ATAD and Securitisation Undertakings: Reshaping the Safe Harbour

March 29, 2022 | Blog
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) of a securitisation undertaking (organisme de titrisation) vis-à-vis investors (e.g. dividend distribution commitments to shareholders) and creditors (e.g. borrowing costs) are considered deductible expenses for tax purposes. This principle enables Luxembourg securitisation undertakings 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 and economically equivalent 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 a limitative list of “financial undertakings” with certain exemptions to those interest deduction limitation rules. One such exemption applies to securitisation special purpose entities (or SSPEs) within the scope 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) subject to the Luxembourg Securitisation Law only are generally not exempted from the scope of application of the ATAD 1 Law.

The exemption challenged by the EU Commission

On 14 May 2020, the EU Commission sent a formal notice to Luxembourg challenging the scope of the exemption created pursuant to the ATAD 1 Law. The EU Commission took the view that the list of “financial undertakings” exempted from the interest deduction limitation rules as per ATAD 1 cannot be extended. Thus, SSPEs should 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. Consequently, the tax treatment applicable to SSPEs should be similar to “traditional” securitisation companies carrying securitisations within the sense of the Securitisation Law and there should in essence be no difference in the tax treatment applicable to SSPEs and securitisation undertakings generally.

SSPEs will no longer be exempted

The Luxembourg government has followed the predicted “complying approach” and recently submitted a bill of law to the Luxembourg parliament in view of addressing the notice received from the EU Commission. The party line is to acknowledge the interpretation made by the EU Commission and amend the current scope of exempted entities by amending the interest deduction limitation rules enshrined in Article 168bis of the Luxembourg income tax law of 4 December 1967.

Removing SSPEs from the scope of exempted entities is expected to be effective from 1 January 2023.

Existing and forthcoming securitisation undertakings structured as SSPEs will need to carefully assess their situation to determine to what extent the removal of the exemption is relevant to their situation and whether the application of the interest deduction limitation rules implemented under the ATAD 1 Law could affect their tax neutrality. 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 or not the interest deduction limitation rules may have an impact.

Things will remain unchanged for securitisation undertakings not qualifying as SSPEs since they were not exempt from the interest deduction limitation rules since the implementation of the ATAD 1 Law.

Alternative options
Since the entry into force of the ATAD 1 Law, the Luxembourg securitisation market has been able to find solutions for securitisation undertakings incorporated under the Securitisation Law to remain tax neutral. 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.

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