VAT & securitization vehicles, why proper structuring is key

Indeed, the applicable provisions (Law of 22 March 2004 & EU Regulation 2017/2402) provide for a flexible approach regarding the securitization’s definition, the range of assets that can be securitized (movable or immovable, tangible or intangible), the legal form of the vehicle(s) that can be used for structuring the transaction, or the ability to use compartments to segregate the assets and liabilities within the securitization vehicle (“SV”).

In particular, the Luxembourg legislation defines securitization as the transaction by which a securitization undertaking: 1) acquires or assumes, directly or indirectly through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties, and 2) issues financial instruments or contracts, for all or part of it, any type of loan, whose value or yield depends on such risks.

From a VAT standpoint, SVs are commonly considered as VAT taxpayers (“assujetti”) per se, usually not entitled to any input VAT recovery. However, any potential VAT leakage is mitigated by the VAT exemption that applies to the management services provided to such SVs, provided they meet the criteria laid down by the European Court of Justice ("ECJ“) in terms of “being specific to and essential for the activity of managing special investment funds”.

As regards the transfer of the risks to the SV, the Luxembourg legislative framework covers different scenarios, with the SV acquiring the legal title to the assets directly (“true sale”), by using credit derivatives (“synthetic securitization”) or by committing itself in any other way.

It is in the case of “synthetic securitization” that the EJC recently issued a decision in the case “O. Fundusz” (Case C 250/21, 6 October 2022, Szef Krajowej Administracji Skarbowej v O. Fundusz Inwestycyjny Zamknięty reprezentowany przez O S.A) which is worth taking into consideration when structuring a new securitization transaction.

Read our article in the AGEFI Luxembourg