Securitisation - Ireland vs Luxembourg

Over a decade on from the global financial crisis, securitisation has regained popularity across several different asset classes and jurisdictions. Both Ireland and Luxembourg have emerged as top jurisdictions for a variety of transactions including securitisation, aircraft leasing and alternative lending. According to the Irish Debt Securities Association, at the end of Q2 in 2023 the assets of Irish Special Purpose Vehicles (“SPVs”) equated to €1,087.6bn, with a record number of 3,364 SPVs established in the country.

PwC estimate the cumulative value for Securitisation Vehicles (“SVs”) in Luxembourg to be €408 billion by the end of Q2 in 2023. In the previous year, SVs in Luxembourg were valued at €395 billion, equating to a 3.3% YoY increase.

Although both Ireland and Luxembourg present unique advantages for the establishment of SPVs and SVs, choosing the right jurisdiction for domiciliation can be a lengthy process. We set out below, a variety of advantages that Ireland and Luxembourg present as jurisdictions for the domiciliation of securitisation vehicles.

Ireland

Ireland has long been established as one of the top jurisdictions globally for securitisation transactions. A significant contributing factor to Ireland’s dominance in this market is the special treatment afforded to certain qualifying SPVs as set out in Section 110 (“S110”) of the Taxes Consolidation Act 1997 (“TCA”) (as amended). As per S110 of the TCA, taxable profits of such qualifying companies are calculated on the same basis as a trading company. This means that the cost of financing such as profit-dependent interest is generally tax-deductible and other costs such as the issuing of financial instruments are tax-deductible. An S110 company, therefore, overcomes issues with interest deductibility in certain circumstances. Any surplus income is subject to tax at a rate of 25%. However, in most cases, with careful structuring, S110 companies can achieve a tax-neutral position.

Furthermore, S110 companies are not subject to VAT on their activities and management services can generally be provided to S110 companies on a VAT exempt basis. Irish VAT legislation confirms that management services supplied to an SPV falling within the S110 framework, whether by an originator or otherwise, are exempt from Irish VAT. This legislative exemption provides clarity which is not necessarily available in other jurisdictions. In comparison, collateral management and administration services provided to Dutch CLO SPVs and other securitisation vehicles may no longer qualify for fund management VAT exemption and may be subject to VAT at the prevailing rate. Such tax risk needs to be assessed in the structuring process as this will have a significant implication on investors returns.

Ireland has also implemented the Anti-Tax Avoidance Directive (“ATAD”) interest limitation rules in a manner that continues to facilitate tax efficient structures with the carve out for the single company worldwide exemption.

Although Ireland’s ATAD interest limitation rules hold a significant advantage over other jurisdictions, including Luxembourg, it is important to note that a recent tax ruling from Luxembourg indicates that it is possible to achieve such an exemption in the jurisdiction.

Luxembourg

Luxembourg has been a highly attractive market for arrangers and originators of securitisation transactions since the introduction of the law of 22 March 2004 on securitisation (as amended) (the “Securitisation Law”).      

The recent enhancement of this legislation, voted in February 2022, has brought further clarifications and modernisation of the existing framework guarding the spirit of high protection for investors and their interests.

One of the key advantages of Luxembourg SVs is the flexibility to securitise a wide range of assets including bonds, loans, warrants, units to beneficiary shares and more. Furthermore, there is flexibility to create multiple fully segregated compartments representing distinct pools of assets and liabilities with statutory limited recourse of compartments as opposed to contractual limited recourse. The SV can grant security interests and guarantees to third party leverage providers. The Securitisation Law also provides for bankruptcy remoteness and statutory recognition of contractual arrangements: non-petition, limited recourse, claim subordination and non-seizure of assets.

As per the Securitisation Law, the active management of securitised risks is permitted if the pool of assets is made up of debt securities, claims or debt financial instruments, provided they are issued by way of a private placement. This enhances Luxembourg’s ability to attract actively managed CLOs and CDOs.

The SVs are treated as fully taxable entities and are subject to Corporate Income Tax (“CIT”) and Municipal Business Tax (“MBT”) on their consolidated income. However, the taxable income of a securitisation company may be reduced. Subject to certain conditions, payments to security holders are not subject to withholding tax. Additionally, the SVs are subject to a minimum annual Net Wealth Tax (“NWT”) determined by the total assets of each SV compartment.

Securitisation funds are particularly advantageous in Luxembourg as they are treated as tax transparent vehicles. As such, the taxation of income generated by a securitisation fund occurs at the investor level rather than at a fund level. Securitisation funds are not subject to CIT, MBT, NWT or subscription tax. Additionally, distributions by a securitisation fund are not subject to withholding tax in Luxembourg.

Take Aways

Due to the competitive nature of the securitisation market, in recent years Ireland and Luxembourg have adapted their regulatory regime to position themselves as the location of choice for the establishment of securitisation transactions, with each jurisdiction boasting unique benefits.

Both Ireland and Luxembourg boast highly developed markets supported by a comprehensive network of professional service providers including legal advisors, tax specialists and corporate service providers. Both jurisdictions offer favourable tax regimes underpinned by robust legal and regulatory frameworks.

For further information on securitisation in Ireland and Luxembourg, or to find out how Cafico International can assist you, please reach out to Niamh Manning or Rolando Ebuna.

The content of this article is provided for information purposes only and is not legal or other advice.