Securitization Vehicles in Luxembourg

Luxembourg, together with Ireland, remains the location of choice for securitisation activities.

Luxembourg  offers indeed an attractive environment for setting up securitization vehicles (SVs), thanks to a strong and flexible legal system and a favourable tax regime. These vehicles are used to manage and transfer various types of financial risks by issuing securities to investors.

Legal Basis

Securitization in Luxembourg is governed by the Law of 22 March 2004 as amended,  which allows a securitization vehicle to take on risks linked to loans, assets, or liabilities from other parties, and then issue financial instruments based on those risks.

Structure Options

SVs can be formed either as:

• Companies, such as public limited companies (S.A.), private limited liability companies (S.à r.l.), or partnerships (SCA), or

• Funds, which have no legal personality and must be managed by a Luxembourg-based management company.

Compartment Model

SVs can be organized into multiple compartments, with each one legally and financially separate from the others. This “ring-fencing” setup ensures that liabilities or performance issues in one compartment do not affect the other compartments of the SV.

Regulatory Supervision

If an SV issues securities to the public on a continuous basis, it must be approved and monitored by the CSSF (Luxembourg’s financial regulator). Private placements by so called “well informed investors” or one-time issuances are typically not subject to this supervision, which makes that most of SVs in Luxembourg are unregulated.

Tax Advantages

Luxembourg SVs benefit from tax neutrality:

• Although subject to corporate income tax (CIT) and municipal business tax (MBT), most of their income is offset by deductible payments made to investors or creditors.

• As a result, the taxable profit is usually close to zero.

• There is no withholding tax on distributions to investors, and some management fees may be exempt from VAT.

Expanded Possibilities Since 2022

An important legal update in 2002  allows SVs to raise funds not only through traditional securities but also via instruments like loans and promissory notes. In addition, while one of the main criteria for qualifying as a SV is risk assumption by third parties and not by the SVs themselves, the latter may now  also actively manage debt portfolios, enabling  higher returns in complex structures like collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs).

We at BLBInLaw assist our clients in setting up their SVs and ensuring that the related documentation is compliant with Luxembourg law and regulations.