Impact of new taxation rules ("ATAD") on Luxembourg securitisation vehicles

20/12/18

On 18 December 2018, the Luxembourg Parliament (Chambre des Députés) voted the draft bill n°7318 (the "ATAD 1 Law") to transpose the EU Anti-Tax Avoidance Directive 2016/1164 of 12 July 2016 ("ATAD 1"). Amongst others, the ATAD 1 Law introduces a new article 168bis LIR in the Luxembourg Tax Law that will limit the deduction of (net) interest expenses1 (i.e. interest expense exceeding interest income or income economically equivalent to interest) for Luxembourg taxpayers as from 1 January 2019.

In order to assess the actual impact of this interest limitation rule, which is described in more detail below, each party involved in an existing or planned securitisation transaction should make a case-by-case ATAD impact assessment to determine the best possible solution going forward.

As securitisation funds, set up in the form of FCPs, are not subject to corporate tax, they will not be subject to the interest limitation rules as opposed to securitisation vehicles with corporate form (e.g. SA, SARL, SCA, SCoopSA) that are entities fully subject to tax in Luxembourg.

Securitisation funds Not in scope
Securitisation companies In scope but some exemptions apply (e.g. with regards to the EU Securitisation Regulation)

It is thus important to look at first whether some securitisation companies can benefit from an exemption (I.) and second what is the practical impact if no exemption is applicable (II.).

Based on our market knowledge of securitisation structures in Luxembourg, exemptions may be limited in practice. Therefore, the actual impact on a securitisation structure needs to be analysed on a case-by-case basis and, if necessary, specifically addressed and appropriate solutions adopted.

I. Exemptions to the interest limitation rules

The ATAD 1 Law provides for some exemptions to the interest limitation rules, which may be of interest for securitisation companies:

  • De minimis rules of EUR 3 million per year

The exceeding borrowing costs incurred during the financial year are deductible without limitation up to EUR 3 million. The amount needs to be calculated on the company level and not only on a compartment level.

  • Grandfathering for debt instruments concluded before 17 June 2016

When determining the amount of exceeding borrowing costs, a taxpayer may exclude borrowing costs arising from borrowing concluded before 17 June 2016. The exclusion shall not extend to any subsequent modification of the debt instrument or agreement, which means that the amount of deductible borrowing costs shall be computed as if no amendments took place. Therefore, interest expense on debt instruments issued before 17 June 2016 (subject to review of their potential amendments and their effects on the initial debt) should not be subject to these interest limitations rules.

  • Stand-alone entity

The ATAD 1 Law provides that a stand-alone entity is exempted from the interest limitation rules. Based on common understanding, securitisation companies whose shares are held by a trust, foundation or Stichting are usually considered as "orphan". However, the ATAD 1 Law defines a stand-alone entity as a taxpayer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise (to be understood as an entity which, in the reading of the ATAD 1 Law, includes trusts, foundations, and Stichtings holding directly or indirectly more than 25% of the taxpayer) or non-Luxembourg permanent establishment.

As a result, based on the ATAD 1 Law, a securitisation company fully held by a single trust, foundation or Stichting should not be regarded as stand-alone entity and would thus be in scope of the interest limitation rules.

  • EU securitisation vehicles

Securitisation companies in the meaning of Article 2 point 2 of Regulation (EU) 2017/2402 ("EU Securitisation Regulation") are out of scope of the interest deduction limitation rules. In substance, this will suppose the existence of securitisation of credit risk and the subordination through tranching.

  • AIF

Alternative Investment Funds in the meaning of the AIFM Directive 2011/61/EU (“AIFMD”) are out of scope. Therefore, if the securitisation company is an AIF in the meaning of AIFMD, it should not be subject to the interest limitation rules.

II. How the interest limitation rules work and what is the practical impact?

  • The exceeding borrowing costs shall be limited to 30% EBITDA as from 1 January 2019

The exceeding borrowing costs of a securitisation company will be deductible in any tax period only up to 30% of its net revenues before interest, tax depreciation and amortization (“EBITDA”). Tax-exempt revenues like income and gains derived from qualifying participation shall be excluded when computing the EBITDA of the taxpayer.

  • Importance of exceeding borrowing costs definition

The limitation will apply to "exceeding" borrowing costs, which means that the interest limitation rules will affect only securitisation companies that accrue more borrowings costs than interest revenue or other economically equivalent revenues unless an exemption applies.

Borrowing cost are defined by the ATAD 1 Law as interest expenses on all forms of debt and other costs economically equivalent. The rule applies to any financing, irrespective of whether provided by related parties or third parties. The ATAD 1 Law includes the same non-limitative list of elements set out in ATAD 1 that are to be considered as borrowing costs. This list includes notably:

  • Remuneration due under profit participating loans,
  • Imputed interest on instruments such as convertible bonds and zero coupon bonds,
  • Amounts disbursed under alternative financing arrangements, such as Islamic finance,
  • Finance cost element of finance lease payments,
  • Capitalised interest included in the balance sheet value of a related asset, or the amortisation of capitalised interest,
  • Amounts measured by reference to a financial return under transfer pricing rules where applicable,
  • Notional interest amounts under derivative instruments or hedging arrangements related to an entity’s borrowings,
  • Certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance,
  • Guarantee fees for financing arrangements,
  • Arrangement fees and similar costs related to the borrowing of funds.

In practice, securitisation companies not having significantly more interest expenses than interest income should thus not be substantially impacted by the interest limitation rules.

One of the issues for some securitisation companies comes from the fact that the ATAD 1 Law does not provide a clear definition or guidance for interpretation of what constitutes interest revenue and other economically equivalent taxable revenue under Luxembourg law and leaves room for interpretation, especially with regards to realised capital gains (e.g. from fund investments or non-performing loans).

Such structures should be closely analysed and an assessment should be made if a potential restructuring is needed.

Conclusion

In summary, it has to be noted that exemptions foreseen by ATAD 1, which would have excluded many securitisation vehicles from the scope, notably the stand-alone entity exemption, has been implemented into the ATAD 1 Law in a way that would practically allow only a minority to benefit from it. Yet, the EU securitisation vehicle exemption is a consequent continuance of the sense of ATAD 1 and will allow several securitisation companies to remain out of scope.

We recommend to each involved party to make a case-by-case ATAD impact assessment of their securitisation company in order to determine the best solution going forward. We would be happy to assist you in this process.

1. The ATAD 1 Law refers to "(exceeding) borrowing costs", which has a slightly wider definition than interest.

1. PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,870 people employed from 76 different countries. PwC Luxembourg provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice. The firm provides advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. The firm helps its clients create the value they are looking for by contributing to the smooth operation of the capital markets and providing advice through an industry-focused approach.

2. The PwC global network is the largest provider of professional services in the audit, tax and management consultancy sectors. We are a network of independent firms based in 158 countries and employing over 250,000 people. Talk to us about your concerns and find out more by visiting us at www.pwc.com and www.pwc.lu.

Contact us

Holger von Keutz

Partner, Securitisation Leader, PwC Luxembourg

Tel: +352 49 48 48 2383

Alina Macovei

Tax Partner, PwC Luxembourg

Tel: + 352 49 48 48 3122

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