How to set up a Luxembourg securitization vehicle

Luxembourg has established itself as a premier destination for securitization vehicles (SVs) due to its investor-friendly legal framework, fiscal efficiency, and strategic location in the heart of Europe. Setting up a securitization vehicle in Luxembourg involves several steps, from selecting the right structure to ensuring compliance with regulatory requirements. Below is a comprehensive guide to the process.

1. Understand Securitization in Luxembourg

Securitization in Luxembourg refers to the process of pooling financial assets and transforming them into tradeable securities. The Luxembourg Securitization Law of 22 March 2004 governs these activities, offering a flexible framework that supports a wide range of securitization transactions, including:

• Asset-backed securities (ABS)
• Collateralized loan obligations (CLOs)
• Real estate-backed transactions
• Credit risk transfer

A securitization vehicle in Luxembourg can be structured as a company or a fund, depending on the investor’s objectives and operational needs.

2. Choose the Legal Form

The first step is selecting the legal form for your securitization vehicle. Luxembourg law allows SVs to be set up as:

• Companies: Typically structured as public limited companies (S.A.), private limited companies (S.à r.l.), partnerships limited by shares (S.C.A.), or cooperatives organized as public limited companies (SCoSA).
• Funds: These are contractual arrangements with no legal personality, often chosen for greater operational simplicity.

For most international transactions, securitization companies are the preferred option due to their robust governance structures.

3. Define the Scope of Activities

A securitization vehicle can engage in the acquisition, holding, and management of financial assets, as well as the issuance of securities. It’s crucial to clearly define the scope of activities in the constitutional documents to ensure compliance with the Securitization Law.

Additionally, SVs can compartmentalize assets and liabilities into separate compartments, allowing for the segregation of risks and tailored issuance programs.

4. Draft Constitutional Documents

The formation of a securitization vehicle requires drafting appropriate constitutional documents, including:

• Articles of Association (for companies)
• Offering Memorandum (detailing the structure, risks, and asset pool)

These documents must align with Luxembourg’s legal requirements and the specific objectives of the securitization transaction.

5. Obtain Regulatory Clearance

Depending on the structure and scope of the SV, regulatory oversight by the Commission de Surveillance du Secteur Financier (CSSF) may be required. Generally:

• Non-regulated SVs: Securitization vehicles issuing securities on a private placement basis do not require CSSF approval.
• Regulated SVs: If securities are offered to the public on a continuous basis, CSSF authorization is mandatory.

6. Incorporate the Vehicle

Once the constitutional documents are ready, the SV must be incorporated. This process involves:

• Notarization: The articles of association must be executed before a Luxembourg notary.
• Registration: Filing with the Luxembourg Trade and Companies Register (RCS).
• Capital Requirements: Minimum share capital for an S.A. is €30,000, while an S.à r.l. requires €12,000.

7. Tax Structuring

Luxembourg offers significant fiscal advantages for securitization vehicles, including:

• Tax Neutrality: Income and gains generated by the securitization vehicle are typically not subject to corporate income tax.
• No Withholding Tax: Distributions made to investors are generally exempt from withholding tax.
• VAT Exemption: Management services provided to securitization vehicles are exempt from VAT.

However, careful tax structuring is essential to ensure compliance with transfer pricing and anti-abuse regulations.

8. Open Bank Accounts and Appoint Service Providers

A securitization vehicle must open a bank account in Luxembourg for capital contributions and ongoing transactions. Additionally, appointing professional service providers is essential, including:

• Corporate Administrators
• Auditors
• Legal Advisors
• Custodians (if required by the structure)

9. Initiate Securitization Transactions

Once operational, the securitization vehicle can commence transactions by:

• Acquiring Assets: Purchase or transfer of financial assets.
• Issuing Securities: Structured to match the cash flow and risk profile of the underlying assets.
• Managing Risks: Implementing mechanisms such as credit enhancements or hedging.

10. Ensure Ongoing Compliance

Maintaining a Luxembourg securitization vehicle requires adherence to local regulations, including:

• Annual Reporting: Filing audited financial statements.
• Tax Compliance: Submitting periodic tax declarations.
• CSSF Reporting: If regulated, regular reporting to the CSSF.

Setting up a securitization vehicle in Luxembourg provides a versatile and efficient platform for structured finance transactions. By leveraging Luxembourg’s sophisticated legal and regulatory framework, businesses can achieve tailored financing solutions while benefiting from fiscal advantages. Partnering with experienced advisors ensures smooth incorporation and ongoing compliance, enabling your securitization vehicle to thrive in this dynamic financial hub.

Damalion helps international investors to structure their investments thanks to the Luxembourg investment vehicles which offer strong stability and advantages. Contact your Damalion expert now.