific minimum share capital, which will then depends upon the legal form and ranges between Euro 12,000 and 30,000. The securitization company is required under the Luxembourg commercial company law to allocate each year 5% of its profits to the creation of a legal reserve until the reserve has reached an amount equal to 10% of the share capital. 6
Luxembourg Investment Vehicles / SV > ELIGIBLE INVESTORS The SV is not restricted to any particular type of Investor. The shares, the bonds and the notes can be subscribed by an individual, a group of individuals or any type of corporate Investors. The Securitisation Laws provides a high level of protection against the bankruptcy of all the parties involved in a securitization transaction. It provides that the incorporation documents may comprise clauses, whereby Investors and/or creditors waive their rights to initiate a bankruptcy proceeding against the SV. The obligations of the Investors due to a bankruptcy of the SV cannot exceed the amount of their investment in the SV. The assignment of claims to or from the SV is legally valid and enforceable towards third parties by the signature of the assignment although, in accordance with international guidelines, the laws of the country of the assignor shall governs the enforceability of the sale of the claims towards the debtor as well as the discharging effect of the debtor s payment. > SERVICE PROVIDERS 1. DEPOSITARY The custodian is responsible for keeping the documentation proving the existence of securitized assets and guaranteeing that these assets are kept under the best condition for the Investor. Securitization Law requires that Authorized SVs must entrust the custody of their liquid assets and securities with a credit institution established or having its registered office in Luxembourg. 2. EXTERNAL AUDITOR Whatever their legal form and accounting adopted, SVs must be audited by an independent auditor (réviseur d entreprises). For the case of an Authorized SV, it shall be an authorized independent auditor (réviseur d entreprises agréé). 7
Luxembourg Investment Vehicles / SV > TAXATION 1. SECURITIZATION COMPANIES Securitization companies are subject to tax in Luxembourg at the effective rate of 27.08% and a minimum net wealth tax set at EUR 4,815. However, they will be entitled to deduct from their gross profits their operational costs including all obligations assumed towards investors and creditors, securitization companies should not generate significant taxable profits and should therefore in principle, be tax neutral. Securitization companies should be entitled to benefit from the double tax treaties concluded by Luxembourg and a residence certificate could be issued by the Luxembourg tax authorities upon request. Should the securitization company lose the benefit deriving from the double tax treaties and the parent-subsidiary Directive 90/43, the obstacle could be overcome by inserting in the control chain (between the securitization company and the target subsidiary companies) a simple Luxembourg SOPARFI (SA, Holding) that would benefit by default. Securitization companies are not subject to any debt-equity ratio and is furthermore exempt from net wealth tax. 2. SECURITIZATION FUNDS AND MANAGEMENT COMPANIES Securitization funds are considered as tax transparent entities. Consequently, its Investors and creditors are subject to a similar tax treatment as if they would invest directly in the underlying assets. (i) Withholding tax, if any, on income from underlying assets should be reduced as per the provisions of the relevant double tax treaty between the country of the debtor of the income and the country of residence of the Investor. (ii) The securitization fund is exempt from corporate tax and net wealth tax. (iii) There is no withholding tax on distributions. (iv) Double taxation at the level of the Investor will be avoided under its own domestic tax law, or in accordance with the double tax treaty in force between its country of residence and the country of residence of the debtor of the underlying income. It will be subject(through the Management Company) to tax in Luxembourg at the effective tax rate of 27.08% and net wealth tax of 0.5%. The Securitisation Law provides that the management services of SVs located in Luxembourg is exempt from VAT. 3. FIDUCIARY REPRESENTATIVE A Luxembourg fiduciary representative is subject to tax in Luxembourg at the effective tax rate of 27.08% and net wealth tax of 0,5%. In case where a fiduciary representative, acts in an independent way towards the Investors or towards the SV and receives a consideration for the services it rendered, the fiduciary representative should be considered as a taxable person for VAT purposes. Depending on the terms of the agreement between the parties, the services rendered by the fiduciary representative may benefit from a VAT exemption or be subject to Luxembourg VAT. 8
Presentation of the Firm LEXTRAY is committed to providing the highest quality legal and tax services. Our team is at your service in 6 different languages (English, French, Italian, German, Spanish and Arabic), directly active in 7 jurisdictions (Luxembourg, Italy, Switzerland, UK, Ireland, Singapore and Dubai) and indirectly through our associates in the Netherlands, Spain, USA, Argentina and Brazil, to provide you with the finest tailor-made work products and solution. Our widespread territorial coverage allows us to remain in constant contact with you, 24h24 and 7/7, guaranteeing a first-rate standard and rapid execution as well as a clear, practical and up-to the minute advice. Considering the fast moving and aggressive business environment we nowadays facing, we are committed to a relentless professional skill update and are outmost attentive to tuning to the clients wishes and adapting to new laws and regulations. EMPHASIS ON OUR INVESTMENT VEHICLES PRACTICE AREA Our Luxembourg team has a robust expertise in all areas of Luxembourg investment vehicles law. This includes among others: (i) support in finding the ideal investment vehicle to meet your requirements and your goals from a governance, regulatory and tax perspective; (ii) support in setting up the vehicle; (iii) tax structuring support; (iv) providing ongoing corporate support service throughout the lifetime of the vehicle; (v) keeping you updated on the new regulatory developments. 9
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