1 Legal and regulatory framework

1.1 Which laws typically govern securitisations in your jurisdiction?

The legal framework applicable to securitisation is governed by the Law of 22 March 2004, as amended on 9 February 2022 ('Securitisation Law'). In addition, as Luxembourg is an EU member state, the EU Securitisation Regulation (2017/2402) is also applicable to securitisation activities in Luxembourg.

1.2 Which bodies are responsible for regulating securitisations in your jurisdiction? What powers do they have?

The Commission de Surveillance du Secteur Financier (CSSF) is the competent authority for securitisation in Luxembourg.

The CSSF is responsible for authorising regulated securitisation undertakings to conduct their activities in accordance with the Securitisation Law. It has the power to supervise regulated securitisation undertakings and ensure compliance with the Securitisation Law.

1.3 What is the regulators' general approach in regulating securitisations?

The CSSF supervises securitisation undertakings that are (or should have been) authorised because they make more than three offers to the public per financial year.

In order for a securitisation undertaking to be regulated, it must obtain authorisation from the CSSF, which will:

  • approve its articles of incorporation or management regulations; and
  • verify whether the securitisation undertaking has an adequate organisation and adequate resources to conduct its activities.

As part of its supervisory role, the CSSF may, among other things, request a periodical statement of the securitisation undertaking's assets and liabilities and its operating results.

1.4 What role, if any, does the central bank play in the securitisation market in your jurisdiction?

The Luxembourg Central Bank (BCL) has developed a data collection system for securitisation vehicles in compliance with the EU regulations adopted by the European Central Bank concerning statistical reporting on the assets and liabilities of financial vehicle corporations.

The BCL provides a definition of a 'securitisation undertaking'. Each vehicle falling under this definition must comply with the BCL reporting requirements. The BCL establishes and publishes on its website a calendar of remittance dates on which monthly and quarterly statistical reports must be submitted.

The BCL has exempted securitisation vehicles from the reporting requirements, provided that the securitisation vehicles contribute to the quarterly aggregated assets/liabilities account for at least 95% of the aggregated assets of all Luxembourg securitisation vehicles. Currently, this threshold amounts to €70 million.

2 Market and motivations

2.1 How sophisticated is the securitisation market in your jurisdiction and how has it evolved thus far?

The securitisation market is well developed in the Luxembourg financial sector and has recently undergone significant regulatory changes. At the beginning of 2021, there were over 1,300 active securitisation vehicles in Luxembourg, containing more than 8,000 compartments. About 90% of the Luxemburg securitisation vehicles contain compartments, allowing the originators to use one vehicle for several different projects due to the segregation of assets between each compartment.

Securitisation undertakings in Luxembourg are governed by the Securitisation Law. On 9 February 2022, an amended version of the Securitisation Law was introduced, which has brought even more flexibility to the securitisation regime in Luxembourg.

The new law has established a flexible regime for securitisation which attracts originators and sponsors to set up their securitisation undertakings in Luxembourg. Securitisation undertakings may be set up as a securitisation company or a securitisation fund and, depending on their activity, may be non-regulated or regulated (ie, supervised by the Luxembourg regulator).

2.2 In which industry sectors, if any, is securitisation most common in your jurisdiction? What major securitisations have been effected thus far?

The banking sector is one of the most important when it comes to securitisation. Securitisation is mostly used in Luxembourg as a means of raising capital to finance debt, and most securitisation vehicle are used to securitise trade or lease receivables or loans. In addition, real estate and security token-related projects are also important sectors, which are increasingly using capital markets alternatives such as securitisation to raise capital.

2.3 What are the benefits of securitisation, for both originators and investors?

Securitisation offers the opportunity for originators to transfer the risk of their investments elsewhere and to increase their capacity to engage in a greater number of projects. In addition, securitising risk exposures allows investors to be exposed to such risk, which they might otherwise not have access to.

2.4 What are the risks of securitisation, for both originators and investors?

Investors are exposed to the performance of the underlying assets connected to the financial instruments to which they have subscribed. Therefore, if the proceeds generated by the underlying assets are insufficient to satisfy the obligations of the related financial instruments due to the investors, the investors may not receive all revenues contractually agreed under the financial instruments. Given the limited recourse and non-petition nature of securitisation undertakings, investors may be unable to enforce their claims once the assets owned by the securitisation undertaking or its compartment have been liquidated.

Originators may have different types of risk depending on their role within the securitised exposure. One of these risks relates to the Securitisation Regulation. The originator may comply with Article 6 of the Securitisation Regulation, pursuant to which it will hold a material interest of 5% of the securitised risk. As a result, originators may be exposed to the securitisation risk in the same way as investors.

2.5 Is there a developed covered bond market in your jurisdiction and how does it compare and compete with securitisation as means of disintermediation and recycling bank capital?

Luxembourg issuers have issued covered bonds. A bill of law, to come into force on 8 July 2022, will amend the current regime for covered bonds. The law will allow universal banks to issue covered bonds in Luxembourg, which was previously restricted to banks that held a special licence ('banques d'émission de lettres de gage'). Banks that wish to issue covered bonds must comply with certain strict conditions. These new rules should open up the covered bond market in Luxembourg even further.

Covered bonds follow a similar system to securitisation. However, they are restricted to the banking sector, whereas securitisation is open to all types of issuers.

2.6 To what extent does the government intervene as a state actor in securitisation (eg, by guaranteeing certain securitised assets, providing credit enhancement to impact transactions or sponsoring public bodies to act as originator of or investor in asset-backed securities issues)?

Securitisation is an important activity carried out primarily in the private sector and thus the Luxembourg government is not a main actor in this context.

3 Structures

3.1 What securitisation structures are most commonly used in your jurisdiction?

Securitisation structures in Luxembourg may be established as either:

  • a securitisation company with a corporate form; or
  • a securitisation fund.

A securitisation company must take the form of:

  • a public limited company;
  • a joint stock company;
  • a private limited company; or
  • a cooperative with limited liability.

It can create one or several compartments corresponding to a distinct part of its holding.

A securitisation fund has no legal personality and must be managed by a management company, which must be a commercial company. The fund is formed from one or several joint ownership organisations or one or several fiduciary estates. In the former case, the fund must be under a co-ownership regime, with the latter scenario being governed by trust and fiduciary contract legislation.

The vast majority of securitisation structures in Luxembourg are incorporated as:

  • public limited liability companies (sociétés anonymes) (SAs); or
  • private limited liability companies (sociétés à responsabilité limitée) (SARL).

However, the legal framework in Luxembourg offers additional corporate forms – namely, the possibility to structure a securitisation vehicle as:

  • a partnership limited by shares (société en commandite par actions);
  • a cooperative company organised as a public limited company (société coopérative sous forme de société anonyme);
  • a limited or special partnership (société en commandite simple or société en commandite spéciale); or
  • a simplified limited company (société par actions simplifiée).

Securitisation companies may be either regulated by the Commission de Surveillance du Secteur Financier (CSSF) or non-regulated, depending on whether their securities are offered to the public and whether public offers are made on a continuous basis.

3.2 What is the split between 'term' and asset-backed commercial paper transactions?

'Term' securitisation transactions refer to long-term placements; the transaction is considered closed once the underlying loans or assets are paid back. On the other hand, asset-backed commercial paper securitisation transactions concern short-term financing on a rollover basis. These transactions remain in place for an indefinite period of time.

3.3 What are the advantages and disadvantages of these different types of structures?

The main factors to be considered when choosing the type of structure will depend on:

  • how the securitisation undertaking will be financed (debt versus equity);
  • the categorisation of the vehicle from a tax perspective; and
  • the type of investors targeted.

The financing method may determine the most efficient vehicle, as certain corporate forms are not suitable for equity financing, such as SARLs. If the securitisation undertaking intends primarily to segregate its projects in compartments and finance them via equity, a partnership may be the most flexible vehicle; although SAs also have the capacity to onboard equity financing projects.

In terms of tax treatment, if the vehicle is to be transparent, the securitisation undertaking will be incorporated in the form of one of the aforementioned partnerships; whereas if the vehicle is to be opaque, SAs and SARLs are the most popular corporate forms.

Ultimately, depending on the type of investors targeted, the securitisation undertaking may be regulated or non-regulated. Securitisation undertakings that issue more than three offers to the public within a financial year must be regulated pursuant to the Securitisation Law.

3.4 What other factors should originators consider when deciding on a structure?

When considering the most appropriate structure for the securitisation undertaking, originators should bear into consideration certain aspects. The most important are as follows:

  • Regulated or non-regulated vehicle: The originator should identify from the outset the types of investors that the securitisastion undertaking will target. If the originator intends to offer the securities to the public more than three times per financial year, authorisation from the CSSF must be obtained. In case of a non-regulated vehicle (ie, not supervised by the CSSF), the securitisation vehicle can make up to three issues per year (taking into account the total number of issues of all compartments).
  • Listing of securities to a market: If the originator wishes to make securities available to the public, this should be considered in choosing the appropriate structure.
  • Equity constraints: Further analysis should be carried out if the originator wishes to finance its securitisation project by way of equity from a tax perspective, as well as in terms of costs.

4 Eligibility

4.1 What requirements and restrictions apply to prospective originators in your jurisdiction?

The requirements and restrictions in terms of securitisation are enshrined in the Securitisation Law. No further provisions apply to originators from a Luxembourg law perspective in the context of securitisation activities.

Apart from the national laws, the Securitisation Regulation fully applies in Luxembourg and therefore originators of a securitisation may retain a material economic interest in the securitisation which cannot fall below the threshold of 5%.

4.2 What requirements and restrictions apply to prospective investors in your jurisdiction and how are retail and wholesale/professional investors distinguished?

The distinction between retail and professional investors is based on the concept of a 'professional client' under the Law of 5 April 1993 on the financial sector, as amended which ultimately mirrors the EU Second Markets in Financial Instruments Directive (2014/65/EU) (MiFID II). As a result, the concept of a 'retail investor' encompasses any investor which is not a professional client under MiFID II.

The requirements and restrictions applicable to prospective investments will depend on whether the securitisation undertaking is regulated or non-regulated. Generally speaking, securitisation undertakings can onboard both professional client and retail investors. However, non-regulated securitisation undertakings must not make more than three offers of financial instruments to the public within a financial year.

Pursuant to the Securitisation Law, an 'offer to the public' is an offer:

  • which does not target professional clients only;
  • which is not distributed by way of private placement; and
  • whose minimum investment is less than €100,000.

4.3 What requirements and restrictions apply to custodians and servicers in your jurisdiction?

Regulated securitisation vehicles must entrust their assets to custodians, which must hold an authorisation issued by the relevant competent authority. The custodians that act as such for regulated securitisation vehicles must have their registered office in Luxembourg; this requirement does not apply to non-regulated securitisation vehicles.

4.4 What classes of receivables and other assets may be securitised in your jurisdiction? What requirements and restrictions apply in this regard?

The Securitisation Law in Luxembourg does not restrict the types of assets that can be securitised to a particular class of receivables. Notably, a securitisation transaction may include commercial, auto and mortgage leases and loans, as well as other trade receivables and distressed loans.

In addition, and pursuant to the Securitisation Law, any risks relating to the holding of assets – whether movable or immovable, tangible or intangible – as well as risks resulting from the obligations assumed by third parties or relating to all or part of the activities of third parties are capable of being securitised.

4.5 What measures, if any, have been taken in your jurisdiction to promote investor involvement in securitisations?

The Securitisation Law was recently updated and significantly modernised to provide a more flexible regime for securitisation activities. This includes the capacity for securitisation undertakings to have an active role in debt portfolios, provided that this does not involve investments by retail investors. The amended law also provides for a more flexible regime for fiduciary representatives to be authorised by the Commission de Surveillance du Secteur Financier in order to represent the interests of investors and creditors in the context of securitisation.

These measures should make securitisation a more attractive investment option in Luxembourg. However, from an operational perspective, no specific measures have been introduced in Luxembourg to promote the involvement of investors in securitisation.

5 Special purpose vehicles

5.1 What forms do special purpose vehicles (SPVs) typically take in your jurisdiction and how are they established?

Public limited liability companies (SAs) and private limited liability companies (SARLs) are the most commonly used forms. They are established through a notarial deed.

A special purpose vehicle (SPV) may also be set up as:

  • a partnership limited by shares (SCAs);
  • a cooperative organised as a public limited company; or
  • as from 2022:
    • a special limited partnership;
    • a simple limited partnership;
    • an unlimited company; or
    • a simplified joint stock company (SAS).

5.2 Are SPVs typically established locally or offshore? What are the benefits and risks of each?

SPVs are established locally, with their registered office and central administration located in Luxembourg.

5.3 How is the SPV typically owned?

The shareholder of the SPV is usually legally separated from the originator, with the SPV being set up as an orphan vehicle through a trust or foundation.

5.4 What requirements and restrictions apply to SPVs in your jurisdiction?

A minimum share capital of:

  • €30,000 for SAs, SCAs and SASs; and
  • €12,000 for SARLs.

5.5 What requirements and restrictions apply to the directors of the SPV? What are their primary duties?

The Securitisation Law does not provide for specific requirements. Pursuant to the general principles set forth in the Law of 10 August 1915 on commercial companies, the main duties of directors are:

  • to achieve the company's corporate purpose; and
  • to act in the best corporate interests of the SPV.

5.6 What measures can be implemented to ensure, as far as possible, the insolvency remoteness of the SPV?

The constitutional documents of the SPV usually include non-petition, limited recourse, non-seizure of assets and subordination provisions. Compartment segregation may also be used.

5.7 If the originator becomes insolvent, is there a risk that the assets of the SPV may be consolidated with its own by the courts? If so, how can this be mitigated?

In principle, due to the corporate veil of the SPV, the assets of the SPV are not consolidated with those of the originator in case of the latter's insolvency.

However, there is a risk of the extension of collective proceedings to the SPV in case of fictitiousness of the SPV or confusion of assets and liabilities.

To mitigate this risk, it is recommended that any activities of the SPV and the originator be clearly separated.

6 Transfer of receivables

6.1 Can the transfer of receivables to the SPV be governed by laws other than your local law? If so, what laws are typically chosen?

The Securitisation Law governs securitisation in Luxembourg. It provides that:

  • the law governing the assigned claim determines:
    • its assignability;
    • the relationship between the assignee and the debtor;
    • the conditions for the debtor;
    • the conditions under which the assignment may be relied on against the debtor; and
    • the nature of the discharge of the performance by the debtor; and
  • the law of the state in which the assignor is situated governs the conditions under which the assignment may be relied upon against third parties.

Luxembourg often deals with securitisations involving foreign laws, such as English law, and the relevant receivables are typically transferred under the relevant foreign laws. The EU Rome I Regulation (593/2008) on the law applicable to contractual obligations also applies.

6.2 What local law requirements (documentary and procedural) are required to ensure that foreign law documents are recognised and enforceable locally?

As provided for by EU Regulation 2016/1191 on promoting the free movement of citizens by simplifying the requirements for presenting certain public documents in the European Union, public documents (eg, regarding birth, domiciliation, nationality) – whether originals or certified copies issued by the authorities in an EU country – are accepted by the authorities of another EU country as authentic without an apostille stamp to prove their authenticity. An official translation of such documents is not required if they are written in one of the official languages of the EU country in which they are presented. Otherwise, the authorities of the EU country that issued the documents will provide a multilingual standard form. Luxembourg is also a party to the Convention of 5 October 1961 Abolishing the Requirement of Legalisation for Foreign Public Documents from the Hague Conference on Private International Law.

Where a foreign document is presented in litigation, depending on the law(s) governing the transferred assets and on the types of assets transferred, the Luxembourg courts will apply the EU rules, such as Rome I, the EU Brussels 1bis Regulation (1215/2012) or the Convention of 2 July 2019 on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters from the Hague Conference on Private International Law.

6.3 How does the transfer of receivables from the originator to the SPV typically take place? What are the formal, documentary and procedural requirements for perfecting the transfer?

According to the Civil Code, the assignment of a claim against a third party is effective between the assignor and the assignee by the exchange of consents. The assignment is only enforceable against the debtor of the assigned receivables (and against third parties) by the notification to, or the acceptance by the debtor of, the assignment of the claim. The notification and/or acceptance of such assignment shall be made either by a notarial deed or by a private document. If, before the assignor or assignee notifies the debtor of the assignment of the claim, the debtor has paid the assignor, it will be validly discharged, unless it is proved that it otherwise had knowledge of the assignment. The sale or assignment of a claim will typically also include the accessories to the claim, such as guarantees, liens and mortgages.

A person that sells a claim or other tangible right must guarantee its existence at the time of the assignment, even if it is made without security. It will be liable for the solvency of the debtor only where it has undertaken to do so, and only up to the amount of the price it has obtained from the claim. Where it has promised to guarantee the debtor's solvency, this promise refers only to present solvency and does not extend to the future, unless the assignor has expressly stipulated this.

6.4 What other requirements and restrictions apply to the transfer of receivables?

According to the Securitisation Law, the assignment of an existing claim to or by a securitisation undertaking becomes effective between the parties and against third parties as from the moment the assignment is agreed upon, unless the contrary is provided for in such agreement.

A future claim which arises from an existing or future agreement can be assigned to or by a securitisation undertaking, provided that it can be identified as being part of the assignment at the time it comes into existence or at any other time agreed between the parties. The assignment of a future claim is conditional upon its coming into existence; but when the claim does come into existence, the assignment becomes effective between the parties and against third parties as from the moment the assignment is agreed on, unless the contrary is provided for in such agreement, notwithstanding the opening of bankruptcy proceedings or any other collective proceedings against the assignor before the date on which the claim comes into existence.

The claim assigned to a securitisation undertaking becomes part of its estate as from the date on which the assignment becomes effective, notwithstanding any undertaking by the securitisation undertaking to reassign the claim at a later date. The assignment cannot be recharacterised on grounds relating to the existence of such an undertaking.

The assignment to or by a securitisation undertaking entails, unless otherwise agreed:

  • the transfer of the guarantees and security interests securing such claim; and
  • its enforceability by operation of law against third parties, without any further formalities.

The assigned debtor is validly discharged from its payment obligations by payment to the assignor as long as it has not gained knowledge of the assignment.

An assignment prohibited by the agreement from which the assigned claim arises or which for other reasons does not comply with the provisions of such agreement is not effective against the assigned debtor unless:

  • the assigned debtor has agreed thereto;
  • the assignee legitimately ignored such non-compliance; or
  • the assignment relates to a monetary claim.

The articles of incorporation, the management regulations of the securitisation undertaking, an assignment agreement or any other agreement may grant the assignor a right over all or part of the assets of the securitisation undertaking which are available after payment of all other creditors.

6.5 Is there a doctrine under which a transaction describing itself as a sale can be recharacterised by the courts as a financing secured by assets which are the subject of the purported transfer? How can the application of this doctrine be overcome?

The Securitisation Law provides that the assignment by the securitisation undertaking of the acquired receivable cannot be recharacterised.

6.6 If the originator becomes insolvent, is there a risk that the transfer of receivables may be unwound? If so, how can this be mitigated?

If the assignor or the third party to which the collection of claims has been entrusted becomes subject to insolvency proceedings – such as bankruptcy, controlled management, judicial liquidation or any other proceedings affecting the rights of creditors generally – the securitisation undertaking is entitled to claim any sums collected on its behalf prior to the opening of such proceedings, without the other creditors having any rights to such amounts and notwithstanding any claims raised by the bankruptcy receiver, the controlled management commissioner or the liquidator.

The articles of incorporation, the management regulations of a securitisation undertaking and any contract entered into by the securitisation undertaking may contain clauses whereby investors and creditors undertake:

  • not to seize the assets of the securitisation undertaking or, as the case may be, of the acquiring or issuing undertaking; and
  • not to file for bankruptcy or request the opening of any other collective or reorganisation proceedings against them.

The assignment of a future claim is conditional upon its coming into existence; but when the claim does come into existence, the assignment becomes effective between the parties and against third parties as from the moment the assignment is agreed on, unless the contrary is provided for in such agreement, notwithstanding the opening of bankruptcy proceedings or any other collective proceedings against the assignor before the date on which the claim comes into existence.

7 Security

7.1 What types of security interests can be taken over the assets of the SPV in your jurisdiction? Which are most commonly used?

Under the Securitisation Law, a securitisation undertaking may not, by any means whatsoever, create security interests over its assets or transfer its assets for guarantee purposes, except to secure the obligations relating to a securitisation transaction. Unless otherwise agreed, security interests and guarantees shall, by operation of law, extend to:

  • the proceeds of the assets assigned or over which security interests have been granted;
  • any funds received in payment; and
  • the assets in which they are invested.

Luxembourg law does not provide for 'all-assets' security as in certain other jurisdictions – security interests must therefore be taken separately over distinct types of assets (eg, real estate, shares, receivables, bank accounts). In respect of receivables security, the most common security interests used in Luxembourg are pledges governed by the Law of 5 August 2005 on financial collateral arrangements, as amended.

7.2 What are the formal, documentary and procedural requirements for perfecting a security interest?

According to the Law of 5 August 2005 on financial collateral arrangements, the provision of collateral must be capable of being evidenced in writing. The written instrument evidencing the provision of collateral, which may be in electronic format or any other durable medium, must allow the identification of the collateral to which it applies. With regard to book entry financial instruments and cash claims collateral, it is sufficient to prove that they have been credited to or form a credit in a designated account.

Perfection requirements vary depending on:

  • the types of assets pledged (ie, financial instruments or receivables); and
  • the types of financial instruments pledged.

For receivables, the pledge thereof is perfected as a matter of Luxembourg law by the entry into the relevant pledge agreement by all parties thereto (however, if the pledged receivables are governed by a foreign law and/or due by a foreign debtor, the relevant foreign law perfection requirements must also be followed).

7.3 What charges, fees or taxes arise from the perfection of a security interest?

Acquisition of debt portfolios for investment purposes: The acquisition of debt portfolios for investment purposes is generally exempt from value added tax (VAT). However, factoring services are not exempt from VAT and attention should be paid to ensure that any discount on the acquisition of debt portfolios in view of their securitisation:

  • is not reflective of a remuneration for a factoring or similar service; and
  • is reflective only of the fair market value of the receivables in question.

Otherwise, the securitisation vehicle could be deemed to constitute the provision of a service, which would be subject to VAT.

The acquisition of other assets or rights in view of their securitisation will follow normal rules applicable to all transfers of such assets; no special VAT regime applies in this respect.

Management of investment funds: There is no VAT on the management of investment funds and similar entities, as follows:

  • Securitisation partnerships: These are fully tax transparent (and thus exempt from income taxes and net wealth tax), provided that:
    • the securitisation activity does not constitute a business activity per se;
    • the partnership is not commercially tainted (this happens when the majority of the partners of an unlimited company are corporate entities or when the general partner of a simple limited partnership or a special limited partnership is a corporate entity holding 5% or more); and
    • the reverse hybrid rules do not apply.
  • Securitisation companies: These are fully taxable while exempt from net wealth tax (except for minimum net wealth tax).
  • Securitisation funds: These are:
    • exempt from direct taxes (income and net wealth tax);
    • not subject to subscription tax; and
    • subject to VAT but with an exemption for management services.

Distributions to investors/creditors: These are fully tax deductible unless the interest limitation rule applies.

Distributions from a securitisation company to its investors: These are not subject to Luxembourg withholding tax, except for a 20% withholding tax with regard to interest payments made by a Luxembourg paying agent to Luxembourg resident individuals.

No stamp registration duties: Agreements entered into in the context of a securitisation transaction and all other instruments relating to such transaction are not subject to registration formalities, even when referred to in a public deed or produced in court or before any other public authority, provided that they do not have the effect of transferring rights which:

  • must be transcribed, recorded or registered; and
  • relate to:
    • immovable property located in Luxembourg; or
    • aircraft, ships or riverboats recorded on a public register in Luxembourg.

However, they may be submitted for registration, in which case they are registered at the fixed rate.

7.4 What other considerations should be borne in mind when perfecting a security interest in your jurisdiction?

The debtor of a pledged claim may validly discharge its obligation to the collateral provider or any other pledgee, as long as it has no knowledge of the granting of the pledge. Therefore, in practice, the debtor either is a party to the pledge agreement for this purpose or receives notice of the pledge.

7.5 What are the respective obligations and liabilities of the parties under the security interest?

The Law of 5 August 2005 on financial collateral arrangements leaves rather broad contractual freedom to the parties to determine these – certain highlights of those provided by the 2005 law are as follows:

  • The priority of pledges granted over the same assets is determined by the date on which they became enforceable against third parties/were perfected.
  • The pledgor is presumed to be the owner of the assets pledged. The validity of a pledge is not compromised by the lack of ownership, unless the pledgee has been notified, in advance and in writing, of such lack of ownership. This rule is without prejudice to the liability of the pledgor. If the pledgor has notified the pledgee that it is not the owner of the pledged assets, the validity of such pledge is subject to the confirmation by the pledgor that it has obtained the consent to the pledging from the owner of the assets.
  • Any rights granted by the pledgee to the pledgor to dispose of the pledged assets do not affect the transfer of possession or granting and perfection of the pledge.

7.6 In the event of default, what options are available to enforce the security interest? Is self-help available in your jurisdiction or must enforcement action go through the courts? Are there insolvency regimes such as conservatorship or examinership that impose an automatic stay on the exercise of self-help remedies?

According to the Law of 5 August 2005 on financial collateral arrangements, if the relevant enforcement event agreed between the parties to the pledge agreement occurs, the pledgee may, unless otherwise provided for, enforce the pledge without prior notice. The main methods of enforcement under the 2005 law are:

  • appropriation (by the pledgee or a third party designated by it); or
  • private sale (by the pledgee on normal commercial terms) of the pledged assets.

If pledges of different ranks exist over the same assets, specific rules apply in case of enforcement of the lower-ranking pledge where the higher-ranking pledge is not being enforced. Pledges governed by the 2005 law are in principle insolvency remote.

According to the Securitisation Law, the liquidator may not grant security interests over the assets of the securitisation undertaking or transfer such assets for security purposes without the authorisation of the court. The court may grant such authorisation to the liquidator at any time during the liquidation proceedings in respect of all or part of the assets of the securitisation undertaking.

The liquidator may:

  • bring and defend all actions on behalf of the securitisation undertaking;
  • receive all payments;
  • grant releases with or without discharge;
  • realise all assets of the undertaking and re-employ the proceeds therefrom;
  • issue or endorse any negotiable instruments; and
  • compound or compromise all claims.

7.7 Will local courts recognise a foreign court judgment in favour of an investor?

With other EU member states, Luxembourg applies the EU Brussels 1bis Regulation.

With third countries, the recognition and enforcement of judgments depends on bilateral agreements and on the application the Convention of 2 July 2019 on the Recognition and Enforcement of Foreign Judgements in Civil or Commercial Matters from the Hague Conference on Private International Law. Otherwise, the Civil Code sets out rules on exequatur proceedings.

7.8 If the servicer becomes insolvent, will an enduring power of attorney/mandate granted by the servicer in favour of the secured parties be recognised and enforceable post-insolvency of the servicer?

In a true sale, as the securitisation undertaking becomes the legal owner of the assets, any subsequent insolvency of the seller should not impact the securitisation, except potentially where the sale was subject to conditions for its effectiveness (eg, if the seller was retained as a collection agent for the assets post-sale). For synthetic securitisation, the impact of the seller's insolvency potentially depends on the manner of assumption of assumed risks.

7.9 Do limited recourse, non-petition and subordination provisions bind creditors of SPVs in your jurisdiction and what are the applicable qualifications?

For Luxembourg special purpose vehicles (SPVs) which are not securitisation vehicles, non-petition provisions with respect to those SPVs may not be enforceable in Luxembourg. Contractual subordination has been recognised by case law. Limited recourse is sometimes used in security granted by parties which are not obligors; although technically this is not necessary, as pledges under the 2005 law are by their nature limited to the specific assets which they are expressed to concern (and their enforcement and other proceeds).

8 Registration and disclosure

8.1 What public disclosure and reporting requirements apply to securitisations in your jurisdiction?

Securitisation undertakings must comply with the provisions on the preparation of annual accounts and the filing and publication of such accounts set out in the Law of 19 December 2002 on the trade and companies register and the accounting practices and annual accounts of undertakings. The management reports must contain all significant and material information relating to their financial situation which may affect the rights of investors. Every securitisation undertaking that is subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF) must:

  • have its accounts audited by an approved statutory auditor; and
  • spontaneously communicate to the CSSF such reports together with written comments within the framework of its audit of the annual accounting documents.

A fine of up to €12,500 may be imposed on the directors, managers and officers of authorised securitisation undertaking or a fiduciary representative, and on the liquidators in case of the voluntary liquidation of an authorised securitisation undertaking, where:

  • they refuse to provide the financial reports and the requested information;
  • such documents prove to be incomplete, inaccurate or false; or
  • any other serious irregularity is established.

In case of forced liquidation of authorised undertakings, the court may request:

  • the liquidator to deliver a report on the status of the liquidation and a report on the use of the assets of the undertaking; and
  • the approved statutory auditor to examine such documents.

The court will then issue its judgment and close the liquidation process.

8.2 What registration requirements, if any, apply to securitisations in your jurisdiction?

Only two classes of securitisation undertakings must be licensed by the CSSF:

  • Securitisation undertakings which continuously issue financial instruments offered to the public must be authorised by the CSSF and are subject to several requirements on a regular basis. The issue of financial instruments offered to the public pertains to more than three issues of financial instruments during a financial year:
    • that are offered to non-professional clients (as provided for in the Law of 5 April 1993 on the financial sector);
    • whose denominations are below €100,000; and
    • which are not distributed in the form of a private placement during a financial year.
  • The CSSF approves the articles of association or management regulations of the securitisation undertaking and, where applicable, its management company. Securitisation companies and management companies of securitisation funds must have an organisation and adequate means for the conduct of their activities and supervision by the CSSF. They are registered on a list held by the CSSF.
  • Fiduciary representatives subject to the Securitisation Law must also be authorised by the CSSF.

Other securitisation undertakings must comply with the laws on commercial companies, such as the 1915 law and the 2002 law.

8.3 Is there any requirement to notify obligors of a securitisation? If so, how is this effected?

There is no obligation to notify the obligors. However, as the assigned debtor is validly discharged from its payment obligations by payment to the assignor as long as it has not gained knowledge of the assignment, such notification is recommended.

9 Credit rating agencies

9.1 What requirements and restrictions apply to credit ratings agencies in your jurisdiction? Are there specific provisions that regulate their relationship with issuers?

Luxembourg applies EU Regulation 1060/2009 on credit rating agencies and the other EU relevant legal texts thereon. There are no specific Luxembourg laws in this regard.

9.2 What are the main factors that rating agencies consider when rating the securities of the issuer?

Please see question 9.1.

10 Taxation

10.1 What tax considerations should be borne in mind from the perspective of the originator? What strategies, if any, are available to mitigate them?

Originators transferring assets/risks to Luxembourg securitisation vehicles are generally not Luxembourg tax resident and the following comments are therefore of a broader general nature.

The transfer of assets and/or risks to a securitisation vehicle will generally be a realisation event for tax purposes in the hands of the originator, unless:

  • the securitisation does not imply a true sale and is, for example, a synthetic securitisation; and
  • the tax laws governing the originator, unlike Luxembourg tax law, look at legal ownership rather than economic ownership.

Other points to bear in mind include value added tax (VAT), transfer taxes and similar stamp duties that may apply to the transfer of certain assets. Particular attention should be paid to the securitisation of distressed or discounted debt portfolios where the discount negotiated would compensate a (factoring) service, as this may trigger VAT.

10.2 What tax considerations should be borne in mind from the perspective of the issuer? What strategies, if any, are available to mitigate them?

Luxembourg corporate securitisation vehicles are subject to corporate income taxes, unlike securitisation funds and partnerships. Although securitisation companies have traditionally been allowed to deduct all commitments towards investors (including dividends), limitations on such deductions have been introduced in recent years as a result of the implementation of EU anti-tax avoidance directives and similar anti-abuse rules.

Interest deduction limitation rules now limit the deduction of borrowing costs from income that is not interest income or economically equivalent income to the higher of:

  • 30% of earnings before interest, taxes, depreciation and amortisation; and
  • €3 million per tax year.

Anti-hybrid mismatch rules may also deny the deduction of payments to associated enterprises made on hybrid instruments or to hybrid entities leading to a double deduction or deduction without inclusion or in other cases of hybrid mismatches (eg, imported mismatches).

Finally, payments to associated enterprises established in blacklisted countries may also be denied deduction in the absence of commercial reasons for such payments.

Denied deductions will lead to increased tax leakage at the level of the securitisation company. Remedies are generally complex and may not always be risk free. For example, they could take the form of:

  • interposing entities between investors and the securitisation company to mitigate hybrid situations;
  • financing by way of shares to argue that deductible dividends are not borrowing costs within the meaning of the interest deduction limitation rules; or
  • choosing a transparent securitisation vehicle if the taxation of the investors permits this.

10.3 What tax considerations should be borne in mind from the perspective of investors? What strategies, if any, are available to mitigate them?

The taxation of investors depends foremost on the local tax regime in their country of residence. Interest income on securities issued by the issuer may be treated differently compared to dividends. Because of the nature of their activities and their funding, securitisation vehicles may not be considered to be the beneficial owners of the assets or risks that they securitise, and beneficial ownership of such assets or risks may thus be attributed to the investors, which may potentially lead to a different taxation at their level or at the level of the assets securitised (leading to a different tax treaty position). Because of their specific tax regime, securitisation companies may be viewed as controlled foreign corporations for certain investors, leading to adverse tax implications for them. The choice of a transparent securitisation fund or partnership could be a solution to this.

11 Trends and predictions

11.1 How would you describe the current securitisation landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

By the end of March 2021, there were more than 1,300 active securitisation vehicles in Luxembourg, generating about 9,000 securitisation transactions. Of these securitisations vehicles, 95% were in corporate form, in which the securitisation funds represent a minority of 5%.

According to European Central Bank statistics, Luxembourg securitisations have lower total assets than in competing jurisdictions. However, the recent legislative reforms will allow for greater flexibility, especially in light of the possibility for securitisation vehicles to access loan financing without limit. The reforms provide for:

  • a diverse range of social forms for securitisation vehicles;
  • diversification of financing alternatives;
  • the possibility to actively manage a pool of debt assets; and
  • the segregation of equity-financed compartments.

Those new provisions will afford more opportunities to originators to structure their securitisation projects. It is expected that the new securitisation regime will lead to further growth in the Luxembourg market.

12 Tips and traps

12.1 What are your top tips for the smooth conclusion of securitisations and what potential sticking points would you highlight?

Securitisation in Luxembourg has always been an attractive investment solution and an alternative to investment funds. However, due to the additional flexibility and options introduced by the recent amendments to the Securitisation Law, securitisation should become an increasingly important part of Luxembourg's financial sector.

Originators and sponsors should explore the new regime, which allows, under certain conditions:

  • the active management of debt portfolios;
  • the onboarding of retail investors;
  • the financing of securitisation projects via equity;
  • the segregation of certain rights to the investors of a given project; and
  • the issue of any types of financial instruments within the meaning of the Second Markets in Financial Instruments Directive or debt contractual arrangements.

The authors would like to thank Frédéric Feyten (Head of Tax and Managing Partner), Pawel Hermelenski (Partner of Corporate and M&A practice), Vivian Walry (Partner and Head of Banking & Finance practice), Zornitsa Dimitrova, Julien Robert, and Anne Picot-Guillot at CMS Luxembourg for their contribution to this chapter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.