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Luxembourg Securitization

The Securitization allows the transfer, to a specific entity, of some risks associated with all types of assets or properties (financial, personal property, real estate, tangible and intangible assets, receivables, future cash flows, etc.).
The law on Securitization was passed on 22 March 2004 and is based on the concept of fiduciary property recently introduced by Luxembourg law.

The law introduces the setting up of Securitization Entities. Securitization allows a seller (company, firm or individual) to sell to a Securitization Entity, some risks associated with receivables, other assets or commitments assumed by third parties, by issuing transferable securities whose value or yield depends on such risks.

These assets or risks are represented by nominative or bearer securities (shares, bonds or certificates) representing incomes or cash flows generated.
There are two types of Securitisation Vehicles that Luxembourg market can offer to investors, namely:
The setting up of a Securitization Company
They are exempt from statutory auditor, but must be certified by an independent auditor. Securitization Companies may be formed as an SA, an SARL, and an SA in partnership limited by shares, a cooperative corporation resident in Luxembourg. The by-laws may authorize the Board of Directors to create one or more compartments, each corresponding to a distinct part of its assets.

or a Securitization Fund
Securitization Funds do not benefit from legal personality. They are managed by a management company, resident in Luxembourg. Securitization Funds consisting of one or more fiduciary estates are subject to the laws on trusts and fiduciary contracts. Assets and liabilities of the funds are segregated from those of the management company.
The funds may consist of several independent compartments.
Therefore, the law allows a company or a person to draw from its estate in favour of a Securitization Entity established in Luxembourg, certain assets to no longer bear the risks associated with its management or holding. Some investors finance thus the Securitization Entity which issues securities; investors bear therefore the risk on assets held by this organization.
The law includes all transactions by which a Securitization Entity acquires or assumes the risk associated with an asset. The financing of the transactions is done by issuing shares, bonds or any other type of securities (certificate, emtn, subordinated debt).

By operation of law, all the following assets may be securitized:
- trade receivables
- mortgages
- current accounts
- stock
- bond loan
- any financial asset
- all non-current assets (immovable properties or secured rights)
- activities with a certain and reasonable value to generate future income
As long as the Securitization Entity does not issue securities to the public on an ongoing basis, it should not be approved by the CSSF (Commission for Supervision of the financial sector). This also applies to the management company.

Accounting for Securitization Companies varies according to the Securitization Entity selected:
For Securitization Companies
The law of 10 August 1915, as amended, on commercial companies and the law of 1 January 2005 on the register of commerce as well as the accounting and the annual accounts of the company. The management report must contain all meaningful information relating to the financial situation that could affect the investors' rights.

For Securitization Funds
According to the laws of 30 March 1988 and 20 December 2002, they are subject to the accounting and fiscal scheme of mutual funds, with the exception of the subscription fee which is not due.

For Compartments
Each compartment is a fiduciary estate distinct from other compartments of the Securitization Entity. Each compartment has therefore its own rights and obligations. It results from it that accounting (assets and liabilities) must be held separately by each entity.
The Tax Base of the Securitisation entity
as a Company
The Securitization Entity, when incorporated as a company, is fully taxable on any profits resulting from the underlying activity performed within it.
As a consequence, all incomes (interests, dividends collected, earnings, profits, capital gains) are fully taxable and form the positive part of the tax base.
Instead, all the expenses related to the management of the underlying activity, are deductible from such tax base.
The balance of these two amounts forms the taxable income before the allocation. This is the gross profit attributable to investors.

From this taxable income all payments to be allocated to investors (securities holders, stocks, bonds, certificated issued by the Securitization Entity,) will be deducted.
These payments, whatever named, are actually supposed to be interests paid to investors.
In summary, the Securitization Entity is taxable on the balance of what it actually keeps for itself in accordance with the principles of the classical establishment of Luxembourg companies tax base (increase of reserves).
It should be noted that the Securitization Entity cannot claim exemption concerning the payment of dividends or of capital gains on these same shareholdings. It is by no means a Soparfi. Instead, the Soparfi can be used in tandem with the Securitization Entity.
It should be noted that the Securitization Entity has no limits or rules restricting its debt limit. Consequently, it is possible to finance the Entity without having to secure a minimum capital and to use the levers resulting from interest expenses to the best.

- No withholding tax is applicable on interest paid by the Securitization Entity
- No withholding tax is applicable on payments allocated to share holders, bonds, securities or certificates issued by the Securitization Entity
- No withholding tax is applicable on royalties paid by the Securitization Entity
- No withholding tax is applicable to dividends paid to financing security holders of the Securitization Entity, insofar as they are entitled to a share of net income of the securitized asset.

as Securitization Funds
No taxation is applicable on the profits earned by the funds.
Regarding withholding and taxation for incomes earned abroad:
- either it is made in the form of joint ownership, in which case each investor is taxable on the portion of revenues of which he is the undivided owner
-or it is formed as a trust estate, in which case the taxation of the income from this estate by appropriation, is to be considered as if the management company was the owner, since the unit holders have only one right of credit in respect to the management company.

Mother company-subsidiary Directive and the Securitization Entity
The Securitization Entity is excluded from article 166 LIR, which means that it cannot be exempted on dividends it receives from other Luxembourg companies or foreign companies even if they qualify for taxation. Furthermore, capital gains on these same shareholdings are no longer exempted from income tax.

VAT and Securitization Entity
Management operations of Securitization Entities are exempted from VAT.
Section 90 of the Act provides for a full exemption from the wealthy tax for Securitisation Entities.

Source Fidomes

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