The Boom of Securitisation Vehicles in Luxembourg

Marjoleine Van Oort & Alicia Sacco

Following the Amended Law on securitisation, Luxembourg offers one of the best regulations for setting up a global securitisation structure.

The basics of securitisation

Securitisation can be described as the pooling of income-generating assets in order to repackage them via a securitisation vehicle into interest-bearing securities, along with their associated risks. Investors can then subscribe to the securities and receive interest, dividends and repayment of the principal amount following an agreed schedule. Such process is used to market assets that are too illiquid, and for which the pooling allows a decrease in funding costs and a mitigation of risk.

New law for extended possibilities

Voted on March 22, 2004, the securitisation law (the “Law”) has made Luxembourg one of the top destinations for carrying securitisation transactions. As of March 2021, almost 10,000 compartments and over 1,000 active vehicles were registered. In February 2022, the Amended Law was adopted, and warmly welcomed by the finance sector. It allows Luxembourg to increase its attractiveness and flexibility for securitisation vehicles (SVs) to investors worldwide.

Indeed, the Amended Law extends the possibilities for third-party financing options and grants interests on securitised assets in favour of third parties. From financing securitisation with loans to welcoming other categories of investors that may not subscribe to securities, the source of funding for securitisation structures is broader then ever. In addition, the ban for active management has been completely lifted for portfolios composed of debts instruments or receivables, which should appeal to collateralized loan obligations‘ managers and will stimulate a new market for Luxembourg.

Features of securitisation in Luxembourg

Assets

Luxembourg SVs can process the securitisation of many different types of tangible and intangible assets like mortgage-backed loans, collateralised-debt obligations and asset-backed receivables (such as real estate receivables, life insurance policies, consumer loans, commodities, credit card receivables, etc.). There is also a great variety of financial instruments that can be securitised, amongst others shares, bonds, warrants, options, notes, structured products, and in general, all instruments with ownership or claim rights can be issued by the SVs to finance themselves.

Compartments

Compartmentalisation is the process of splitting different parts of the assets and liabilities in separate compartments inside a securitisation vehicle. A compartment is isolated in case of insolvency and bankruptcy of other compartments. Some accounting decisions can also be taken on a compartment basis rather than at the level of the entire SV, such as the approval of annual accounts, the allocation to legal reserves and the distribution of profits.

Taxation

Another big advantage of Luxembourg SVs lies in the taxation regime. Opaque vehicles are only subject to the Minimum Net Wealth Tax (MNWT) of EUR 4,815 (2023) per year. Tax neutrality is achieved as dividends/interest paid to the investors are tax deductible. On such payments, no withholding taxes are applicable. If the SV is set up as a fund or a tax-transparent corporate legal form, in principle it qualifies as tax transparent. These features are a good basis for tax optimisation through securitisation.

"Luxembourg taxation rules are a good soil for tax optimisation through securitisation, especially if the securitisation vehicle is a fund"

Costs

Legal fees for the set up of SVs in Luxembourg are significantly lower than in many other countries, as a consequence of reducing the number of documents needed for offerings. Accounting is also cheaper because no IFRS accounting is required. These two characteristics are non-neglectable when it comes to the establishment of a securitisation structure.

Conclusion

Securitisation vehicles are back at the front of the stage. Luxembourg as jurisdiction is certainly one of the best places to set up securitisation structures nowadays. Recent law changes reinforce this position and are widening the market for a positive impact in this sector.

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