SPVs in Luxembourg

Luxembourg, a leading European hub for securitisation and structured finance transactions, provides a pragmatic and secure legal and tax framework for establishing Special Purpose Vehicles (SPVs). These vehicles, which are crucial in private equity, real estate, leveraged buyouts (LBOs), debt issuance, and listings, benefit from the jurisdiction’s innovative approach and adaptability. 

Core Technical Requirements for Establishing SPVs

An SPV is a subsidiary created by a parent company to isolate financial and legal risk.

In Luxembourg, the use of SPVs has traditionally been tax-driven, but is now equally motivated by other attractive features such as the ability to integrate hybrid features such as compartments, and the advantages of the financial collateral law of 2005, making the country very interesting for LBOs and various financing structures.

• Legal Structure: SPVs can take various forms, including public limited companies (SAs), private limited liability companies (SARLs), and partnerships. The choice depends on the specific needs of the transaction.
• Regulatory Framework: Unlike regulated investment funds, SPVs generally operate outside the direct purview of financial sector laws like the Law of 17 December 2010 on Undertakings for Collective Investment (UCIs), the Law of 13 February 2007 on Specialised Investment Funds (SIFs) or the Law of 23 July 2016 on Reserved Alternative Investment Funds (RAIFs). However, it is important to note that if a Luxembourg SPV is involved in lending, it may require a license under Article 28-4 of the Law of 5 April 1993 on the financial sector (LFS).
• Lending License: A Luxembourg entity that professionally engages in granting loans to the public for its own account requires a license from the Commission de Surveillance du Secteur Financier (CSSF).This is not required if (i) the loans are on a one-off basis, (ii) intra-group, (iii) to a limited circle of persons, or (iv) for loans with a nominal value of at least EUR 3.000.000 granted to professionals. 
• Substance Requirements: While SPVs were traditionally lightly regulated, substance requirements are now a key consideration. This includes having a registered office, a local director, and necessary infrastructure. The level of substance required is proportional to the complexity of the SPV’s activities.
• Capital Requirements: The specific capital requirements vary depending on the chosen legal structure. Generally, companies will require a minimum share capital.
• Accounting and Audit: SPVs must maintain proper accounting records and may require an external audit.
• Anti-Money Laundering (AML): SPVs are subject to AML/CFT requirements under the Law of 12 November 2004 . They must identify and verify beneficial owners and comply with due diligence obligations.

Implementation Process and Market Effects

The implementation process involves the following steps:

• Choosing a Legal Structure: Selection of the appropriate legal form.
• Drafting Constitutive Documents: Preparation of articles of association or partnership agreements.
• Registration: Registration with the Luxembourg Trade and Companies Register (RCS). 
• Obtaining Necessary Licenses: Applying for any required licenses, such as a lending license, if the SPV is involved in lending activity.
• Setting up Bank Accounts: Establishing bank accounts in Luxembourg.
• Appointment of Directors: Appointing qualified directors and managers. 
• Tax Considerations: It is important to be aware of the tax treatment of SPVs, particularly in light of the international tax developments.

The use of Luxembourg SPVs has a significant positive market effect, driving business and employment within Luxembourg’s financial sector. Luxembourg has a reputation for being fast-to-adapt and innovative, which is attractive to international clients.

Examples and Best Practices

SPVs are commonly used in private equity, real estate, LBOs, debt issuance and listings.

• Private Equity: Luxembourg SPVs are often used to hold portfolio companies, facilitating investment structuring and exits.
• Real Estate: SPVs are used to hold real estate assets, allowing for ring-fencing of risks and easier transfer of ownership.
• LBOs (Leveraged Buyouts): SPVs are employed to facilitate acquisitions, holding debt and equity instruments.

Best practices include:

• Ensuring adequate substance, especially in light of the increased focus from tax authorities.
• Proper documentation of all transactions and compliance with regulatory requirements.
• Careful selection of directors and managers with the necessary experience, local expertise and location.

Key Transactional Aspects

Key transactional aspects to consider include:

• Financing: SPVs often engage in complex financing transactions, requiring careful consideration of security and collateral arrangements.
• Debt Funds: Debt funds may use Luxembourg SPVs for originating or holding loans. The total assets under management of debt funds in Luxembourg reached EUR 510 billion by December 2023.
• Cross-Border Considerations: SPVs often involve cross-border transactions, requiring compliance with various international tax and regulatory laws.
• Contractual Agreements: Well-drafted agreements are essential to ensure proper governance and to minimise risks.

Legal and Compliance Challenges

Legal and compliance challenges include:

• AML/CFT Compliance: Ensuring compliance with Luxembourg and EU AML/CFT laws, including beneficial ownership reporting. 
• Data Protection: Compliance with the General Data Protection Regulation (GDPR).
• Tax Compliance: Adhering to Luxembourg tax laws and avoiding any transfer pricing (ensuring fair pricing for transactions between related companies so that each company’s taxable income is accurate. Tax authorities monitor this to prevent profit shifting to lower-tax areas).
• Regulatory Changes: Keeping up with the constantly evolving regulatory landscape, including EU directives and CSSF circulars.
• Lending Regulations: Awareness of the lending regulations and licensing requirements under the LFS.

Latest Trends in SPV Use

• Increased Substance Requirements: There is a trend towards more stringent substance requirements, which impact the operational setup of SPVs.
• Focus on Transparency: Increased focus on transparency and beneficial ownership information.
• Digitalization: The use of digital technologies in the administration and management of SPVs.
• Sustainable Finance: Integration of environmental, social, and governance (ESG) factors into SPV operations.
• Crypto-Assets: Monitoring the implementation of the new EU framework for crypto-assets.

Establishing SPVs in Luxembourg offers numerous benefits, but it requires a thorough understanding of the legal and regulatory environment. By adhering to best practices and staying abreast of the latest developments, investors and asset managers can utilise Luxembourg SPVs effectively to achieve their strategic objectives.