ATAD and Securitisation Vehicles: The Sequel

June 3, 2020 | Publication
The exemption under ATAD 1

The basic rule
According to the law of 22 March 2004 on securitisation, as amended (the Securitisation Law), all commitments (engagements) vis-à-vis investors (e.g. dividend distribution commitments to shareholders) and creditors (e.g. borrowing costs) are considered as deductible expenses for tax purposes. This principle enabled Luxembourg securitisation undertakings (organismes de titrisation) to achieve tax neutrality in most cases.

Then came ATAD 1
The law of 21 December 2018 (the ATAD 1 Law) implemented Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD 1) in Luxembourg tax legislation and introduced interest deduction limitation rules. Under these rules, excessive borrowing costs due to creditors (i.e. borrowing costs that are in excess of the interest revenues), are deductible in the tax period in which they are incurred only up to the higher of (i) 30 percent of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA) or (ii) EUR 3 million.

The ATAD 1 Law provides for certain exemptions to those interest deduction limitation rules to a limitative list of “financial undertakings”, among which one applicable to securitisation special purpose entities (or SSPEs) in the sense of Regulation (EU) 2017/2402 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). Other Luxembourg securitisation undertakings (at least, for those structured as companies) are generally not exempted from the scope of application of the ATAD 1 Law.

The exemption being challenged

The European Commission sent on 14 May 2020 a formal notice to the Luxembourg authorities challenging the scope of the exemption created pursuant to the ATAD 1 Law. It appears that the European Commission takes the view that SSPEs do not qualify as exempted “financial undertakings” in the sense of ATAD 1 and, accordingly, should not be excluded from the scope of application of the interest deduction limitation rules. It derives from this reading that the tax regime applicable to SSPEs should be similar to “traditional” securitisation companies carrying securitisations within the sense of the Securitisation Law and that there should in essence be no difference in the tax regime applicable to SSPEs and securitisation undertakings generally.

The outlook

The Luxembourg securitisation market is now awaiting the response of the Luxembourg authorities. The notice received from the European Commission is only the first step in the procedure, and Luxembourg is expected to adjust its legislation within the next 4 months. Absent any adjustment, the European Commission may send a reasoned opinion to the Luxembourg authorities, marking the start of a formal infringement procedure.

Pending any further developments, existing and forthcoming securitisation vehicles structured as SSPEs will likely need to assess their situation to judge to what extent the challenged exemption is relevant to their situation and whether the application of the interest deduction limitation rules implemented under the ATAD 1 Law could be prejudicial to their functioning. Particular attention will need to be given to the securitised assets held by such SSPEs and the qualification of the income generated by such assets from a tax perspective, as those will determine whether the interest deduction limitation rules may have an impact or not.

Things will remain unchanged for securitisation undertakings not qualifying as SSPEs since they were not exempt from the interest deduction limitation rules anyway.

The Luxembourg securitisation market has since the entry into force of the ATAD 1 Law been able to find solutions for securitisation undertakings incorporated under the Securitisation Law to ensure that those would remain an interesting structuring option. Alternatives exist in terms of structuring to preserve the tax neutrality of SSPEs, notably through reliance on other exemptions foreseen by the ATAD 1 Law. This may include having the SSPE qualify as an alternative investment fund in the sense of Directive 2011/61/EU of 8 June 2011 on alternative investment fund managers or relying on the legal form of a securitisation fund.

Contact information & disclaimer

In case of specific questions and/or requests on these topics, feel free to contact our experts Basile and Arnaud.

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