Securitization vehicles can deduct from their gross profits their operational costs and the dividends, interests and distributions made to the holders of the SV’s issued securities - making the SV a tax neutral entity. Moreover, distributions allocated to investors are exempted from Luxembourg withholding tax.
Securitisation is defined under the securitisation Law as the transaction by which a securitisation undertaking acquires (true sale securitisation) or assumes (synthetic securitisation), directly or through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or which are inherent to all or part of the activities of third parties; and issues securities, whose value or yield depends on such risks.
Securitization Vehicles benefit from flexible combinations of yield, risk, and maturity which can be structured to meet investors’ investment strategies, requirements, and risk appetite. Furthermore, such securities:
- Create additional liquidity for assets
- Minimize the limitations on the ability to raise capital
- Diversify funding sources and transaction structures
- Provide a suitable diversification alternative for investors
An Efficient Investment Vehicle
If properly structured, a SV is tax neutral. The current, maximum flat corporate tax charge applicable to SVs is set at EUR 4,815 per annum provided that the SV's balance sheet is made up of at least 90% of eligible financial assets and cash-at-bank. The SV is also subject to a mandatory minimum net wealth tax charge (which applies in brackets).
This substantial tax neutrality arises because, although a SV is subject to the generally applicable corporate income tax rate on its taxable base, all interest, dividends and other distributions (including commitments) made to the holders of the SV's issued securities constitute deductible items for corporate income tax purposes.
The law provides for the ability to create multiple compartments under a securitization company, where each compartment is segregated from the others, and corresponds to a distinct part of assets financed by distinct securities.
Namely it provides for:
- Risk segregation, limited each compartment; and
- Flexibility for investors to pick & choose which deals to participate in
Importantly, SV's can benefit from the relevant EU Directives (such as the Parent-Subsidiary Directive, the Merger Directive and the Interest-Royalty Directive) and generally have access to the Luxembourg double tax treaty network.
None of the following apply to Luxembourg SVs: withholding tax; capital duties (except a fixed Euro 75 fee on incorporation and any amendments to articles for SVs set up as companies); VAT on management services to a SV; net worth tax; (annual) subscription tax.