1. “Securitisation” in a nutshell
Securitisation consists in the transfer of risks linked to one or more assets to investors through the issuance of financial instruments by, or the granting of credit to, a securitisation undertaking.
Securitisation transactions are a significant sector of the European capital markets with transactions using several asset types as collateral such as residential mortgages, debt, trains, wagons, properties, rents and auto loans, credit card receivables and consumer loans.
It is recognised as being an efficient tool to provide funding to the market, improving the financing of the European economy. Through securitising assets, financial institutions can create tradable securities backed by such assets.
2. Luxembourg as key player
The Luxembourg law of 22 March 2004 on securitisation, as amended (the “Securitisation Law”) purports to provide a flexible and competitive legal, regulatory and tax framework to securitisation projects based in the Grand Duchy of Luxembourg (“Luxembourg”).
The Securitisation Law ensures an environment which protects investors’ interests while at the same time offering considerable flexibility in structuring such securitisation transactions.
Compared to the definition of securitisation in other European legislation, the Securitisation Law provides a rather broad and flexible approach.
Indeed, the Securitisation Law defines securitisation as “the transaction by which a securitisation undertaking acquires or assumes, directly or through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues “financial instruments or contracts, for all or part of it, any type of loan”, whose value or yield depends on such risks.”
3. Typical structure of securitisation transactions
One of the crucial elements of securitisation transactions is the isolation of securitised assets within a specific estate which must be exposed only to liabilities related directly to the holding or enforcement of the securitised claims – the risk is typically split into several contractually subordinated tranches with different risk profiles.
- Financing through the issuance of financial instruments – The Securitisation Law provides for a flexible legal framework, and the traditional securitisation of claims generally involves a transfer of a pool of cash generating assets from an originator to a securitisation undertaking. In this scenario, the securitisation undertaking finances the acquisition of the assets through the issuance of financial instruments, as such term is defined in the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended, allowing the securitisation undertaking to be financed by any type of instruments, governed or not by Luxembourg law. Such financial instruments will be backed by these asset receivables to investors, and the principal and interest payments of such financial instruments will depend on the underlying assets transferred.
- Financing through the transfer of credit loan facilities – Securitisation undertakings may also be financed in full or partially by any form of debt creating a reimbursement obligation to itself, through the transfer of external borrowing or intra-group credit loan facilities associated with a pool of assets (without any transfer of the underlying assets themselves).
4. Underlying assets involved
The Securitisation Law does not provide any limitation with respect to the assets that may be securitised, as long as contemplated in the context of a securitisation transaction, within the meaning of the definition of “securitisation” provided in the Securitisation Law (clause 2 above).
Securitisation undertakings may also acquire assets (movable or immovable – tangible or intangible) or assume all or part of the securitised risks, directly or through another undertaking (including through a wholly owned or partially owned subsidiary of the securitisation undertaking).
5. Forms of securitisation undertakings
It is possible to set up securitisation undertakings either in the form of securitisation companies or in the form of securitisation funds managed by a management company.
Securitisation companies
A securitisation company must be set up either as a:
- public limited company (société anonyme);
- partnership limited by shares (société en commandite par actions);
- private limited liability company (société à responsabilité limitée);
- partnership (société en nom collectif);
- limited partnership (société en commandite simple);
- special limited partnership (société en commandite par actions);
- simplified joint stock company (société par actions simplifiée); or
- cooperative society organised as a public limited company (société coopérative organisée comme société anonyme).
The articles of incorporation of a securitisation company may authorise its relevant management body to create one or more compartments, each compartment corresponding to a distinct part of its assets and liabilities.
Securitisation funds
A securitisation fund does not have legal personality, consists in one or several co-ownerships or fiduciary estates and is managed by a management company which is a commercial company whose object is to manage the securitisation fund and, as the case may be, to act as a fiduciary consisting of one or more fiduciary properties.
Management companies shall draw up management regulations of the securitisation funds and expressly specify their related co-ownership(s) rules or fiduciary estates (i.e. trust or fiduciary) rules, as applicable.
The management regulations of a securitisation fund may also authorise the setting up of several compartments, each compartment corresponding to a distinct co-ownership or fiduciary estate.
6. Supervision
Most of the Luxembourg securitisation undertakings are unregulated and are thus not subject to any regulatory supervision from the Commission de Surveillance du Secteur Financier (the “CSSF”).
Only securitisation undertakings issuing financial instruments that are offered to the public and on a continuous basis must seek prior authorisation from the CSSF to exercise their activities.
According to the Luxembourg law of 25 February 2022 which amended, among others, the Securitisation Law (the “Law of 25 February 2022”), securitisation undertakings which issue “on a continuous basis” are those which carry out more than three issuances of financial instruments offered to the public during one financial year. The number of issuances is to be understood as the total number of issuances carried out by all compartments of the securitisation undertaking during that period.
The Law of 25 February 2022 further determines that an issuance of financial instruments “offered to the public” shall be an issuance:
- which is not intended for professional clients[1] ;
- whose denomination is less than 100,000 euros; and
- which is not distributed as private placement.
The CSSF will need to approve the articles of association of the securitisation company or the management regulations of the securitisation fund and, as the case may be, authorise its management company for the above-mentioned authorisation to be effective.
Securitisation companies and management companies of securitisation funds subject to the CSSF’s approval must have an adequate organisation and adequate resources to exercise their activities and to be supervised by the CSSF.
It is important to note that the securitisation undertakings authorised by the CSSF must entrust the custody of their liquid assets and securities with a credit institution established or having its registered office in Luxembourg.
Once authorised by the CSSF, the securitisation undertakings will be supervised by the CSSF and subject to ongoing disclosure obligations vis-à-vis the CSSF – until the close of the liquidation of the securitisation undertakings.
7. Bankruptcy remoteness and limited recourse
The Securitisation Law expressly recognizes the validity of clauses customarily used in securitisation transactions by which investors or creditors reinforce the bankruptcy remoteness features of securitisation undertakings:
- non-attachment clause: commitment to not attach the assets of the securitisation undertakings; and
- non-petition clause: undertaking to not initiate bankruptcy proceedings against the securitisation undertakings.
The Securitisation Law further indicates that proceedings in violation of the above-mentioned clauses will be dismissed by the courts.
In case a securitisation undertaking delegates the recovery of its claims to a third party, the sums recovered are protected from the bankruptcy of any such third party and the securitisation undertaking has the right to recover such sums.
Furthermore, rights and obligations of investors and creditors are limited in recourse to the assets of (i) the securitisation undertaking or (ii) the relevant compartment to which they relate. Such assets are reserved to satisfy these rights and obligations.
8. An attractive tax environment
The tax regime applicable to securitisation undertakings depends on their legal form.
| Securitisation undertakings established as companies | Securitisation undertakings established as funds | |
|---|---|---|
| Corporate income tax and municipal business tax | Securitisation companies are fully subject to corporate income tax and municipal business tax on their worldwide income. However, their taxable basis is reduced by any operational costs including all obligations assumed vis-à-vis their shareholder(s), investors and/or creditors. As a result, their taxable basis is likely to be nil or close to nil. | Securitisation funds are often transparent for Luxembourg tax purposes and are not subject to corporate income tax nor municipal business tax. |
| Net wealth tax | Securitisation companies are only subject to a net wealth tax in an annual amount which should not exceed EUR 4.815. | Securitisation funds are often transparent for Luxembourg tax purposes and are not subject to any net wealth tax. |
Double taxation treaties | Securitisation companies are in principle fully taxable Luxembourg-resident companies and should therefore qualify as residents under tax treaties and be entitled to their benefits. | Securitisation funds generally do not qualify as residents under tax treaties and are therefore usually not entitled to their benefits. |
| Withholding tax | There is in principle no withholding tax payable on distributions and interest payments made by securitisation undertakings to their investors. However, under certain circumstances, the tax deductibility of such payments may be limited by interest-deduction limitation or other tax measures. | There is in principle no withholding tax payable on distributions and interest payments made by securitisation undertakings to their investors. However, under certain circumstances, the tax deductibility of such payments may be limited by interest-deduction limitation or other tax measures. |
| VAT | Management services rendered to securitisation undertakings (including collateral management fees and investment advisory fees) are in principle exempted from any tax on added value. Securitisation undertakings qualify as VAT taxable persons and should therefore register for VAT if it receives services from non-Luxembourg service suppliers in order for it to self-assess the Luxembourg VAT (in the absence of a general exemption for such services). | Management services rendered to securitisation undertakings (including collateral management fees and investment advisory fees) are in principle exempted from any tax on added value. Securitisation undertakings qualify as VAT taxable persons and should therefore register for VAT if it receives services from non-Luxembourg service suppliers in order for it to self-assess the Luxembourg VAT (in the absence of a general exemption for such services). |
9. Impact of the AIFM Directive on securitisation undertakings
t is important to assess on a case-by-case basis whether a securitisation undertaking qualifies as an alternative investment fund (“AIF”) under the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers, as amended, which has been transposed into Luxembourg law by the law of 12 July 2013 on alternative investment fund managers, as amended (the “AIFM Directive”).
Indeed, while the AIFM Directive excludes “securitisation special purpose entities” from its scope, it is worth noting that the definitions of “securitisation special purpose entity” and “securitisation” set out therein refer to the definition of “securitisation” foreseen in the Regulation (EU) No 1075/2013 of the European Central Bank of 18 October 2013 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions (recast) (ECB/2013/40), which is much narrower than the definition of “securitisation” sets out in the Securitisation Law.
Consequently, certain securitisation undertakings qualifying as such under the Securitisation Law may not fall within the definition of “securitisation special purpose entities” under the AIFM Directive and could therefore qualify as AIFs.
The CSSF clarified that (i) securitisation undertakings whose principal activity is securitisation of loans granted by themselves as first lenders or (ii) those which issue structured products with principal purpose (a) to offer a synthetic exposure to assets other than credit and (b) where the transfer of the credit is only ancillary, cannot benefit from the exemption under the AIFM Directive, given that they do not qualify as “securitisation special purpose entities” thereunder.
The CSSF further indicated that, irrespective of the fact that a securitisation undertaking qualifies or not as a “securitisation special purpose entity” under the AIFM Directive, securitisation undertakings do not qualify as an AIF if:
- they only issue debt instruments; and/or
- they are not managed according to an “investment policy” within the meaning of the AIFM Directive.
10. Granting of security interests
Securitisation undertakings may grant security interest over any of their securitised assets in the context of a securitisation transaction, which permit having security interests against parties that are not direct creditors.
11. Accounting rules
Typically, financial statements of a securitisation undertaking must comply with the Luxembourg generally accepted accounting principles, as provided by the Luxembourg law of 19 December 2002 on the trade and companies register and the accounting and the annual accounts of companies, as amended.
In the case of a securitisation undertaking including compartments, financial statements must in addition clearly state the financial data for each compartment. Separate balance sheets and profit and loss accounts are typically disclosed for each compartment (in addition to the combined ones).
Under the Securitisation Law, the obligation to draw up annual accounts also extends to securitisation undertakings established as partnerships (sociétés en nom collectif), limited partnerships (sociétés en commandite simple) and special limited partnerships (sociétés en commandite spéciale), while these forms of companies benefit from an exemption under the Luxembourg law of 10 August 1915 on commercial companies, as amended.
A securitisation undertaking must be audited by at least one statutory auditor (réviseur d’entreprises) which, in case of a regulated securitisation undertaking, must be approved by the CSSF.
12. Current European legal framework
The Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (the “Securitisation Regulation”) constitutes the European legal framework regulating securitisation transactions, and securitisation transactions carried out by securitisation undertakings may fall under its scope.
The Securitisation Regulation defines securitisation as “a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics: (a) payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures; (b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme; (c) the transaction or scheme does not create exposures which possess all of the characteristics listed in Article 147(8) of Regulation (EU) No 575/2013.”
The Securitisation Regulation’s definition of securitisation is more restrictive, requiring credit risk and tranching, whereas the Securitisation Law is more flexible. Transparency and disclosure obligations as well as risk retention requirements will apply to securitisation undertakings, originators and sponsors involved in securitisation transactions falling under the scope of the Securitisation Regulation.
Contemplated securitisation transactions therefore need to be analysed on a case by case basis to determine whether or not they fall within the scope of the Securitisation Regulation. This is not the case for many securitisation undertakings in Luxembourg.
13. Upcoming changes to the Securitisation Regulation
On 17 June 2025, the European Commission published a legislative package introducing targeted amendments to the Securitisation Regulation, aiming at strengthening the European securitisation market.
Among the proposed changes, we can find the following key elements:
- introduction of separate definitions of public securitisation and private securitisation, which would imply different applicable transparency and reporting regime, offering more flexibility for private securitisation;
- simplification of due diligence obligations;
- clarification of the scope of the transparency requirements.
These changes are designed to reduce operational complexity for both issuers and investors, foster market development and maintain investor protection standards.
[1] Within the meaning of point (5) of Article 1 of the Luxembourg law of 5 April 1993 on the financial sector, as amended.