Luxembourg has a longstanding reputation as a prime location for foreign investment. Two recent legal developments – securitisation vehicles and the private asset management company, or societe de gestion de patrimoine familial (SPF) – aim to uphold that reputation.

A law on securitisation, passed by the Luxembourg Government on 22 March, 2004, laid the foundations for the legal, regulatory and tax framework for securitisation vehicles in the Grand Duchy.

The definition of securitisation encompasses all transactions whereby a special purpose vehicle (SPV) acquires (true sale securitisation) or assumes (synthetic securitisation) any risk linked to an asset. This acquisition or assumption is financed by the issue of shares, bonds or other securities, the return value of which is dependent on the investment risks.

The law on securitisation makes a distinction between securitisation vehicles that have either been set up in the form of a company, or under the form of a fund run by a management company. The securitisation company must adopt one of the following forms:

. a company limited by shares – societe anonyme (SA);

. a limited liability company – societe a responsabilite limitee (SARL);

. a partnership limited by shares – societe en commandite par action; or

. a cooperative organised as a company limited by shares – societe cooperative organisee comme societe anonyme.

A securitisation company is not subject to a specific minimum share capital. The minimum share capital depends on the legal form and ranges between €12,500 (£8,400) for a SARL to €31,000 (£21,000) for an SA.

There is no need to have the approval of a Luxembourg administrative authority, such as the Financial Sector Supervisory Commission (CSSF), for securitisation vehicles issuing securities in a private placement or making a single issue of securities or issue on an irregular basis. However, securitisation vehicles that issue securities on a continuous basis to the public must be authorised by the CSSF. The following terms appear to be understood as follows:

. 'Continuously' means issues more than once per calendar quarter (four times per year); and

. 'To the public' means either by public advertising or by investors who do not invest more than 125,000 (£85,000) per person.

The law on securitisation allows for the securitisation of "risks related to the ownership of all assets, whether movable, tangible or intangible, as well as risks resulting from commitments that were assumed by third parties or that are inherent to all or part of the activities undertaken by third parties".

As a result, virtually all assets can be securitised, including mortgages, trade receivables, commercial credits, current accounts, shares, debenture loans and buildings. Potential applications of securitisation include:

. Securitisation of a portfolio of securities. To cancel the negative consequences of the risk inherent to holding securities being accounted for on the balance sheet, a company will transfer this portfolio at current value to a securitisation vehicle. This allows companies to convert a portfolio of securities into liquid assets. The investors investing in the securitisation vehicle have the benefit of acquiring a significant interest in a portfolio of securities without having to bear the full investment of this portfolio alone.

. Securitisation as a structure for intra-group financing activities. It enables a group company to find a financing source within the securitisation vehicle. Holders of the securities of the securitisation vehicle will be paid profits owed to them for the financing activity. Unlike normal Luxembourg companies, there is no debt-to-equity ratio that needs to be maintained on a securitisation vehicle. A securitisation vehicle can thus be financed without having to maintain any minimum capital requirement. This substantially reduces the costs of financing.

Tax benefits

. No debt-equity ratio. There is no debt-to-equity ratio obligation that needs to be maintained for a securitisation vehicle. This is not the case when using a common Luxembourg company (Soparfi), where there is an 85:15 debt-equity ratio. Furthermore, if capital is contributed to an SPV, the law provides for a cap on the contribution duty of €1,250 (£850). This amount also covers any further capital increase.

. Withholding tax. Interests and royalties paid by securitisation vehicles are not subject to any withholding tax. Payments made to holders of shares (for instance dividend payments) of a SPV are not subject to any withholding tax. A common Luxembourg company is subject to a 20% withholding tax on dividends.

. Deductibility of expenses and payments to investors of the SPV. All expenses relating to the management of the SPV are fully deductible and the payments made to investors of the SPV (whether in the form of interests or dividends) are moreover fully deductible from the taxable basis of the SPV.

. The management of securitisation vehicles is exempt from VAT.

. Securitisation vehicles are exempt from wealth tax whereas normal Luxembourg companies are subject to a wealth tax of 0.5% on the net assets of the company.

. Benefit from Luxembourg's double tax treaty network. As securitisation companies are fully taxable companies, they normally can benefit form the Luxembourg's double tax treaty network.

. The liquidation of securitisation companies is tax exempt.

Private asset management company As the European Commission (EC) announced on 19 July, 2006, that the holding 1929 company violated European Union (EU) state aid rules (article 87 EC Treaty) and distorted competition, the Luxembourg Government has since announced the introduction of a new investment vehicle for private wealth investment that would replace the holding 1929 company.

On 20 November, 2006, the Luxembourg Government lodged Bill number 5637, pertaining to the creation of a new investment vehicle, the private asset management company (SPF). Here, we outline the key features and the tax issues related to the SPF as indicated in the Bill, which is still under discussion and may be subject to amendments.

Legal form

An SPF can adopt one of the following forms – SA, SARL, a partnership limited by shares, or a cooperative organised as a company limited by shares.

The activity is strictly limited to the acquisition, detention, management and disposal of its financial assets within the meaning of the law of 5 August, 2005, on financial guarantees (e.g. shares, bonds, publicly quoted shares, shares of Soparfis, shares of a SICAR, structured products and derivatives).

The SPF must not interfere in the management of any of its subsidiaries and shall not carry out any commercial activity. Unlike the holding 1929 company, the SPF cannot grant any interest bearing loans to other companies and its subsidiaries.

Eligible investors

Whereas the holding 1929 company has no limitation in that respect, the shares in an SPF can only be subscribed by eligible investors who are:

. natural persons acting in the scope of the management of their private assets;

. 'private asset entities' which act exclusively for the benefit of the private assets of one or more natural persons, (e.g. trusts, private foundations, etc.); or

. intermediaries acting for the account of the investors e.g. a bank acting under a fiduciary agreement.

The shares issued by the SPF can be bearer shares but cannot be publicly quoted on a stock exchange.

There is no need to have the approval of the CSSF. The competent authority to exercise the tax control is the administration de l'enregistrement et des domaines. Every year the domiciliary agent, a char-tered accountant or an auditor must issue a certificate mentioning that:

. the SPF is held by eligible investors (as defined here above);

. the SPF does not receive more than 5% of its dividends from non-EU companies taxed at a rate below 11%; and

. the SPF has respected its obligations as paying agent in the scope of the Savings Directive .

The SPF must keep account and every year must publish its annual accounts.

Tax issues

. There is no debt equity ratio that needs to be maintained for a SPF. However, a tax of 0.25% ( taxe d'abonnement) is due for the part of the debts that exceed eight times the paid-up capital increased by the issue premium.

. No corporate income tax.

. No VAT.

. Taxe d'abonnement – a tax of 0.25% (with a maximum of 125,000 on the amount of the paid-up capital increased with the issue premium, if any).

. Withholding tax on interest. Interest paid to Luxembourg residents is taxed at 10% and to non-resident natural persons at 15% under the regime of the Savings Directive.

. No withholding tax on distributions. There is no withholding tax due on dividends paid either to Luxembourg or foreign residents.

. No wealth tax. SPFs are exempt from wealth tax whereas Luxembourg companies are subject to a wealth tax of 0.5% of the net assets of the company.

. Excluded from the parent-subsidiary directive 90/435 of 23 July, 1990 (as amended) and Luxembourg's double tax treaty network.

Luxembourg's legislators have created a tailored framework for securitisation transactions by establishing a well-balanced compromise between flexibility of the securitisation vehicle on the one hand and investor protection on the other hand, while providing at the same time a tax-neutral environment.

The new Bill pertaining to the creation of the SPF offers an attractive new vehicle for private wealth investment in a renowned marketplace. The SPF may become the vehicle of choice for individuals owning a former holding 1929 company or individuals wishing to optimise their personal tax planning.

Olivier Sciales and Remi Chevalier are name partners of Chevalier & Sciales.