Publications

The new European protection mechanism to ensure the development of the euro area against foreign investment In this 30-min webinar, our CMS experts: Gérard Maitrejean, Angélique Eguether and Julie Butlingaire...

In this 30-min webinar, our CMS experts: Aurélien Hollard and Benjamin Bada unravel the com­plex­it­ies of liquidity management applicable to investment funds. In the context of retailisation of private...

The CMS Corporate/M&A Group is pleased to launch the 16th edition of the European M&A Study

Breaking News | The European Commission (the Commission) has recently submitted a communication to the attention of the European Securities and Markets Authority (ESMA) proposing certain amendments to...

Political agreements have now been reached on the remaining texts of the AML/CTF Package: the new AML/CTF directive (“AMLD”), AML/CTF regulation (“AMLR”) and the anti-money laundering authority...

How to maximise the potential of securitisation solutions for your investment strategy? In this 15-min webinar, our CMS experts: Aurélien Hollard, José Ocaña and Julie Pelcé together with Arnaud...

During European Microfinance Week, LuxFLAG brought together the European impact investment industry in Luxembourg for a panel discussion focused on impact labels, especially the LuxFLAG Microfinance Label, and their potential for promoting sustainable investments. After a short talk about the historical evolution of the microfinance market, the discussion addressed the regulatory implications for impact asset managers. This session can be of a particular interest for investors looking for microfinance investment opportunities who need to understand the current challenges asset managers face when making impact investment decisions. Investment professionals, but not only, will share their vision of the future developments in microfinance in the financially excluded regions and their implications for the investment fund industry. Panel Speakers:  Aurélien Hollard, CMS LuxembourgAnna Letta, LuxFLAGBenoit Bouet, re­sponsAb­il­ityTA­TIANA Kalinina, Triodos Investment Management

Introduction In recent years, both investors and investment managers have been keen to develop debt instruments for meeting the demand of alternative sources of financing for small and medium-sized enterprises (SMEs), in particular when they are unable to secure credit from the traditional banking system. One of the main instruments for implementing a private debt strategy in Luxembourg is the private debt fund, which is attracting more and more interest from investors and investment managers for several reasons. Indeed, Luxembourg private debt funds experienced a 51% growth in assets under management between June 2022 and June 2023, reaching EUR 404.4 billion [1]. The economic rationale appears to be the steady increase in interest rates since 2021 [2], which has priced out a large number of SMEs while promising higher and stable profits for investors over the medium to long term. Judging by the continued growth of private debt funds, it appears that investors expect interest rates to at least remain at their current level as long as the European Central Bank succeeds in mitigating inflation.  Another factor which helps explain the steady growth of private debt funds is the Luxembourg regulatory framework, which facilitates (under certain conditions) lending activities for investment funds. The upcoming entry into force of the amendments to Directive 2011/61/EU (AIFMD) on alternative investment fund managers (the so-called AIFMD II) [3], which will set a harmonized framework for loan origination across the EU, will likely further bolster the current market trends for private debt funds. In this context, cautious optimism in the foreseeable future appears warranted for this asset class and it would not be surprising if it took up a greater proportion of fund managers’ portfolios. This newsflash will first provide a brief overview of the loan origination regime currently applicable in Luxembourg, before outlining the changes that AIFMD II will bring, particularly for non-regulated funds. Part 1:  Luxembourg’s attractive lending regime for private debt funds It is worth noting at the outset that there is currently a patchwork of domestic rules on loan origination, which leads to an uneven playing field across the EU. Until the implementation of AIFMD II (expected Q1 2026), each national regime (including in Luxembourg) will still be applicable, which means that regulatory convergence is unlikely before then and forum shopping by market participants will likely continue in the next few years. Domestically, the approach chosen by Luxembourg has been to accommodate debt funds’ strategies through its general investment management framework [4]. The well-known Luxembourg investment fund toolbox has already proved to be attractive to managers looking for a favourable jurisdiction in which to establish their funds, and private debt funds are no exception. In addition, the Commission de Surveillance du Secteur Financier (CSSF) had already designed a framework [5] to regulate private debt funds, but it has also allowed the development of a market practice for lending operations (including loan origination), especially for alternative investment funds [6] (AIFs). Lending operations (which include loan origination) are regulated in Luxembourg pursuant to article 28-4 of the Luxembourg law of 5 April 1993 on the financial sector (the LFS), which requires professionals to be authorized by the CSSF when engaging in the business of granting loans to the public for their own account. The CSSF has set out certain narrow and specific exemptions for private debt funds originating loans:i) Statutory exemption from the requirements laid down in article 28-4 of the LFS for regulated funds:This exception concerns in particular specialized investment funds (SIFs) governed by the law of 13 February 2007 relating to SIFs, undertakings for collective investment (UCIs) authorized under Part II of the law of 17 December 2010 relating to UCIs and investment companies in risk capital (SICARs) governed by the law of 15 June 2004 relating to SICARs. Simply put, these vehicles, when originating loans, are not subject to a CSSF licence because they fall outside the scope of the LFS but remain, nevertheless, subject to other applicable Luxembourg legislation, including consumer protection rules and regulations. Incidentally, despite long-standing diverging market views, unregulated funds (such as reserved alternative investment funds (RAIFs) governed by the law of 23 July 2016 relating to RAIFs) are not covered by the LFS statutory exemption and therefore do require CSSF approval to engage in loan origination, unless they can qualify for other exemptions available for unregulated funds. ii) Exemption available for unregulated funds:The CSSF has provided some guidelines on several cases where article 28-4 of the LFS does not apply to Luxembourg AIFs that originate loans. There are objective exemptions that do not necessitate a deep legal analysis (so-called “safe harbours”), such as where:the loans are provided on an irregular basis, and would therefore not constitute a professional activity;the loans are issued exclusively intra-group; andeach loan granted has a nominal value of at least EUR 3,000,000 and is granted exclusively to “pro­fes­sion­als” as that term is defined in the Luxembourg Consumer Code. In addition, unregulated funds could also benefit from an exemption when the loan is not granted to the public but, according to CSSF guidelines, to “a limited circle of previously determined persons”. This notion, however, remains vague and must be interpreted on a case-by-case basis. For this reason, it is strongly recommended that a thorough legal analysis is conducted and that a request for a negative clearance letter is submitted to the CSSF in order to prevent any legal uncertainty regarding the applicability of this exemption. Part 2: The upcoming regime of loan origination under AIFMD II To this day, rules set by each Member State generally do not provide sufficient guidance and clarity on how a loan origination activity should be lawfully conducted (including in Luxembourg, as described in Part 1).   The so-called AIFMD II will provide a minimum number of safeguards and risk procedures for funds aiming to engage in loan origination. The new set of rules is warmly welcomed by the industry, as it will not only provide additional clarity but also create a level playing field across jurisdictions, thereby strengthening the private debt market by providing more business opportunities to funds, while also establishing a high level of protection for investors.   For a full description of the key features implemented by AIFMD II, please refer to our previous article. As with any new or upcoming regulation, AIFMD II already raises questions that will need further clarification from the legislator. After a transitional period, existing AIFs that originate loans or gain exposure to loans through third parties (regardless of whether an AIF meets the definition of loan-origination AIF) will need to implement effective policies, procedures and processes for assessing their credit risk. It is worth noting, however, that we do not have more details on these procedures at this time. From a Luxembourg perspective, one could expect that these requirements will be similar to the ones already prescribed by the CSSF for AIFs engaged in loan ori­gin­a­tion/par­ti­cip­a­tion (see footnotes 5 and 6). Market participants are also eagerly awaiting the regulatory technical standards to be issued by the European Securities and Markets Authority (ESMA) for clarification on liquidity management tools (LMTs) for loan origination AIFs that will remain open-ended at the end of the transitional period. For the time being, one should be mindful that point 9(a) of the recitals of AIFMD II clearly states that “AIFs granting loans to consumers are subject to the requirements of other instruments of Union law applicable to consumer lending”. It is also legitimate to ask whether the CSSF position will evolve following the entry into force of AIFMD II and especially on the notion of “public”. Would the notion be narrowed to allow loan origination AIFs to make the most of the new regime? If this were the case, it may encourage unregulated funds qualifying as loan origination AIFs to dispense with having to submit a request to the CSSF for a negative clearance letter. In the meantime, Member States remain free, of course, to “lay down national product frameworks that define certain categories of AIFs with more restrictive rules”, although such considerations will have to be weighed against the risk of seeing managers favouring other more welcoming jurisdictions in which to domicile their loan origination funds. Our team will continue to monitor the path favoured by the Luxembourg legislator going forward, but it remains optimistic that it will continue to skilfully balance investor protection considerations while also safeguarding the competitive advantage that Luxembourg has built over the years in the private debt market fund space. More generally, to find out more about the possibilities and opportunities for structuring a debt strategy in Luxembourg, please see the following article, which summarises the features of a Luxembourg securitisation vehicle that could be an interesting alternative for a private debt strategy. [1] ALFI/KPMG Private debt fund survey 2023[2] Key ECB interest rates, European Central Bank’s website (https://www. ecb. europa. eu/stats/policy_and_ex­change_rates/key_ecb_in­terest_rates/html/in­dex. en. html)[3] Final text of political agreement on AIFMD II has been published, 15.11.23, CMS Newsflash (ht­tps://cms-lawnow. com/en/eal­erts/2023/11/fi­nal-text-of-polit­ic­al-agree­ment-on-aifmd-ii-has-been-pub­lished)[4] The Luxembourg private debt funds scene – an asset class on the rise, 2017, JurisNews Investment Management vol. 5 – N°3/2017, page 95[5] Questions and answers on the statuses of “PFS” - Part II, point C7, 15 June 2021, CSSF[6] CSSF FAQ - Luxembourg Law of 12 July 2013 on alternative investment fund managers, point 22, 16 December 2022, CSSF

Introduction The Grand Duchy of Luxembourg stands out as one of the leading financial hubs for structuring asset managers’ debt strategies either through securitisation or debt fund structures (for debt fund structures, please click here). Indeed, it maintains a pioneering role in the credit financing landscape by reinforcing and updating its legal framework in line with the latest market trends. One major change was the 2022 amendments to the Law of 22 March 2004 on securitisation (the Luxembourg Securitisation Law) [1], which made securitisation a much more flexible and attractive regime, placing Luxembourg on the same playing field as the most important EU securitisation jurisdictions such as Ireland. Core benefits of the Luxembourg Securitisation Law Flexible methods of setting up a securitisation vehicle and legal forms The Luxembourg Securitisation Law allows for the set-up of securitisation vehicles (SVs) either as securitisation companies or securitisation funds managed by a management company. An SV in the form of a company may be set up as a tax-opaque corporate entity, such as a public limited liability company (société anonyme – SA) or a private limited liability company (société à responsabilité limitée – Sàrl), or a tax-transparent partnership, such as a special limited partnership (société en commandite spéciale – SCSp). Conversely, securitisation funds do not have legal personality (ergo tax transparent) as they are portfolios of assets managed by a Luxembourg management company. They can be structured either as co-ownership of their investors or as a fiduciary estate where the management company holds the securitised assets as fiduciary property, which will be segregated from its own assets. Possibility of creating compartments The Luxembourg Securitisation Law allows for the set-up of multiple compartments, permitting the segregation or so-called ring-fencing of assets and liabilities in each of the independent compartments of the vehicle. This possibility of creating separate compartments within an SV is almost unique in continental Europe and triggers a significant reduction of costs as well as formalities for multiple or repetitive transactions initiated by the same originator and/or arranger. Regulatory supervision SVs may be regulated or not. The key factor is the access to funds by the public. If an SV makes offers of financial instruments to the public on a continuous basis (i.e. more than three times during one financial year), then it will need to obtain a licence granted by the Luxembourg regulatory authority, the Commission de Surveillance du Secteur Financier (the CSSF). However, if the SV is primarily engaged in private placements of financial instruments and occasional public offerings (subject to the relevant conditions), this authorisation will not be required. Risks that can be securitised It is generally agreed that one of the major advantages of Luxembourg’s Securitisation Law is that any foreseeable income or risk stream can be securitised. Added to this, assets that will arise in the future can also be part of a securitisation transaction. Some of the assets that may be securitised are those listed below:debt and equity se­cur­it­ies;busi­ness, commercial and mortgage loans, including non-performing loans (NPLs);credit card and trade re­ceiv­ables;rights and receivables related to financial contracts and/or operating busi­nesses/com­mod­it­ies, and assets covered by financial leases;real estate; andintellectual property rights. Multiple ways of financing an SV The Luxembourg legal framework is quite flexible and permits the financing of the SV through a multitude of ways, including, inter alia, the issuance of financial instruments, including all types of debt security such as bonds, notes, certificates in registered, bearer or dematerialised form, options, warrants, futures conferring the right to acquire shares, or any contracting instrument evidencing claim rights such as loans or promissory notes. It is also possible for an SV to be financed through equity securities and/or beneficiary shares. Active management of CLOs and CDOs Under the Luxembourg's recently amended Securitisation Law, SVs, when issuing financial instruments through private placement, are permitted to actively manage pools of risks, consisting of debt securities, debt financial instruments or claims. This change expanded the scope of the Luxembourg debt market by welcoming the so-called collateralised loan obligations (CLOs) or collateralised debt obligations (CDOs). Statutory subordination for different types of financial instrument The Luxembourg Securitisation Law provides for the subordination of different types of debt and equity instrument issued by an SV. The instruments issued by an SV in corporate form are classified in the following order, starting with the senior in­stru­ments:fixed income debt in­stru­ments;non-fixed income debt in­stru­ments;be­ne­fi­ciary shares;shares; andcorporate units or partnership interests,unless the rank of the rights of investors and creditors is defined differently in the provisions of the articles of incorporation, the management regulations or any agreement entered into by the SV. Favourable tax regime The tax benefits provided by the Luxembourg Securitisation Law and Luxembourg’s tax framework constitute one of the most crucial elements in selecting this as the ideal jurisdiction for setting asset managers’ debt strategies. Tax-opaque SVs (SA or Sàrl) are fully taxable and subject to corporate income tax, municipal business tax and an employment funds’ contribution (income taxes) in Luxembourg (resulting in an aggregate rate of 24.94% in Luxembourg City for 2024).  However, tax-opaque SVs benefit from a special tax deduction right pursuant to which commitments (which are generally considered to include any dividends and interest charges) vis-à-vis shareholders and creditors are generally considered as operating expenses and thus are tax deductible (except if specific rules restricting such deduction apply, e.g. interest deduction limitation rules, or interest due to investors in EU non-cooperative or “blacklisted jur­is­dic­tions”). SVs are exempt from net wealth tax (except for the annual minimum net wealth tax, which generally amounts to EUR 4,815). Dividend distributions and interest accrued or paid by tax-opaque SVs are not subject to withholding tax in Luxembourg (except for certain interest payments made to Luxembourg tax resident individuals). With regard to value added tax, qualifying management services received by an SV incorporated in Luxembourg are exempt. Generally, SVs are not obliged to register for value added tax purposes in Luxembourg except when receiving VAT taxable services from abroad, namely accounting or legal services. Furthermore, tax-opaque SVs are in principle fully entitled to benefit from more than 80 double tax treaties that Luxembourg has signed and are currently in force. SVs under the partnership form (SCS or SCSp) are in principle tax transparent and are therefore generally not subject to income taxes, nor to net wealth tax in Luxembourg. This is subject to Luxembourg “reverse hybrid” rules being applicable in relation to income taxes. There is no withholding on profit distributions or interest accrued or paid by an SV in the form of a partnership (except for certain interest payments made to Luxembourg tax resident individuals). Value added tax effects are in principle the same as for tax-opaque SVs. Such vehicles are in principle not entitled to double tax treaty benefits. Finally, although the Luxembourg Securitisation Law allows for the creation of compartments, this is disregarded from a tax perspective, meaning that the SV is considered as a single taxpayer. Increased investor protection Ensuring increased investor protection is one of the most significant aspects of the Luxembourg Securitisation Law. The bankruptcy remoteness principle separates securitised assets from any insolvency risks of the SV or originator, service provider and all other parties involved. Therefore, in the event of the bankruptcy of the originator or of the services entrusted by the SV with the collection of cash flows from the assets, the Luxembourg Securitisation Law stipulates that the SV is entitled to claim the transfer of ownership of the securitised assets and any cash received on its behalf before the opening of liquidation proceedings. Also, the Luxembourg Securitisation Law allows for contractual provisions that are valid and enforceable and which aim to protect the SV from the individual interests of involved parties, consequently enhancing the SV’s protection as follows:claim subordination pro­vi­sion;non-re­course pro­vi­sion;non-pe­ti­tion provision; andnon-seizure of assets. In addition, the Luxembourg Securitisation Law provides that assets are exclusively available to satisfy investors’ claims on an SV, or a compartment in the case of several compartments, and to satisfy creditors’ claims in respect of those assets. Thus, compartment segregation prevents insolvency contamination between different compartments and provides limited recourse to the assets of a given compartment only. Conclusion Luxembourg is undoubtedly your key European gateway to structuring your next securitisation project, offering a wide range of benefits, including, inter alia, an array of possible corporate forms, flexible financing methods, the possibility to actively manage a debt portfolio under certain conditions, new rules on the creation of compartments and an attractive tax regime. Alternatively, for additional insights and ways into organising your debt strategy in Luxembourg and exploring potential opportunities, please see the following article. Do not wait any longer to get your project started! Get in touch now with our Capital Markets experts: Aurélien Hollard, José Ocaña, and Stamatina Stylianopoulou as well as our securitisation tax specialists: Frédéric Feyten, Alejandro Dominguez, and Pierre George.[1] https://www. cssf. lu/wp-con­tent/up­loads/L_220304_se­cur­it­isa­tion. pdf.

Despite geopolitical tensions, fears of recession and strong inflationary pressures across the EU, as well as the fiscal tightening needed to contain them, M&A in the CEE region has remained reasonably buoyant. Findings from the CMS Emer­ging Europe M&A 2023/24 report, published in cooperation with EMIS, demonstrate the resilience of the Emerging Europe deals market as activity holds firm against a backdrop of geopolitical tensions and strong inflationary pressures. Welcome to the 2023/24 edition of the Emerging Europe report.

We are thrilled to unveil our #CMSLux­Ad­vent­Cal­en­dar23, featuring 24 essential legal insights for 2023 that will shape the legal landscape in 2024. Immerse yourself in the discovery of crucial new regulations right up to Christmas, and get ready to be informed about the major legal developments that will shape our year ahead. Stay tuned for our daily advent reveals starting!