The International Capital Markets Review: Luxembourg
Key international market participants consider Luxembourg, one of the few AAA rated countries, to be among the most attractive business centres in the world. With approximately 135 registered banking institutions, a successful investment fund industry with approximately 3,686 funds managing net assets of approximately €4.5 billion and a dynamic insurance sector, Luxembourg offers a full range of diversified and innovative financial services.
i Legal system
Luxembourg is a parliamentary democracy headed by a constitutional monarch, the Grand Duke. The Grand Duke and the government (headed by the Prime Minister) exercise executive power, and legislative power is vested in the Chamber of Deputies, a unicameral legislature of 60 directly elected members. A second body, the Council of State, composed of 21 ordinary citizens appointed by the Grand Duke, advises the Chamber of Deputies on the drafting of legislation.
The Constitution is the supreme law of Luxembourg.2 Luxembourg's legal system is based on civil law; a number of laws are based on French or Belgian legislation.
Laws are enacted by the Chamber of Deputies and promulgated by the Grand Duke. The Constitution confers the Grand Duke with the power to adopt the necessary regulations and orders for the implementation of laws. The Grand Duke may, however, not suspend laws or dispense their implementation.
The Grand Duke can also authorise the government to make ministerial regulations in respect of limited technical issues.
Certain public bodies have the power to adopt special regulations within their field of competence. These bodies must act within the limits that have been previously defined by the legislature. Administrative circulars offer guidance on the interpretation of laws, especially in tax law matters.
Case law is not binding in Luxembourg; the law does not recognise the rule of precedent that applies in Anglo-Saxon legal systems. Judges' decisions can, however, be founded on a reference to case law. In the absence of Luxembourg case law, judges may turn to Belgian, French or even German case law for tax law matters.
ii Judicial system
The Luxembourg judicial system is divided into a judicial branch and an administrative branch. Next to these two branches is the Constitutional Court, the aim of which is to rule by way of judgment on the conformity of particular laws with the Constitution, except for those that sanction international treaties.
The judicial branch is headed by the Supreme Court of Justice, which comprises the Court of Cassation, the Court of Appeal and a public prosecution department. The Court of Cassation is primarily responsible for hearing cases that seek to overturn or set aside decisions given by the various benches of the Court of Appeal, and judgments by courts of last resort.
The country is divided into two judicial districts and three townships, and each has respectively a district court or a lower court (courts of justices of the peace), or both. The district court hands down decisions in ordinary law and hears all cases other than those falling expressly within the competence of another jurisdiction. It is competent for most appeals cases against judgments rendered by the lower court operating within the court's judicial district. The presidents of the district courts, or the magistrates appointed to them, hear interlocutory applications and render interim orders in urgent cases, civil or commercial.
Unless otherwise provided for by law, appeals can be lodged with the Administrative Court against decisions rendered by the Administrative Tribunal, or other administrative jurisdictions that have been granted specific jurisdiction. The Administrative Tribunal decides on claims introduced against administrative measures or decisions in cases of:
- acting in excess of authority;
- improper exercise of authority;
- breaches of the law or of procedures designed to protect private interests;
- appeals against administrative decisions in respect of which no other remedy is available in accordance with laws and regulations; and
- appeals against administrative measures having a regulatory character, irrespective of the authority from which they emanate.
iii Regulatory bodies in the financial sector
The Luxembourg financial sector supervisory authority (CSSF) regulates the financial services sector. It is responsible for investigating possible wrongdoing and bringing enforcement actions against credit institutions and professionals in the financial sector (PFS) for breaches of applicable law. It has the widest powers to supervise and control Luxembourg credit institutions and the PFS. The CSSF cooperates with foreign supervisory authorities on prudential supervision matters. Circulars and regulations issued by the CSSF complete the legislative framework of the Luxembourg financial sector.
The CSSF also supervises the securities markets and receives complaints from investors. It is the Luxembourg competent authority for approving prospectuses that comply with Regulation (EU) 2017/1129 on prospectuses for securities (the Prospectus Regulation) and alleviated prospectuses that comply with the Luxembourg Act of 16 July 2019 on Prospectuses for Securities (the Prospectus Act). Furthermore, the CSSF monitors issuers' compliance with their obligations arising under the Act of 11 January 2008 on Transparency Obligations, as amended (the Transparency Act), and Regulation (EU) 596/2014 on market abuse (the Market Abuse Regulation), certain provisions of which have been implemented into Luxembourg law by the Act of 23 December 2016 on Market Abuse (the Market Abuse Act).
Finally, the CSSF participates, at EU and international level, in negotiations concerning the financial sector, and coordinates the implementation of governmental initiatives and measures to bring about an orderly expansion of activities of the financial sector.
The Luxembourg central bank (BCL) has a dual role: it is an integral part of the European System of Central Banks and the Eurosystem, on the one hand, and it is the central bank of Luxembourg, on the other. The BCL is responsible for implementing the monetary policy in Luxembourg decided by the Governing Council of the European Central Bank (ECB) and, among other things, for payment systems and clearing of settlement systems, cash operations and financial stability.
The Luxembourg Finance Ministry has general competence over the financial services sector (including tax legislation and financial legislation).
The year in review
i Developments affecting debt and equity offerings3
No offer of transferable securities may be made to the public in Luxembourg without the prior publication of a prospectus approved by the CSSF or a competent foreign authority.
Depending on the type of offer and of the securities offered, different regimes apply. The Prospectus Regulation, which has applied in its entirety across all EU Member States since 21 July 2019, together with related Level 2 delegated acts and Level 3 guidance, provides an EU prospectus regime (the PDIII regime). Public offers that are not covered by the Prospectus Regulation are governed by Part III, Chapter 1 of the Prospectus Act, which applies to alleviated prospectuses. The main difference between the two regimes is that only public offers made under the Prospectus Regulation can benefit from the European passport for securities. Part III, Chapter 1 is used for public offers made only within the territory of Luxembourg.
Generally, a prospectus or an alleviated prospectus must contain all the information that enables prospective investors to make an informed assessment of the contemplated investment. The contents and format of a prospectus governed by the Prospectus Regulation are determined by the European Commission Regulation (EU) 2019/9804 (Regulation 2019/980). Part III prospectuses are drafted on the basis of Regulation 2019/980 if they are used for a public offer or on the basis of the rules and regulations (ROI) of the Luxembourg Stock Exchange (LxSE) if they are used for an admission to trading.
Where an offer to the public is made in Luxembourg only and Luxembourg is the home Member State, the prospectus must be drawn up in English, German, French or Luxembourgish (the four languages accepted by the CSSF). Multilanguage prospectuses are also generally accepted). Where an offer to the public is made in more than one EU Member State, including Luxembourg, and Luxembourg is the home Member State, the prospectus must also be drawn up in a language accepted by the competent authorities of each of those EU Member States. Alternatively, upon election by the issuer, the prospectus may be drawn up in a language customary in the sphere of international finance. The language of a document incorporated by reference does not need to be the same as that of the prospectus (the person applying for approval to 'passport' the prospectus must, however, ensure compliance with the language regime of the host Member State) provided that the language of the document incorporated by reference is one of the four languages accepted by the CSSF, and that the readability of the prospectus is not compromised.
The Prospectus Regulation provides for exemptions from the obligation to publish a prospectus for certain offers.5 In addition to these, the Luxembourg legislature elected to opt for the additional exemption offered to EU Member States under the Prospectus Regulation. Accordingly, the Prospectus Act exempts from the obligation to draw up a prospectus offers to the public for a total amount not exceeding €8 million.6 However, prior notification to the CSSF of such exempted offers is required and, for public offers below €8 million but equal to or higher than €5 million,7 the Prospectus Act requires the publication of an information note. Furthermore, the obligation to publish a prospectus does not apply to offers to the public of certain types of securities (such as, under certain conditions, securities offered or allotted (or to be allotted) to existing or former directors or employees by their employer whose securities are already admitted to trading on a regulated market or by an affiliated undertaking).
On 19 July 2019, the CSSF published Circular Letter 19/724 outlining the technical procedures regarding submissions of documents to the CSSF.8
The admission to trading of securities requires the prior publication of a prospectus in accordance with the Prospectus Regulation. The regime applicable for admissions to trading varies, to a great extent, according to the market on which the admission to trading is sought. Issuers can either request an admission to trading on the regulated market (within the meaning of MiFID II9) of the LxSE or the Euro MTF market. Depending on the type of securities for which an admission to trading on the regulated market is sought, the Prospectus Regulation (certain provisions of which are implemented by Part II of the Prospectus Act) or Part III, Chapter 2 of the Prospectus Act is applicable. Only prospectuses approved under the Prospectus Regulation can benefit from the European passport. The competent authority for the approval of a listing prospectus under the Prospectus Regulation is the CSSF, whereas the LxSE governs the approval of alleviated prospectuses under Part III, Chapter 2 of the Prospectus Act.
The Euro MTF market is the LxSE's alternative market. It is not considered a regulated market in the sense of MiFID II. For admissions to trading on the Euro MTF market, Part IV of the Prospectus Act applies and essentially refers to the ROI as regards the relevant provisions for the content and format of the prospectus to be produced. A prospectus that is drafted in accordance with Regulation 2019/980, however, is also acceptable for a Euro MTF listing prospectus. Euro MTF prospectuses are approved by the LxSE. The Euro MTF market is a multilateral trading facility (MTF) (as defined in MiFID II) and not just a listing place. The main advantage for an issuer to seek admission to trading for its securities on the Euro MTF market is that the stringent disclosure, transparency and reporting obligations under the Transparency Act do not apply. The Market Abuse Regulation does, however, apply to the Euro MTF market. The Euro MTF market is eligible for the Eurosystem operation (ECB) and eligible for investments made by Luxembourg investment funds (undertakings for collective investment in transferable securities (UCITS)). More than 35,000 securities were admitted to trading on both markets of the Luxembourg Stock Exchange. More than 26,000 listed debt securities make it the number one ranked stock exchange for international bond listings.
The Luxembourg Stock Exchange also features a third listing venue called the Securities Official List (SOL). An admission to SOL is purely a listing, without admission to trading. The listed securities will appear on the Official List of the Luxembourg Stock Exchange. Admission to SOL is subject to compliance with a specific rulebook with less stringent disclosure and documentation requirements than the Prospectus Act or the Prospectus Regulation. In addition, neither the Transparency Act nor the Market Abuse Regulation10 apply to SOL.
At the end of 2018, the Luxembourg Stock Exchange launched two professional segments available on the regulated and Euro MTF markets, which only professional investors can access, thus providing issuers with some advantages in respect of compliance with MiFID II and PRIIPs obligations and with some disclosure obligations under the Prospectus Regulation.
The Act of 6 April 2013 on Dematerialised Securities (the Dematerialisation Act) has modernised Luxembourg securities law by introducing a complete legal framework for dematerialised securities to keep pace with market developments.
The Dematerialisation Act draws on the French, Swiss and Belgian regimes. However, in contrast to these regimes, the dematerialised form of securities will exist in addition to the traditional bearer and registered forms of securities. Dematerialised securities will thus constitute a third type of securities, and an issuer will be free to choose from among the three.
The Dematerialisation Act lays down the legal framework for the dematerialisation of securities, which are either equity or debt securities issued by Luxembourg joint-stock companies or common funds or debt securities issued under Luxembourg law by foreign issuers. The Dematerialisation Act does not provide for compulsory dematerialisation but for compulsory conversion if an issuer so decides. Dematerialisation will be achieved by the registration of the securities in an account held by a single body (a settlement organisation or a central account keeper).
The Dematerialisation Act is at the forefront of the field of dematerialisation as it has closely aligned the Luxembourg regime with the Unidroit Convention on substantive rules for intermediated securities dated 9 October 2009, as well as, to a certain extent, the works of the European Commission in relation to the future securities law directive.
The Luxembourg framework on dematerialisation offers greater flexibility and choice for issuers and market participants, increases the speed of transfers by eliminating operational complexities and the risks inherent in the handling of physical securities, and reduces settlement and custody costs.
Immobilisation of bearer shares and units
The Luxembourg Act on the Immobilisation of Bearer Shares and Units (the Immobilisation Act) came into force on 18 August 2014. The Immobilisation Act purports to adapt Luxembourg legislation to the recommendations of the Financial Action Task Force and the Global Forum on Transparency and Exchange of Information for Tax Purposes in terms of identification of holders of bearer shares and units. At any time, the availability of information regarding the identity of bearer shareholders or unitholders must be guaranteed while still preserving the confidentiality of the information towards third parties and other shareholders or unitholders. The new regime applies to bearer shares and units, irrespective of whether they are listed, issued by Luxembourg companies or contractual funds. Bearer shares and units must be deposited with a depositary established in Luxembourg that is subject to anti-money laundering requirements. A transitional period of six months is provided for bearer shares and units that were issued prior to the entry into force of the Immobilisation Act. Depositaries and directors and managers of companies and management companies of contractual funds who fail to comply with the requirements may incur civil or criminal sanctions. The Immobilisation Act also applies to companies that have issued registered shares where the share register is not held at their registered office or where otherwise the share register does not comply with the requirements of the Act of 10 August 1915 on Commercial Companies, as amended (the Companies Act). Criminal sanctions will be imposed in the event of a breach of the relevant legal provisions applying to share registers.
In August 2019, Luxembourg implemented the second shareholders' rights directive, SRD II,11 and introduced new obligations for companies whose shares are admitted to trading on a regulated market established or operating in an EU Member State, and for intermediaries, institutional investors, asset managers and proxy advisers that are interacting with them. Accordingly, the Act of 24 May 2011 on the Exercise of Certain Shareholder Rights at General Meetings of Listed Companies (the Shareholder Rights Act) has been amended, in particular to require that listed companies establish a remuneration policy for directors, submit it to the non-binding advisory vote of shareholders and publish it on their website. To help shareholders monitor the application of the remuneration policy, listed companies must also produce an annual remuneration report (to be published on their website) describing how the remuneration policy has been implemented and giving an overview of the remuneration granted to each individual executive.
The listed companies must further submit material12 transactions with related parties for approval to the management body of a company and publicly disclose such transactions no later than at the time of the conclusion of a transaction.
The Shareholder Rights Act, as recently amended, also fostered shareholders' transparency by giving the right to listed companies to request any intermediary in a chain of intermediaries to provide information on the identity of their shareholders and by requiring shareholders that are institutional investors and asset managers to develop and publicly disclose an engagement policy (that is, a policy describing how they integrate shareholder engagement in their investment strategy). Institutional investors and asset managers must, on an annual basis, publicly disclose how their engagement policy has been implemented. Institutional investors must further disclose on their website certain elements of their equity investment strategies and of their arrangements with their delegated asset managers, and how their equity investment strategies and arrangements take into account and contribute to the medium to long-term performance of the relevant listed companies.
For the first time, proxy advisers are required to make available on their website their code of conduct (or explain why they do not have one) and, if applicable, report on its implementation each year. Additionally, they must disclose at least once a year certain information in connection with the preparation of their research, advice and recommendations regarding votes.
The Companies Act has been modernised: a number of existing practices have been embedded into law and a series of new mechanisms and instruments have been introduced. From a capital markets perspective, the attractiveness of private limited liability companies as issuance vehicles has been increased by allowing them to carry out public offers of debt securities. Other requirements that gave rise to concern, such as the requirement for audit reports in the context of convertible debt securities issuances, have been removed. The Companies Act now also allows the issuance of shares with different nominal values, and provisions on tracker shares have been embedded into the Luxembourg Civil Code.
Market Abuse Regulation
Since 3 July 2016, the Market Abuse Regulation has replaced the market abuse act of 2006. Simultaneously, various implementing and regulatory technical standards adopted by the European Commission have come into effect. The Market Abuse Regulation is complemented by CSMAD.13 The CSMAD, together with certain provisions of the Market Abuse Regulation, have been implemented into Luxembourg law by the Market Abuse Act. The most important change is the application of the market abuse rules to a wider scope of trading venues: those rules now also apply to MTFs and organised trading facilities as further defined in MiFID II.
The Market Abuse Regulation prohibits any person who possesses inside information from using that information by acquiring or disposing of, or trying to acquire or dispose of, for his or her own account or for the account of a third party, either directly or indirectly, financial instruments to which that information relates. This also includes the cancellation or changing of an order placed before the person in question had the relevant information. The Market Abuse Regulation further requires issuers to make public inside information that directly concerns them. Inside information means information of a precise nature that has not been made public relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and that, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivate financial instruments.
Information is likely to have a significant effect on price if it is information of a kind that a reasonable investor would be likely to use as part of the basis of his or her investment decisions. Information shall be deemed to be of a precise nature if it indicates a set of circumstances that exists or that may reasonably be expected to come into existence, or an event that has occurred or that may reasonably be expected to occur, where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the financial instruments.
Inside information given to a specific third party need not be disclosed to the public where there is a duty of confidentiality between the issuer and that third party (imposed by law, regulation, statute or contract).
The protection of investors requires public disclosure of inside information (unless an issuer is entitled to delay the disclosure of inside information) to be as fast and as synchronised as possible between all investors. A delayed disclosure of inside information must be notified to the relevant national competent authority. Inside information (which must be in the French, English or German language) must be notified through mechanisms that allow reasonably efficient broadcasting of such information to the public. Neither the Market Abuse Regulation nor its implementing technical standards provide a definitive set of mechanisms and means of publication to be used but they contain a list of mandatory information to be included in any announcement of inside information. In addition, issuers are required under the Market Abuse Regulation to post all published inside information on their websites for a period of at least five years.
Besides the prohibitions on insider dealing, the Market Abuse Regulation also incriminates market manipulation. Stabilisation measures, buy-back programmes as well as market soundings must also be analysed in light of the market abuse regime.
The Transparency Act (which implemented the European Directive 2004/109/EC dated 15 December 2004, as amended by Directive 2013/50/EU, on the harmonisation of transparency requirements into Luxembourg law) applies to issuers for which Luxembourg is the home Member State and whose securities are admitted to trading on a regulated market (thereby excluding the Euro MTF market).
Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 has been transposed into Luxembourg law by the Act of 10 May 2016, which extends the definition of issuer to clarify that issuers of non-listed securities that are represented by depositary receipts admitted to trading on a regulated market also fall within the scope of the Transparency Act. Further, the law amends a number of definitions (including the definition of home Member State) and introduces new administrative sanctions. The rules on the disclosure of major shareholdings have been reinforced, and the scope of financial instruments linked to shares that are covered by these requirements has been broadened. Finally, it is interesting to note that the quarterly financial reporting obligations and the requirement to notify new loan issuances have been removed.
Issuers falling within the scope of the Transparency Act are mainly obliged to publish annual financial reports, half-yearly financial reports and, if applicable, an annual report on payments made to governments. The Transparency Act 2008 also complements the Market Abuse Regulation by defining the methods of disclosure of inside information that falls within the definition of regulated information for issuers having their securities listed on a regulated market.
The above publication requirements in respect of annual financial reports and half-yearly financial reports do not apply to an issuer that issues exclusively debt securities admitted to trading on a regulated market, the denomination per unit of which is at least €100,000 (or its equivalent in another currency).
The Transparency Act distinguishes between regulated information and unregulated information. Issuers of securities admitted to trading on a regulated market are required to disclose, store and file regulated information (according to the terms defined in CSSF Circular Letter 08/337, as amended). In other words, an issuer is required to publish regulated information, store the regulated information with an officially appointed mechanism (OAM) for the central storage of regulated information (in Luxembourg, the LxSE has been appointed as OAM) and file the regulated information with the CSSF.
Article 17 of the Transparency Act sets out additional ongoing disclosure requirements relating to general meetings and the exercise of voting rights that are applicable to an issuer of debt securities, and that aim at ensuring equal treatment for all holders of debt securities that are in the same position.
Equal treatment is one of the two key legal aspects to be assessed by an issuer that intends to buy back its debt securities. Abiding by the provisions on market abuse is the second.
Historically, the CSSF favoured an extensive interpretation of the principle of equal treatment. By reference to the very wording of the relevant legal provision (that is, equal treatment must be ensured 'in respect of all the rights attaching to those debt securities'), the CSSF considered that the right of a holder of debt securities to participate in an offer by, or on behalf of, the issuer to buy back the debt securities is, in principle, a right attaching to the debt securities.
The CSSF now adopts a narrower reading of the notion of equal treatment to bring it in line with the practice applicable on other relevant markets. In short, the CSSF considers that the words 'rights attaching to' debt securities do not include the right to receive an offer to buy the securities made by or on behalf of the issuer. Thus, an offer can lawfully be made to some but not all holders of a series of debt securities and the issuer may propose different terms to different investors. This possibility is also of importance for exchange offers, to which the CSSF's position also applies.
ii Developments affecting derivatives, securitisations and other structured products
The Short Selling Regulation14 is directly applicable in EEA Member States (including Luxembourg). The Short Selling Regulation lays down a common regulatory framework for all EEA Member States with regard to the requirements on short selling of shares and debt instruments and certain aspects of credit default swaps. In Luxembourg, the Short Selling Regulation is complemented by the Act of 12 July 2013 on Short Selling of Financial Instruments and Implementing the Short Selling Regulation (the Short Selling Act), as well as CSSF Circular 12/548, as amended by CSSF Circular 13/565 (CSSF Circular 12/548). The Short Selling Regulation imposes (among other things) obligations on natural or legal persons to notify to the relevant competent authority (in Luxembourg, the CSSF) and, as applicable, disclose to the public net short positions in relation to the issued share capital of companies that have shares admitted to trading on a trading venue, and in relation to issued sovereign debt and uncovered positions in sovereign credit default swaps, each that reach or fall below the relevant notification thresholds specified in the Short Selling Regulation.15
The CSSF has developed a web-based platform16 for the notifications and disclosures of net short or uncovered positions covered by the Short Selling Regulation. Exemptions for market making activities and primary market operations, as permitted under the Short Selling Regulation, can be applied for by sending a notification of intent form (set out in CSSF Circular 12/548) to the CSSF by post or by email.17
The Short Selling Act also clarifies and extends the powers of the CSSF over, and with respect to, natural and legal persons that are subject to the Short Selling Regulation but that are not otherwise subject to the prudential supervision of the CSSF. In particular, the Short Selling Act provides to the CSSF:
- on-site inspection powers (subject to certain conditions);
- the power to obtain information and documents necessary for the discovery of truth in relation to acts prohibited by the Short Selling Regulation;
- the power to impose sanctions, including administrative fines of up to €1.5 million. If, however, the relevant person has drawn from the offence committed a pecuniary benefit (whether direct or indirect), the administrative fine may not be less than the amount of the benefit but not more than five times the amount; and
- the power to make public any sanction imposed by the CSSF (except where disclosure of this kind would seriously jeopardise the financial markets).
As part of an EU level reaction to the covid-19 crisis, the European Securities and Markets Authority (ESMA) issued a decision on 16 March 2020 temporarily requiring the holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority (the CSSF in Luxembourg) if their position reaches or exceeds 0.1 per cent of the issued share capital in a relevant entity after the entry into force of the decision. The temporary transparency obligations apply to any natural or legal person, irrespective of their country of residence. They do not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country, or to market making or stabilisation activities. This decision was renewed on 11 June 2020 and extends for a period of three months.
The Act of 5 August 2005 on Financial Collateral Arrangements, as amended (the Collateral Act 2005), provides an attractive legal framework for security interests, liberalised rules for creating and enforcing financial collateral arrangements, and protection from insolvency rules. It applies to any financial collateral arrangements and covers financial instruments in the widest sense as well as cash claims and receivables.
The Collateral Act 2005 also provides for transfers of title by way of security and recognises the right of a pledgee to re-hypothecate pledged assets. This enables the pledgee to use and dispose of the pledged collateral. Contractual arrangements allowing for substitution and margin calls are expressly recognised by the Collateral Act 2005, and are protected in insolvency proceedings in which security interests granted during the pre-bankruptcy suspect period can be challenged.
The Collateral Act 2005 was amended in May 2018 (in connection with the implementation of MiFID II) to exclude inappropriate use of title transfer collateral arrangements. Accordingly, credit institutions and investment firms must not, in connection with the provision of investment services, conclude a transfer of title by way of security with retail clients (as referred to in MiFID II) to guarantee the obligations of those clients.
Credit institutions and investment firms must properly consider (and be able to demonstrate that they have done so) the use of transfers of title by way of security in the context of the relationship between a client's obligations to the credit institution or investment firm and the client's assets that are subject to a transfer of title by way of security.
When considering and documenting the appropriateness of the use of a transfer of title by way of security arrangement, credit institutions and investment firms shall take into account all the factors set out in Article 13-1 of the Collateral Act 2005.
When using transfers of title by way of security, credit institutions and investment firms shall further highlight to professional clients and eligible counterparties the risks involved and the effects of any transfer of title by way of security on the client's financial instruments and funds.
When implementing a transfer of title by way of security of, or a pledge (with a right of use) over, financial instruments, the conditions with respect to the re-use of financial instruments received as collateral as set out in Article 15 of Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No. 648/2012 should also be considered (where applicable).
Under the Collateral Act 2005, financial collateral arrangements are valid and enforceable even if entered into during the pre-bankruptcy suspect period.
The Collateral Act 2005 confirms that the insolvency safe harbour provisions also apply to foreign law-governed collateral arrangements entered into by a Luxembourg party, which are similar (but not necessarily identical) to a Luxembourg financial collateral arrangement. Furthermore, receivables pledges are validly created among the contracting parties and binding against third parties as from the date of entering into the pledge agreement. The Collateral Act 2005 also provides for an efficient appropriation mechanism by allowing the collateral taker to appropriate the pledged assets (at a price determined prior to or after the appropriation of the asset) and to direct a third party to proceed with the appropriation in lieu of the collateral taker.
According to the Collateral Act 2005, set-off between assets (financial instruments and cash claims) operated in the event of insolvency is valid and binding against third parties, administrators, insolvency receivers and liquidators, or other similar organs, irrespective of the maturity date, the subject matter or the currency of the assets, provided that set-off is made in respect of transactions that are covered by bilateral or multilateral set-off provisions between two or more parties.
Articles 141 and 143 of the Act of 18 December 2015 on the Recovery, Resolution and Liquidation of Credit Institutions and Certain Investment Firms (among other things), as amended (the BRR Act 2015) dealing with netting, will come into play where credit institutions are a party to the relevant agreement and affect the enforceability of netting without prejudice to the application of Articles 66, 67 (as applicable) and 69 of the BRR Act 2015.
Furthermore, termination clauses, clauses establishing a connection between assets, close-out netting provisions and all other clauses stipulated to allow for set-off are valid and binding against third parties, administrators, insolvency receivers and liquidators, or other similar organs, and are effective notwithstanding:
- the commencement or continuation of reorganisation measures or liquidation proceedings, irrespective of the time at which the clauses (including set-off clauses) were agreed upon or enforced; and
- any civil, criminal or judicial attachment or criminal confiscation, as well as purported assignment or other disposition of, or in respect of, the rights in question.
Set-off made by reason of enforcement or conservatory measures or proceedings, including one of the proceedings set out in (b) above, is deemed to have occurred before any such measure or proceeding applies.
With the exception of provisions on over-indebtedness, Luxembourg law provisions relating to bankruptcy, and Luxembourg and foreign provisions relating to reorganisation measures, liquidation proceedings, attachments, other situations of competition between creditors or other measures or proceedings set out in (a) and (b) above, are not applicable to set-off contracts and do not affect the enforcement of such contracts.
According to Article 208 of the BRR Act 2015 and Article 200 of the Collateral Act 2005, the Collateral Act 2005 shall apply without prejudice to Part I of the BRR Act 2015 and Part IV of the Banking Act 1993 on the legislation of another EU Member State implementing BRRD (as defined below). In particular, Articles 10, 11, 13, 14, 18, 19 and 20 (1) to (3) of the Collateral Act 2005 shall not apply:
- to any restriction on the enforcement of financial collateral arrangements, any restriction on the effect of a security financial collateral arrangement or any close out netting or set-off provision that is imposed by virtue of Part I, Title II, Chapters VI or VII of the BRR Act 2015 (that is, the provisions relating to resolution tools and write-downs of capital instruments) or by virtue of the legislation of another Member State pursuant to the relevant provisions of Directive 2014/59/EU of the European Parliament and of the Council dated 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council (BRRD); nor
- any restriction that is imposed by virtue of similar powers under the law of another Member State with a view to facilitating the resolution of an entity referred to under Article 1, Paragraph 2, Subparagraph (c), Item (iv), and Subparagraph (d) of the Directive 2002/47/EC of the European Parliament and of the Council dated 6 June 2002 on financial collateral arrangements by providing safeguards that are at least equivalent to the safeguards under Articles 61 to 70 of the BRR Act 2015.
Luxembourg has in recent years become an important hub for issuers of high-yield bonds, which are often admitted to trading on the LxSE. For structuring reasons, it is often not the parent entity of a group that issues the high-yield bonds but a dedicated Luxembourg special purpose finance vehicle that is a direct or indirect subsidiary of the parent entity. To strengthen the credit rating of high-yield bonds, an issue is usually guaranteed by the parent and all or some of its subsidiaries.
Under applicable Luxembourg law, a guarantor needs to be described as if it were the issuer of the guaranteed bonds. This implies that detailed financial information needs to be given in respect of each guarantor; however, the guaranteeing subsidiaries may be located in jurisdictions where there is no requirement, for instance, to produce annual accounts, or where the accounts are not prepared in English, French or German. Providing this information in respect of all guaranteeing subsidiaries in an acceptable form may be burdensome and costly. Following requests from the industry, the CSSF accepts that the individual accounts of the guaranteeing subsidiaries are replaced by the consolidated financial statements of the group (to which the guaranteeing subsidiaries belong), provided that:
- the guarantees concerned are unconditional and irrevocable (without prejudice to legal provisions applicable in the jurisdictions of the guaranteeing subsidiaries);
- the guaranteeing subsidiaries represent at least 75 per cent, but not more than 100 per cent, of the group's net assets or of the group's earnings before the deduction of interest, tax and amortisation expenses; and
- the prospectus includes in the risk factor section a brief description of the reasons explaining the omission of separate financial information for the guaranteeing subsidiaries.
The LxSE generally follows the CSSF approach when approving prospectuses for high-yield bonds but tends to apply a more flexible approach regarding the above thresholds provided that the interests of investors are, in the opinion of the LxSE, adequately protected.
Capital adequacy requirements
The Act of 5 April 1993 on the Financial Sector, as amended (the Banking Act 1993) implements the CRD IV Package (defined below) into Luxembourg law. The CRD IV Package consists of two main sets of legislation, both of which deal with prudential requirements applicable to credit institutions and certain investment firms and which include capital adequacy requirements.
The Capital Requirements Regulation (CRR)18 and its implementing and delegated regulations correspond to the first set of legislation and are directly applicable in all EU Member States. In the event of conflict between the provisions of the CRR and the provisions of national legislation, the provisions of the CRR will prevail. CSSF Regulation No. 18-03 (repealing CSSF Regulation No. 14-01) on the implementation of certain discretions contained in the CRR deals with the discretions left under the CRR and used under national legislation. In addition, a number of CSSF circulars further clarify, or endorse European Banking Authority guidelines in relation to the interpretation of certain principles under the CRR.
The CRR must be read along with the Capital Requirements Directive IV19 (CRD IV, and together with the CRR, the CRD IV Package), implemented into Luxembourg law by the Banking Act 1993, together with the relevant implementing and delegated regulations in relation to CRD IV. Clarifications for investment firms in the framework of the transposition into Luxembourg law of the CRD IV and CRR are included in CSSF Circular 15/606. The provisions of the Banking Act 1993 are further complemented by the following CSSF Regulations: CSSF Regulation No. 15-01 (on the calculation of institution-specific countercyclical capital buffer rates), CSSF Regulation No. 15-02 (relating to the supervisory review and evaluation process that applies to 'CRR institutions' as defined in the Banking Act 1993), CSSF Regulation No. 15-04 (on the setting of a countercyclical buffer rate) and its subsequent regulations (in particular, currently applicable CSSF Regulation No. 20-03), CSSF Regulation No. 15-05 (on the exemption of investment firms qualifying as small and medium-sized enterprises from the requirements to maintain a countercyclical capital buffer and capital conservation buffer), CSSF Regulation No. 16-01 (on the automatic recognition of countercyclical capital buffer rates during the transitional period) and CSSF Regulation No. 19-09, repealing CSSF Regulation No. 18-06 (concerning systemically important institutions authorised in Luxembourg). In addition, CSSF Circular 15/620, CSSF Circular 15/622 and CSSF Circular 15/625 provide further details on the CRD IV as implemented into Luxembourg law.
The CRD IV Package was updated on 7 June 2019 by Directive (EU) 2019/878 amending the CRD IV as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (the CRD V), and Regulation (EU) 2019/876 amending the CRR as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, and reporting and disclosure requirements (the CRR II, and together with the CRD V, the CRD V Package). The new CRD V Package implements, inter alia, the Financial Stability Board's total loss-absorbing capacity standards for global systemically important banks into EU law by adapting the existing regime relating to the specific minimum requirements for own funds and eligible liabilities. Although most of the provisions of the CRR II will not enter into force until 28 June 2021, some transitional regimes have been designed to be applicable before that date. The CRD V still needs to be implemented into Luxembourg law (although it must be implemented by 28 December 2020 at the latest).
Finally, the CRD IV Package and CRD V Package will be further modified by the Investment Firms Directive (the IFD)20 and the Investment Firms Regulation21 (IFR, and together with the IFD, the IFD Package). The new IFD Package regime will introduce new prudential requirements specifically for investment firms, which will be separate from the CRD V Package requirements (which will continue to apply solely to credit institutions, the definition of which will, however, evolve slightly to include systemically important investment firms) and will involve distinct methods of application and calculation. Although most of the provisions of the IFR will not enter into force until 26 June 2021, some transitional regimes have been designed to be applicable before that date. The IFD still needs to be implemented into Luxembourg law (although it must be implemented by 26 June 2021 at the latest). It is expected that the IFD will be implemented in the Banking Act 1993, but further information as to the implementation process in Luxembourg is still awaited.
The European Market Infrastructure Regulation
In Luxembourg, derivative contracts are regulated under the European Market Infrastructure Regulation (EMIR)22 and its various implementing and delegated Commission regulations, which are legally binding and directly applicable in all Member States.
The Act of 15 March 2016, as amended, transposing, inter alia, EMIR, lays down the powers of supervision, intervention, inspection, investigation and sanction granted to the CSSF and the Luxembourg Insurance Commission as the national competent authorities for the implementation of EMIR.
EMIR was recently amended23 following a review by the European Commission's regulatory fitness and performance programme (REFIT) and negotiations between the European legislators. EMIR (in its REFIT form) entered into force on 17 June 2019.
In Luxembourg, EMIR is further complemented by CSSF Circular 13/557 of 23 January 2013, which merely clarifies certain provisions of EMIR and CSSF Circular 19/723 clarifying the MiFID II definitions of commodity derivatives used in EMIR. The purpose of EMIR is to introduce new requirements to improve transparency and reduce the risks associated with the derivatives market. As such, EMIR applies to all financial counterparties (FCs) and non-financial counterparties (NFCs) as defined under EMIR (regardless of whether they cross the clearing threshold or are subject to the clearing obligation, as applicable) that enter into derivative contracts. EMIR also applies indirectly to non-European counterparties trading with European counterparties or, under certain conditions, to non-European counterparties trading with each other where such trade has a direct, substantial and foreseeable effect within the EU. All FCs and NFCs above a certain clearing threshold (or subject to the clearing obligation) have to clear over-the-counter (OTC) derivative contracts with a central counterparty (CCP) authorised or recognised under EMIR pertaining to a class of OTC derivatives that has been declared subject to the clearing obligation by the European Commission. Contracts not cleared by a CCP are subject to operational risk management requirements and bilateral collateral requirements. EMIR establishes common organisational, conduct of business and prudential standards for CCPs as well as organisational and conduct of business standards for trade repositories.
EMIR also requires FCs and NFCs to report details of their derivative contracts, whether traded OTC or not, to a trade repository.
With regard to a trade entered into between an FC and an NFC that is below the clearing threshold, whether traded OTC or not, the FC will, as of 18 June 2020, be solely responsible and legally liable for reporting to a trade repository on behalf of both counterparties (although the NFC may opt to undertake this reporting). With regard to trades entered into by investment funds, managers of alternative investment funds (AIFs) and UCITS will, as of 18 June 2020, be responsible and legally liable for the reporting obligations of the UCITS or AIFs under their management. Counterparties to intragroup trades made between an FC and an NFC that is below the clearing threshold (and under certain conditions relating to group governance) may also be exempt from reporting the trades to the extent that they notify the competent authorities of their intention to apply this exemption (the competent authorities may oppose this exemption within three months of receiving a notification).
iii Cases and dispute settlement
In a case where the CSSF has refused to approve the appointment of an individual as a bank manager, who subsequently claims damages from the CSSF on the basis of the CSSF's wrongdoing, the Constitutional Court held in a judgment dated 1 April 201124 that the statutory in tort liability regime applicable to the CSSF, which presupposes gross negligence by the CSSF and deviates from ordinary civil liability, which allows damages to be sought for wrongdoing, is not contrary to the constitutional principle of equality before the law. Therefore, a plaintiff must establish that the damage that he or she has suffered is caused by the CSSF's gross negligence to seek the CSSF's liability and to claim damages.
Luxembourg courts consistently confirm the efficiency of Luxembourg financial collateral arrangements established by the Collateral Act 2005. For instance, it was held that:
- a (Luxembourg) criminal attachment over pledged assets does not prevent the effectiveness of a Luxembourg law-governed pledge subject to the Collateral Act 2005 and its enforcement by the pledgee;
- insolvency proceedings involving the pledgor have no effect on the enforcement of the pledge;
- courts are not permitted to impose provisional measures that interfere with the enforcement of financial collateral arrangements,;
- a pledge over shares in a Luxembourg bank account is enforceable, despite concurrent and inconsistent foreign court proceedings that purport to suspend the pledge; and
- the enforcement of a pledge over the shares in a company upon the occurrence of an enforcement event specified in the pledge agreement is possible notwithstanding that the secured debt was not yet due and that the creditor had not claimed the repayment of the secured debt.
iv Relevant tax and insolvency law
Luxembourg companies are subject to corporation taxes at a combined tax rate (including corporate income tax, municipal business tax and the solidarity surcharge) of 24.94 per cent in the municipality of Luxembourg for the fiscal year ending 31 December 2020. They are assessed on the basis of their worldwide profits, after deduction of allowable expenses and charges, determined in accordance with Luxembourg general accounting standards (subject to certain fiscal adjustments and to the provisions of applicable tax treaties). Ordinary Luxembourg companies (LuxCos) are subject to a wealth tax at a rate of 0.5 or 0.05 per cent, assessed on the estimated realisation value of their assets on the wealth tax assessment date, after deduction of any business-related debts. LuxCos are in any event subject to a Luxembourg minimum wealth tax. This minimum wealth tax is also applicable to Luxembourg companies that are subject to the Act of 22 March 2004 on Securitisation, as amended (the Securitisation Act 2004) (LuxSeCos).25
LuxCos carrying out a financial activity are assessed on the basis of an arm's-length profit margin. This profit is expressed as a percentage of a LuxCo's indebtedness. Thus, a LuxCo will always realise an arm's-length profit on the financial transactions entered into, in light of the functions performed and the risks taken, and in accordance with general market conditions. The Act of 23 December 2016 clarifies the concept of the arm's-length principle by introducing a new Article 56 bis into Luxembourg's income tax law.26 In addition, the Luxembourg direct tax administration replaced Circulars LIR 164/2 and 164/2 bis by issuing on 27 December 2016 Circular LIR 56/1-56 bis/1 (the Circular), which sets the Luxembourg tax framework for intragroup financing transactions. The clarification in Luxembourg of formal transfer pricing rules for intragroup financial transactions was expected by the financial sector and strengthens Luxembourg's overall tax-transparency. The Circular endorses the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations27 and keeps Luxembourg in line with international standards in the area of transfer pricing. Furthermore, the OECD has recently released its Transfer Pricing Guidance on Financial Transactions report, which among other things provides guidance to tax administrations on assessing the nature of a purported loan and determining whether it can indeed be regarded as a loan for tax purposes or should be qualified as some other kind of payment (such as a contribution to equity capital).28 The impact of the new guidance on the Luxembourg transfer pricing regime needs to be monitored. The Circular also clarifies the process for applying for an advance pricing agreement (APA). In this context, it should be noted that the general legal framework and the procedural formalities applying to APA filings are set out in the Luxembourg general tax law29 and a Grand Ducal regulation.30 If a LuxCo enters into an intragroup financing transaction coming within the scope of the Circular, it has to comply with a number of requirements set out in the Circular (such as substance requirements, minimum equity at risk, transfer-pricing report, etc). The Circular also confirms that, as of 1 January 2017, the Luxembourg tax administration would no longer be bound by APAs issued for the tax years post 2016, which were based on rules applicable before the introduction of the new Article 56bis into the Luxembourg income tax law.
The obligations assumed by a LuxSeCo towards its investors (holding equity or debt securities) and any other creditors are considered tax-deductible expenses. Therefore, a financial transaction entered into by a LuxSeCo, if properly structured, should not give rise to any corporation taxes subject to, among others, the interest limitation rule. The Luxembourg tax administration does not require a LuxSeCo to realise a minimum profit margin.
Management services rendered to LuxSeCos are exempt from VAT. This is not the case for management services that are provided to LuxCos.
Both LuxCos and LuxSeCos benefit from the wide network of tax treaties entered into by Luxembourg from a Luxembourg standpoint.
In the field of tax evasion and tax avoidance, Luxembourg ensures compliance with its European and international engagements by adopting instruments impacting international tax planning and structuring in Luxembourg.
In this context, Luxembourg has signed the OECD's multilateral convention, which entered into force on 1 August 2019, to implement tax treaty-related measures to prevent base erosion and profit shifting.
In addition, the Act of 21 December 2018 implemented into Luxembourg tax law the provisions of the anti-tax avoidance directive, ATAD I.31 Its main provisions consist of the interest limitation rule, the controlled foreign companies rule, hybrid mismatches rule, exit tax provisions and general anti-abuse rule.
On 29 May 2017, the Council adopted a second anti-tax avoidance directive, ATAD II.32 This directive amends ATAD I by setting up a dissuasive regime regarding hybrid mismatches with third countries and broadening its scope to cover hybrid private equity mismatches, hybrid transfers, imported mismatches, dual residence mismatches and reverse hybrid mismatches. The Act of 20 December 2019 implemented into Luxembourg tax law the provisions of ATAD II. The rules have been applicable in Luxembourg since 1 January 2020, except for the reverse hybrid mismatches rule, which will apply as of 1 January 2022.
On 25 March 2020, Luxembourg adopted an act33 implementing the EU directive on mandatory automatic exchange of information on reportable cross-border taxation arrangements (DAC6).34 DAC6 introduces a mandatory disclosure regime for potentially aggressive tax planning arrangements, and subsequent automatic exchange of the disclosed information between EU Member States.
DAC6 lists a series of characteristics or features that indicate a potential risk of tax avoidance ('hallmarks'). DAC6 imposes an obligation on 'intermediaries' located in the EU such as tax advisers, accountants, lawyers, banks and financial advisers who are involved in the design, marketing or the implementation of arrangements that include one of the hallmarks to file a report on the relevant transaction with their local tax authorities. If the intermediary is located outside the EU or is bound by legal professional privilege, the obligation to report may pass to the relevant taxpayer.
Insolvency situations are governed by a set of rules that have been elaborated by courts and legal literature around the cardinal principle of the pari passu ranking of creditors. Under the applicable Luxembourg law, it is possible for a company to be insolvent without necessarily being bankrupt. If a company fails to meet the two cumulative tests of bankruptcy – the cessation of payments and the loss of creditworthiness – it is not deemed bankrupt. The judgment declaring bankruptcy, or a subsequent judgment issued by the court, usually specifies a period not exceeding six months before the day of the judgment declaring the bankruptcy. During this period, which is commonly referred to as the suspect period, the debtor is deemed to have already been unable to pay its debts generally, or to obtain further credit from its creditors or third parties. Payments made, as well as other transactions concluded or performed, during the suspect period, and specific payments and transactions during the 10 days before the commencement of that period, are subject to cancellation by the Luxembourg court upon proceedings instituted by the Luxembourg insolvency or bankruptcy receiver.
Luxembourg insolvency proceedings have, inter alia, the following effects:
- as a matter of principle, bankruptcy judgments do not result in automatic termination of contracts, except for intuitu personae contracts (i.e., contracts for which the identity of the counterparty or its solvency is crucial). Contracts therefore continue to exist in full force unless the insolvency receiver chooses to terminate them. Termination by reason of insolvency may also be effectively provided for in a contract; and
- once a company has been declared bankrupt, unsecured creditors and creditors with a general priority right are no longer permitted to take any action based on title to movables and immovables, or any enforcement action against the bankrupt company's assets. Actions may only be exercised against the insolvency receiver.
The foregoing does not apply in the following cases:
- creditors may, notwithstanding the bankruptcy of a company, initiate proceedings against the co-debtors of the company;
- secured creditors may still enforce their rights after a bankruptcy adjudication; and
- creditors of new debts, contracted by the insolvency receiver, may still initiate proceedings to have their rights recognised and enforced.
Special insolvency regimes apply to, among others:
- credit institutions and certain investment firms (as defined in the BRR Act 2015) and their respective branches in other EU Member States;
- financial institutions, enterprises and parent companies belonging to the same group as a credit institution or investment firm (collectively with credit institutions and relevant investment firms, the BRR Entities); and
- other financial sector professionals (as defined in the Banking Act 1993) that manage funds for third parties (collectively with the BRR Entities, the financial sector professionals);
BRR Entities may be subject to specific, pre-insolvency, resolution proceedings pursuant to the BRR Act 2015 (implementing the EU Bank Recovery and Resolution Directive (BRRD)35 into Luxembourg law), whereby resolution authorities can use extraordinary resolution powers in relation to resolution tools (such as the bail-in tool) to absorb losses or recapitalise BRR Entities, individually, or their group as a whole.
Article 120 et seq. of the BRR Act 2015 provides for actual insolvency proceedings applicable to financial sector professionals in the form of a special reprieve from payment and liquidation regimes.
Reprieve from payment may be applied for if the global performance of an undertaking's business is compromised, in the event that the undertaking is unable to obtain further credit or fresh monies or no longer has any liquidity, whether there is a cessation of payments, or in the event that a provisional decision has been taken to withdraw the undertaking's licence. In these circumstances, the CSSF may request the court to apply reprieve from payment proceedings to the undertaking. The reprieve from payment cannot exceed six months, and the court will lay down the terms and conditions thereof, including the appointment of one or more persons responsible for managing the reorganisation measures and supervising the undertaking's activities.
A petition for liquidation may be filed by either the public prosecutor or the CSSF. This will typically occur in a situation where a reprieve from payment cannot cure an undertaking's difficult financial situation, where the undertaking's financial situation is so serious that it can no longer satisfy its creditors or where the undertaking's licence has been permanently withdrawn. The court will appoint a judge-commissioner and one or more liquidators. The court may decide to apply bankruptcy rules in respect of the liquidation and, accordingly, fix the suspect period (which may date back no more than six months before the date of filing the application for reprieve from payment). The court as well as the judge-commissioner and the liquidators may decide to vary the mode of liquidation initially agreed upon. The liquidation procedure is terminated when the court has examined the documents submitted to it by the liquidators and the documents have been reviewed by one or more commissioners. Voluntary liquidation by an entity is possible only where the CSSF has been notified thereof by the undertaking one month before notice is given to hold an extraordinary general meeting of the shareholders called to consider the voluntary liquidation.
v Role of exchanges, central counterparties and rating agencies
The LxSE was incorporated on 5 April 1928 as a société anonyme, and the first trading session took place on 6 May 1929; in November 2000, it entered into a cooperation agreement with Euronext. The LxSE is managed by a board of managers appointed by the general meeting of the LxSE's shareholders.
The LxSE is the competent body for all decisions and operations relating to the admission of securities, their suspension, withdrawal and delisting, the maintenance of its official list, the transfer of securities from one market to another, and all the continuing obligations of issuers. It is the operator of the regulated market-denominated LxSE and of the Euro MTF market. The main activities of the LxSE are listing, trading, distribution of financial reports for the investment funds industry, trade reporting and data vending.
The LxSE primarily specialises in the issue of international bonds (for which it is ranked first in Europe), with more than 26,000 debt securities listed. The LxSE maintains a dominant position in European bond issues, with the majority of all cross-border securities in Europe being listed in Luxembourg. More than 60 countries list at least some of their sovereign debt in Luxembourg, while Luxembourg is also a market for debt from large organisations such as the European Bank for Reconstruction and Development, the European Investment Bank, the EU and the World Bank. The LxSE's main equity index is called the LuxX Index, which is a weighted index of the 10 most valuable listed stocks by free-floated market capitalisation. In recent years, the LxSE has diversified its product base by developing its business linked to green and sustainable finance; since 2016, the LxSE has operated a dedicated platform for green, social and sustainable securities (the Luxembourg Green Exchange, or LGX), which has become home to almost half of the world's listed green bonds, with a total issued amount of around US$320 billion.
Clearstream Banking, SA in Luxembourg is one of the major European clearing houses through which more than 2,500 banks, financial institutions and central banks worldwide exchange financial instruments. It is wholly owned by Clearstream International SA, which is a wholly owned subsidiary of the Deutsche Börse Group. Clearstream Banking ensures that cash and securities are promptly and effectively delivered between trading parties. It also manages, administers and is responsible for the safekeeping of the securities that it holds on behalf of its customers. Over 300,000 domestic and internationally traded bonds, equities and investment funds are currently deposited with Clearstream Banking. Clearstream Banking settles over 250,000 transactions daily and is active in 58 markets.
Clearstream Banking is often described as a bank for banks. Basically, its duty is to record transactions between the accounts of different participants in Clearstream Banking, and use that data to calculate the relative financial positions of participants in relation to each other.
LuxCSD, a new central securities depository for Luxembourg, is jointly (50–50) owned by the Luxembourg central bank and Clearstream Banking. LuxCSD provides the financial community with central bank money settlement services as well as issuance and custody services for a wide range of securities, including investment funds.
LuxCSD was designated a securities settlement system by the Luxembourg central bank, which is a requirement to operate under the protection of the Settlement Finality Directive, and has received European Central Bank approval for its Securities Settlement System being eligible for use in collateralisation Eurosystem credit operations.
Currently, no Luxembourg-based rating agency exists.
vi Other strategic considerations
Recognition of trusts
The Act of 27 July 2003 on Trust and Fiduciary Contracts, as amended, recognises trusts that are created in accordance with the Convention on the Law Applicable to Trusts and on their recognition made at The Hague on 1 July 1985 and that are legal, valid, binding and enforceable under the law applicable to trusts.
Securitisation Act 2004
In adopting the Securitisation Act 2004, Luxembourg has given itself one of the most favourable and advanced pieces of European legislation for securitisation and structured finance transactions. According to the Securitisation Act 2004, securitisation means a transaction by which a Luxembourg securitisation undertaking (in the form of a LuxSeCo or a fund managed by a management company) acquires or purchases risks relating to certain claims, assets or obligations assumed by third parties, and finances the acquisition or purchase by the issue of securities, the return on which is linked to these risks.
The Securitisation Act 2004 distinguishes between regulated and unregulated securitisation undertakings. A securitisation undertaking must be authorised by the CSSF and must obtain a licence if it issues securities to the public on a continuous basis (these two criteria applying cumulatively). Both regulated and unregulated securitisation undertakings benefit from all the provisions of the Securitisation Act 2004.
A securitisation undertaking must mainly be financed by the issue of instruments (be it equity securities or debt securities) that qualify as securities under their governing law.
The Securitisation Act 2004 does not contain restrictions as regards the claims, assets or obligations that may be securitised. Securitisable assets may relate to domestic or foreign, movable or immovable, future or present, tangible or intangible claims, assets or obligations. It is also accepted that a securitisation undertaking may, under certain conditions, grant loans directly. Very advantageous provisions for the securitisation of claims have been included in the Securitisation Act 2004.
To enable the securitisation of undrawn loans or loans granted by the securitisation undertaking itself, the Banking Act 1993 exempts such transactions from a banking licence requirement. Furthermore, transactions that fall within the scope of the application of the Securitisation Act 2004 (such as, for example, credit default swaps) do not constitute insurance activities that are subject to Luxembourg insurance legislation.
The Securitisation Act 2004 allows the board of directors of a securitisation undertaking to set up separate ring-fenced compartments. Each compartment forms an independent, separate and distinct part of the securitisation undertaking's estate and is segregated from all other compartments of the securitisation undertaking. Investors, irrespective of whether they hold equity or debt securities, will only have recourse to the assets encompassed by the compartment to which the securities they hold have been allocated. They have no recourse against the assets making up other compartments. In the relationship between investors, each compartment is treated as a separate entity (unless otherwise provided for in the relevant issue documentation). The compartment structure is one of the most attractive features of the Securitisation Act 2004, as it allows the use of the same issuance vehicle for numerous transactions without the investors running the risk of being materially adversely affected by other transactions carried out by the securitisation undertaking. This feature allows securitisation transactions to be structured in a very cost-efficient way without burdensome administrative hurdles. It is important to note that there is no risk-spreading requirement for compartments. It is hence possible to isolate each asset held by the securitisation undertaking in a separate compartment.
The Securitisation Act 2004 also expressly recognises the validity of limited recourse, subordination, non-seizure and non-petition provisions.
Rating agencies are very comfortable with transactions structured under the Securitisation Act 2004 as legal counsel can usually issue clean legal opinions.
From a tax perspective, there is full tax-neutrality for securitisation undertakings (for further information, see Section II.iv above).
The CSSF has published an frequently asked question (FAQ) document setting out guidelines regarding transactions that a securitisation undertaking may enter into. Although these guidelines only apply to securitisation undertakings regulated by the CSSF, the tax administration tends to apply them to unregulated securitisation undertakings as well to decide whether their transactions qualify as securitisation transactions. The CSSF has confirmed in the FAQs, by reference to a FAQ document published by the European Commission on 25 March 2013,36 that an issuer that exclusively issues debt instruments does not constitute an AIF and hence does not fall within the ambit of the AIFMD.37 In addition, according to the CSSF, securitisation undertakings issuing structured products that provide a synthetic exposure to assets (for instance, shares, indices, commodities) based on a set formula and that acquire underlying assets or enter into swap arrangements only with a view to hedging their payment obligations with regard to investors in structured products may, subject to the criteria set out in guidance issued by the European Securities and Markets Authority, be considered as not being managed according to an investment policy and would hence fall outside the scope of the AIFMD.
It is interesting to note that an email address38 has been created to discuss queries concerning the Securitisation Act 2004 with the CSSF.
At the European level, the Securitisation Regulation,39 which has applied since 1 January 2019, sets common rules on securitisation and creates a harmonised set of foundation criteria for simple, transparent and standardised securitisation. Among the key obligations under the Securitisation Regulation are (1) a due diligence obligation for institutional investors to verify certain elements of the transaction, (2) a risk retention obligation (retention of material net economic interest in transactions of not less than 5 per cent – 'skin in the game') for originators, sponsors or original lenders, and (3) reporting obligations.
However, the Securitisation Regulation and the Securitisation Act 2004 define securitisations differently. The Securitisation Regulation defines a securitisation transaction as a transaction or scheme where the credit risk associated with an exposure or a pool of exposures is tranched, while the definition of the securitisation transaction under the Securitisation Act 2004 is broader and does not require the tranching and transformation of credit risk. Consequently, not all securitisation transactions under the Securitisation Act 2004 would fall under the Securitisation Regulation.
A covered bond is a debt security issued by a covered bond bank and guaranteed by a cover pool specifically allocated to these securities. To date, the issuance of covered bonds is restricted to covered bond banks, which must limit their principal activities to the granting of loans that will be specifically secured and that will be refinanced by way of issuing covered bonds. Other activities may only be performed on an ancillary basis.
Covered bond banks are subject to the prudential supervision of the ECB or, as applicable, the CSSF, and the specific supervision of an approved special statutory auditor appointed by the CSSF upon recommendation of the covered bond bank that supervises the coverage assets in respect of covered bonds.
Five types of covered bond may be issued by covered bond banks:
- public sector bonds, guaranteed by claims against, or guaranteed by, public entities (i.e., Member States of the EU, the EEA, the OECD or non-OECD states that fulfil certain credit rating criteria), the state sector or public local entities;
- mortgage bonds, guaranteed by rights in or security interests over real estate;
- movable property bonds, guaranteed by movable property rights or movable property collateral;
- cooperative covered bonds, guaranteed by claims against or debt securities issued by cooperative banks from the EU, the EEA or the OECD that participate in an institutional protection scheme meeting the requirements of the Banking Act 1993; and
- since early 2018, green covered bonds. These new green covered bonds, or renewable energy covered bonds, are guaranteed by rights in assets or securities linked to renewable energy, which includes all energy produced from non-fossil renewable sources (i.e., wind energy, solar energy, thermal, geothermal, hydrothermal and marine energy).
Bonds and other similar debt instruments issued by credit institutions established in a Member State of the EU, the EEA or the OECD or in a non-OECD state that fulfils certain credit rating criteria and that are secured by claims against public sector entities, by rights in rem over real estate, movable property, movable or immovable assets generating renewable energy, rights of substitution in essential project contracts or claims against or debt securities issued by cooperative banks may, subject to certain conditions, also serve as coverage assets. In addition, the coverage assets may encompass bonds or other debt securities issued by a securitisation undertaking and derivatives entered into for hedging purposes only (under certain circumstances).
Covered bond banks benefit from a derogation in the bankruptcy legislation whereby creditors have direct access to a bank's assets in cases of insolvency. The coverage assets may not be attached or seized by creditors of the covered bond bank other than the holders of the covered bonds.
Luxembourg covered bond banks may either be subject to reprieve from payment or liquidation proceedings under the Banking Act 1993. As from the commencement of any of these proceedings, one or more ad hoc managers appointed by the district court will manage the outstanding covered bonds and the coverage assets. The covered bonds and the corresponding coverage assets will not be affected by the above proceedings, in that the coverage assets underlying and securing covered bonds will be segregated from all other assets and liabilities of the covered bond bank. Reprieve from payment proceedings may also be opened in respect of any of the estate compartments established for each category or type of covered bond.
Directive (EU) 2019/2162 on the issue of covered bonds and covered bond public supervision, which is to be implemented in EU Member States by 8 July 2021, has not yet been implemented in Luxembourg.
Luxembourg limited partnership
The Act of 12 July 2013 (which implements the AIFMD) has modernised the Luxembourg limited partnership regime by reference to the Anglo-Saxon limited partnership, which is a popular investment vehicle for structuring venture capital or private equity investments.
There are three types of partnerships in Luxembourg: the common limited partnership (CLP), an intuitu personae partnership with legal personality; the newly introduced special limited partnerships (SLP), an intuitu personae partnership without legal personality; and the partnership limited by shares (SCA), a joint-stock company with partnership features.
Only technical adjustments have been made to the SCA regime as the SCA already benefits from an attractive regime with respect to the level of protection and control granted to the initiator of the structure. The SCA has already been widely used in investment structures.
The regime applicable to CLPs has been thoroughly overhauled to encourage the use of this type of investment vehicle. Furthermore, a new type of investment vehicle, the SLP, which benefits from a favourable structural and tax regime, has been introduced. The SLP is an intuitu personae partnership that has no legal personality and that is subject to few statutory provisions. Most of its features may be freely determined in the limited partnership agreement entered into between the unlimited partners and the limited partners.
The key points of the new limited partnership regime (for CLPs and SLPs) are as follows:
- the identity of limited partners may remain confidential;
- the management of a limited partnership is entrusted to one or more managers, who may or may not be unlimited partners;
- the limited liability of a partner is not jeopardised if that partner performs internal management duties only;
- the rights of partners in the partnership are evidenced either by securities or by entitlements recorded in partnerships accounts; and
- there are no statutory restrictions on the issue and reimbursement of partnership interests; on the sharing by partners in the profits and losses; on the distributions to partners, whether in the form of profit distributions or reimbursements of partnership interests; on the voting rights; or on transfers of partnership interests.
By revamping its partnerships regime to address the current needs of market participants, Luxembourg has further strengthened its position as one of the top European jurisdictions for the domiciliation of investment structures.
vii Future legislative changes
The government is discussing the possibility of introducing the concept of a trust similar to the English trust or the Dutch stichting into the Luxembourg legal framework with a view to strengthening, among other things, the Luxembourg wealth management sector. Discussions inspired by the works of the Haut Comité de la Place Financière, an advisory body to the government in financial sector matters, are currently ongoing at a national level.
The government is proposing an overhaul of the Luxembourg insolvency regime with a view to its modernisation. A bill to that effect is currently pending in Parliament providing for a legal framework prioritising (where practicable) the preservation or reorganisation of a debtor's business as opposed to the liquidation thereof. The proposed amendments include:
- the implementation of various mechanisms that help companies in financial difficulties to avoid bankruptcy proceedings and allow them to preserve their business;
- giving a second chance to businesspeople who in the past have acted in good faith, but nevertheless are subject to insolvency proceedings, to open a new business;
- preventing businesspeople whose business has failed and who have acted in bad faith from setting up new businesses;
- the implementation of mechanisms to protect employees and preserve jobs; and
- the amendment of certain specific provisions of the bankruptcy procedure with a view to its modernisation and the abolishment of certain obsolete insolvency procedures (e.g., controlled management and reprieve from payment) that are not (or are very rarely) used in practice.
EU Member States are further bound to implement the 'restructuring frameworks' directive40 by July 2021 (subject to the extension option set out therein). It is our current understanding that the Luxembourg implementation of the directive (in relation to which no specific bill has been tabled so far) will be included in the above-mentioned wider insolvency law reform.
Even though the exact timing for the implementation of the insolvency reform remains uncertain, it is more likely than not that the related amendments will be adopted in the course of 2021.
Issuance and settlement of securities on a blockchain
Luxembourg recently adopted bill of law 7637 (the Bill), which notably aims to amend the Dematerialisation Act by (1) expressly recognising the use of blockchain or other distributed ledger technology (DLT) to record the issuance of Luxembourg law-governed dematerialised debt securities (by serving as the primary register of such issuance), and (2) opening the role of the central account keeper to EU credit institutions and investment firms (meeting specific organisational and technological criteria).
The Bill is a continuation of the Act of 1 March 2019, which expressly recognised the use of DLT in the context of the circulation of securities. The Bill aims to provide legal certainty to issuers to directly issue DLT securities by keeping their securities registers on a distributed ledger (such as a blockchain).
The Bill also allows a broader array of market participants to facilitate DLT issuances by acting as the central account keeper for such issuances.
Outlook and conclusions
These continue to be challenging times. The financial crisis changed first into an economic recession and then into a public finance crisis. Although signs of recovery can be seen on the horizon for an increasing number of countries, the global economy remains fragile for various reasons (including the political instability in the Middle East and the slowdown of the economies of the BRIC41 and Next Eleven42 countries).
International bodies such as the International Monetary Fund (IMF), the Financial Action Task Force (FATF), the OECD and the European authorities want to set aside the competitive distortions that result from a regulatory playing field that is not level, and try to eradicate weaknesses in regulation and supervision that might adversely affect the stability of the international financial systems, by moving towards a single rulebook.
The financial sector plays a key role in Luxembourg's economy, and the Luxembourg authorities (especially the CSSF) strive to find the right balance between increased supervision and the need for sufficient room to manoeuvre to allow the financial sector to breathe and develop. The Luxembourg authorities recognise that the trend is towards a common supervisory culture and a harmonised application of a single rulebook that deprives them of large parts of their flexibility in the regulation and supervision of the financial sector.
To maintain the attractiveness of Luxembourg in a context where the regulatory framework becomes more and more harmonised, there are clear signals that the Luxembourg authorities want to differentiate themselves from their foreign counterparts via quality of service, responsiveness and approachability. The Luxembourg authorities are putting a particular focus on maintaining Luxembourg's role as the leading international renminbi (Chinese currency) centre in the eurozone, with seven major Chinese banks now having established their European headquarters in Luxembourg, and one of the leading Islamic finance centres in Europe. Further, the Ministry of Finance has relaunched the Haut Comité de la Place Financière to create an institutionalised platform for the exchange of information between key stakeholders of the financial markets and the government, with a view to ensuring that Luxembourg stays at the forefront of economic and financial developments. Several working groups have been set up by the Haut Comité de la Place Financière to modernise Luxembourg's legal framework (including banking, fund, fintech and securitisation legislation) to respond to the needs of the markets and their participants.
Since the Brexit vote, many UK-based financial actors have been looking for alternative locations to establish their operations. Luxembourg's key advantages include:
- the continued affirmation of an AAA rating for long-term and short-term sovereign credit;
- sound public finances;
- a rapid regulatory process;
- the business friendly attitude of the authorities;
- the leading position of the Luxembourg investment fund industry in Europe;
- a large network of double taxation treaties;
- efficient immigration procedures; and
- Luxembourg being recognised as an innovative hub for fintech.
These features make Luxembourg a natural choice for locating new businesses and maintaining access to the European financial markets.
1 Frank Mausen, Henri Wagner and Paul Péporté are partners at Allen & Overy SCS.
2 The current Constitution was adopted on 17 October 1868.
3 The reader should note that this chapter does not deal with Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No. 596/2014 (the Benchmark Regulation) and Regulation (EU) No. 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No. 236/2012, as amended.
4 Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No. 809/2004.
5 For instance, offers addressed solely to qualified investors, offers of securities addressed to fewer than 150 natural or legal persons other than qualified investors per Member State, offers of securities addressed to investors who acquire securities for a total consideration of at least €100,000 per investor, and offers of securities the denomination per unit of which amounts to at least €100,000.
6 Total consideration of each offer in the EU in a monetary amount calculated over a period of 12 months.
8 Submissions of approvals must be filed in PDF format via email at [email protected] Other filings will need to be made at [email protected], whereas final terms must be filed via the platform available on https://finalterms.apps.cssf.lu/ and universal registration documents via email at [email protected] Finally, queries on the Prospectus Act should be made to [email protected]
9 Directive 2014/65/EU of 15 May 2014 on markets in financial instruments.
10 Directive 2014/57/EU on criminal sanctions for market abuse.
11 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.
12 Transactions with related parties are material if their publication and disclosure are likely to have a material impact on the economic decisions of a listed company's shareholders and if they could create a risk for the company and its shareholders who are not related parties, including minority shareholders. The question as to what is material will have to be carefully analysed on a case-by-case basis by the relevant corporate bodies in light of the specific factual setup of the relevant company and transaction.
13 Directive 2014/57/EU on criminal sanctions for market abuse.
14 Regulation (EU) No. 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps.
15 As a response to the coronavirus pandemic, ESMA adopted a decision temporarily adjusting the reporting thresholds.
18 Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012, as amended.
19 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, as amended.
20 Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU.
21 Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No. 1093/2010, (EU) No. 575/2013, (EU) No. 600/2014 and (EU) No. 806/2014.
22 Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories, as amended.
23 Some of the amendments relate, among other topics, to the definition of financial counterparties, to the restrictions of clearing obligations, to changes to the clearing threshold for non-financial counterparties and also to trade reporting.
24 Constitutional Court, 1 April 2011, No. 63/11, http://data.legilux.public.lu/eli/etat/leg/acc/2011/04/01/n1/jo.
25 Note that as of 1 January 2016, the minimum corporate income tax has been abolished and replaced by a minimum wealth tax that applies under similar conditions and amounts as the previous minimum corporate income tax.
26 Income tax law, dated 4 December 1967, as amended.
28 OECD (2020), Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8-10, OECD, Paris, www.oecd.org/tax/beps/transfer-pricing-guidance-on-financial-transactions-
29 Section 29a of the Luxembourg general tax law, dated 22 May 1931, as amended.
30 Grand-Ducal Regulation dated 23 December 2014.
31 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax-avoidance practices that directly affect the functioning of the internal market.
32 Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.
33 Luxembourg law on reportable cross-border tax arrangements (DAC6), dated 25 March 2020, as amended.
34 Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.
35 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, as amended.
36 Questions on Single Market Legislation/Internal Market; General question on Directive 2011/61/EU; ID 1169, Scope and exemptions.
37 Directive 2011/61/EU on alternative investment fund managers.
39 Regulation (EU) 2017/2402 of 12 December 2017 laying down a general framework for securitisations and creating a specific framework for simple, transparent and standardised securitisations.
40 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency).
41 Brazil, Russia, India and China.
42 Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam.