Developments in financing transactions Luxembourg & Belgium

Developments in financing transactionsLuxembourg & Belgium

Louis-Maël Cogis

Pierre-Regis Dukmedjian

Vincent Verkooijen

26 September 2019

© Simmons & Simmons LLP 2015. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

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Introduction

Simmons & Simmons team

General presentation remarks

Developments in the financing transactions in Luxembourg

Financial collateral arrangements

Anti-Tax Avoidance Directives (ATAD)


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Developments in financing transactions

in Luxembourg


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Developments in financing transactions in Luxembourg

Developments on the Luxembourg financing transactions

– More fund financings

– NAV financing

– Capital call financing

– GP financing

– Still strong pipeline of RE financing

– Luxembourg borrowers

– Luxembourg security providers / guarantors


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Developments in financing transactions in Luxembourg

Fund financing transactions

– All types of fund structures but mostly SCSp

– Detailed due diligence

– Usual security package structure

– Notification to investors in the fund for security packages

RE financing transactions

– Still a strong and robust structure used by lenders / borrowers


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Financial collateralarrangements


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Financial collateral arrangements – the usual Luxembourg security package

The Luxembourg law of 5 August 2005 on financial collateral arrangements implementing thedirective 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financialcollateral arrangements

Types of security interests available under the 2005 Law:

– a pledge agreement,

– a title transfer collateral arrangement,

– a repurchase agreement, or

– a fiduciary transfer arrangement.

Accessory nature of Luxembourg financial collateral arrangements


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Beneficiaries of financial collateral arrangements

In favour of the pledgee or in favour of a security agent or trustee acting for the secured parties.

– Article 2(4) of the 2005 Law “Collateral may be provided in favour of a person acting for theaccount of the beneficiaries of the collateral, a fiduciary or a trustee, to secure the claims of third-party beneficiaries, present or future, provided such third-party beneficiaries are determined ordeterminable. Without prejudice to their duties towards the third-party beneficiaries of the financialcollateral arrangements, the persons acting for the account of the beneficiaries of the financialcollateral, the fiduciary or the trustee, enjoy the same rights as those granted to direct beneficiariesof the financial collateral referred to under this law.”


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Assets/collateral “collateral”

– claims

– “financial instruments” has the broadest possible meaning, including:

(a) all securities and other instruments, including, but not limited to shares in companies andother securities equivalent to shares in companies, participations in companies and units incollective investment undertakings, bonds and other forms of debt instruments, certificatesof deposit, loan notes and payment instruments;

(b) securities which give the right to acquire shares, bonds or other securities by subscription,purchase or exchange;

(c) term financial instruments and instruments giving rise to a cash settlement (excludinginstruments of payment), including money market instruments;

(d) all other instruments evidencing ownership rights, claim rights or securities;

(e) all other instruments related to financial underlying, indices, commodities, precious metals,produce, metals or merchandise, other goods or risks;

(f) claims relating to the items described in sub-paragraphs (a) to (e) above or rights in or inrespect of these items,

whether these financial instruments are in physical form, dematerialised, transferable by book entryor delivery, bearer or registered, endorseable or not and regardless of their governing law.


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Secured obligations “relevant financial obligations” means the obligations which are secured by a financial collateral

arrangement and which give a right to cash settlement and/or delivery of financial instruments or toassets underlying such financial instruments. Relevant financial obligations may consist of orinclude:

– present or future, actual or contingent or prospective obligations, without the need tospecifically describe them;

– obligations owed to the collateral taker by a person other than the collateral provider; or

– obligations of a specified class or kind arising from time to time.

What do we see in practice?

– Typically use the same definition as in the facility agreement/intercreditor agreement.Definition will depend on the nature of the transaction.

– No issue with cross-collateralisation under Luxembourg law.

– Mainly monetary obligations.

– Conceivable to secure an obligation to do something.


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Luxembourg is a lender friendly jurisdiction

The 2005 Law provides an exceptional protection to collateral takers in the case of insolvency of the collateral provider.

Pledge agreements as well as enforcement events, and valuation and enforcement measures agreedupon by the parties in accordance with the 2005 Law are valid and enforceable against third parties,commissioners (commissaires), receivers (curateurs), liquidators (liquidateurs) and other similarpersons notwithstanding reorganisation measures, winding-up proceedings or any other similarnational or foreign proceedings.


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Common types of pledge agreements Share pledge

Account pledge

Claims pledge


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Common types of Luxembourg pledge agreements

Holdco

Luxco 1

Propco 1Luxco 2 Propco 2

100%

100%

Intercompany loan

Intercompany loan

Luxembourg bank account

account pledge

claims pledgeclaims pledge

share pledge

share pledge


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Perfection requirements Share pledge

– Recording in the shareholders register

Bank account

– Notification to the account bank

Receivables

– Notification to the debtor – location of the debtor


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Enforcement – most common

Share pledge

– Exercise of the voting rights

– Appropriation

– Sale without initial appropriation

Bank account

– Set-off

– Appropriation

Receivables

– Set-off

– Payment with the pledgee


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Advantages & Experience Advantages, comparison EU Directive, market practice

Experience, structures and strategy


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Anti-Tax AvoidanceDirectives (ATAD)


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Introduction to ATAD On 12 July 2016 the EU Council adopted the Directive (EU) 2016/1164 (“ATAD 1”) laying down

rules against tax avoidance practices that directly affect the functioning of the internal market.

ATAD 1 contains five legally-binding anti-abuse measures, which all Member States shouldapply against common forms of aggressive tax planning. Member States had to apply most ofthese measures as from 1 January 2019.

On 21 December 2018, the law transposing ATAD 1 (the “Law”) was published in the MémorialA N°1164.

On 29 May 2017 the Council adopted the Directive (EU) 2017/952 (“ATAD 2” together withATAD 1 would be “ATAD”) amending ATAD 1 as regard to hybrid mismatches rules, whichbroadens the hybrid mismatches situations covered by ATAD I and extends its application tonon-EU Member States.

Member States have until 31 December 2019 to transpose the ATAD 2 provisions, ready to beapplied from 1 January 2020 (by exception 1 January 2022 for the reverse hybrid provisions).

On 8 August 2019, Luxembourg published the draft law that would implement hybrid mismatchmeasures of the 2017/952 EU Anti-Tax Avoidance Directive (ATAD 2) into Luxembourg domesticlaw.


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Changes in domestic tax law due to ATAD

2019 2019 2019 2019 2019 2020

Interest limitation rule

Hybrid mismatches

within EU

Tax neutral exchangesPermanent

establishment

General anti-abuse rule

Controlled foreign company

rule

Exit taxation

2020 / 2022

To come Hybrid mismatcheswith 3rd countries /

reverse hybrid


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ATAD - Interest limitation rule

Interest Limitation Rule: Net Interest Expenses (or Exceeding Borrowing Costs) are deductiblein the tax year in which they are incurred only up to a maximum of the higher of:

– 30% of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation); and

– EUR 3,000,000.

Non-used deductible interest can be carried forward for 5 years.

Exceeding borrowing costs (non-deductible interests) can be carry forward without timelimitation.

Net Interest Expenses can be defined as the amount by which the deductible BorrowingsCosts of a Luxembourg company exceed taxable interest revenues and other economicallyequivalent taxable revenues that the Luxembourg company receives.


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Situations where this rule should not apply:

– Debts concluded before 17 June 2016 if no subsequent modifications have been done.

– Debts are financing long term infrastructure project (limited to the EU).

– Certain financial undertakings regulated by EU regulations, i.e. Banks, UCITS, AIFsmanaged by AIFMs, etc.

– Standalone entities.

– Companies, which can show that their equity ratio over their total assets are equal or higherthan the ratio of the group, can deduct the entirety of the interest expenses (underconditions).


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Before After

Loan 1

Interest expenses on the Loan 1 are fullydeductible and can be used of offsettaxable income, if needed.

Interest expenses on the Loan 1 would bepartially deductible.

Only an amount of up to 30% of EBITDA or EUR3 million can be used to offset taxable income.

This may increase the taxable income ofLuxHoldCo if non-exempt income is received.


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ATAD - Hybrid mismatches rule introduced by the Law

Application as from 1 January 2019 of the hybrid mismatches rule

The Law has already implemented in Luxembourg the anti-hybrid mismatches rules of ATAD 1,which are related to specific transaction within EU Member States. These anti-hybrid rulesshould be updated before 1 January 2020 when ATAD 2 would be transposed in Luxembourg.

According to the Law ‘hybrid mismatches’ occur when there are differences in the legalclassification of a financial instrument or entity due to a structured arrangement concludedbetween the taxpayer and a party established in another Member State or where thecommercial or financial relations between the taxpayer and an associated enterpriseestablished in another Member State leads to double deduction or deduction without inclusion.


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“associated enterprise” for hybrid mismatches rule as introduce by the Law means:

– an entity in which the taxpayer holds directly or indirectly a participation in terms of votingrights or capital ownership of 25 percent or more or is entitled to receive 25 percent or moreof the profits of that entity;

– an individual or entity which holds directly or indirectly a participation in terms of votingrights or capital ownership in a taxpayer of 25 percent or more or is entitled to receive 25percent or more of the profits of the taxpayer.

Where the mismatch involves a hybrid entity, this definition is modified so that the 25 percentrequirement is replaced by a 50 percent requirement.


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Consequences of application of the hybrid mismatches rule according to the Law:

– In case of double deduction (when the same expenses or losses are deductible both inLuxembourg and another EU Member State) – deny the deduction of such expenses orlosses in Luxembourg if there has been a deduction in another Member State which is thepaying jurisdiction.

– In case of deduction without inclusion (when the payment is deductible in Luxembourgwithout being taxed in another EU Member State) – the deduction shall be denied inLuxembourg if they are not taxed in the other Member State.


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ATAD - Hybrid mismatches ruleDefinitions / Concepts in ATAD 2:

“associated enterprise” according to ATAD 2 means:

– an entity in which the taxpayer holds directly or indirectly a participation in terms of votingrights or capital ownership of 25 percent or more or is entitled to receive 25 percent or moreof the profits of that entity;

– an individual or entity which holds directly or indirectly a participation in terms of votingrights or capital ownership in a taxpayer of 25 percent or more or is entitled to receive 25percent or more of the profits of the taxpayer.

Where the mismatch involves a hybrid entity, this definition is modified so that the 25 percentrequirement is replaced by a 50 percent requirement.

A person who acts together with another person in respect of the voting rights or capitalownership of an entity shall be treated as holding a participation in all of the voting rights orcapital ownership of that entity that are held by the other person.

An associated enterprise also means an entity that is part of the same consolidated group forfinancial accounting purposes as the taxpayer, an enterprise in which the taxpayer has asignificant influence in the management or an enterprise that has a significant influence in themanagement of the taxpayer.

Source: ATAD 2


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ATAD - Hybrid mismatches ruleKey points with respect to Article 9 of ATAD 2:

For the purposes of this article, "hybrid mismatches" means situations involving a taxpayer oran entity where any payment under a financial instrument or any payment to or by a hybridentity gives rise to a deduction without inclusion or a double deduction and arise betweenassociated enterprises, between a taxpayer and an associated enterprise, between the headoffice and permanent establishment, between two or more permanent establishments of thesame entity or under a structured arrangement.

Consequences of the application of this article:

– In case of double deduction – deny the deduction in the Member State that is the investorjurisdiction or in the Member State that is the payer jurisdiction if the deduction was notdenied in the investor jurisdiction .

– In case of deduction without inclusion – the deduction shall be denied in the Member Statethat is the payer jurisdiction and where the deduction is not denied in the payer jurisdiction,the amount of the payment that would otherwise give rise to a mismatch outcome shall beincluded in income in the Member State that is the payee jurisdiction.


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ATAD - Hybrid mismatches ruleKey points with respect to Article 9 of ATAD 2:

When reference to associated enterprise is made, it should be distinguished if it is within thecontext of a payment under a financial instrument or in the context of a hybrid entity, as theholding percentage requirement differs, i.e. 25% for financial instruments and 50% forpartnerships.

After the transposition of ATAD 2 in Luxembourg domestic tax law, ‘acts together’ concept willbe introduced. Such concept extents the situations to which the application of the hybridmismatches rule would apply.


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ATAD - Hybrid mismatches rule: updates to comeKey points with respect to Article 9a of ATAD 2:

This article is applicable where one or more associated non-resident entities holding inaggregate a direct or indirect interest in 50 per cent or more of the voting rights, capital interestsor rights to a share of profit in a hybrid entity that is incorporated or established in a MemberState are located in a jurisdiction or jurisdictions that regard the hybrid entity as a taxableperson, the hybrid entity shall be regarded as a resident of that Member State and taxed on itsincome, to the extent that, that income is not otherwise taxed under the laws of the MemberState or any other jurisdiction.

Consequences of application of this article:

– The hybrid entity shall be regarded as a resident of that Member State and taxed on itsincome to the extent that that income is not otherwise taxed under the laws of the MemberState or any other jurisdiction.


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ATAD - Hybrid mismatches rule: updates to comeKey points with respect to Article 9a of ATAD 2:

Article 9a shall not apply to a collective investment vehicle. For the purposes of this Article,‘collective investment vehicle’ means an investment fund or vehicle that is widely held, holds adiversified portfolio of securities and is subject to investor-protection regulation in the country inwhich it is established.

According to the current draft law, the new provisions on reverse hybrid mismatch rules shouldnot apply to Luxembourg collective investment vehicles meaning companies or funds that arewidely held with a diversified portfolio of securities subject to the rules of investors protection inthe State where they are established. As specified by the commentary to the draft Law, thisshould refer to collective investment funds as defined in the law of 17 December 2010, tospecialized investment funds as defined in the law of 13 February 2007, to reserved alternativeinvestment funds as defined in the law of 23 July 2016 and to alternative investment funds asdefined in the law of 12 July 2013.


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ATAD - Hybrid mismatches rule: updates to come

RAIF SCA

LuxCo

SCS/SCSp

Interest

Limited Partners

Typical example


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Law on security over movable assets

Belgium


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Reform of security over movable assets Law approved on 30 May 2013, scheduled enry into force 1 December 2014, actual entry into

force 1 January 2018

abolishes the part of the law of 25 October 1919 that concerns pledges over business assets(pand handelszaak/gage sur fonds de commerce)

movable asset (actual or future, individually or as one unit) to the extent that such assets can betransferred

– business assets (permits, names, inventories, receivables, know-how, raw materials,machinery, etc.)

– receivables (trade, rental income, vendor, insurance, intragroup, etc.)

– intellectual property rights

– other movable assets

no amendments to mortgage law of 16 December 1851 or financial collateral law of 15December 2004


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Perfection through registration or dispossession Old regime: dispossession (other than business assets or fictitious dispossession of

receivables)

New regime: registering the pledge in the on-line National Pledge Registry or dispossession

Registration by pledge under its responsibility:

– Pledged assets

– Secured (future) claims

– Maximum secured amount

Renewable terms om 10 years


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Simplified enforcement Similar to financial collateral law

Free to determine enforcement procedure

– Sale

– Appropriation

– Lease to third party

No longer prior judicial approval but 10 days’ notice

Possibility to challenge by the pledgor which will suspend the enforcement process

Post factum judicial review up to one year after notice of completion of enforcement

Practical problem for registered pledges


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Security agent and codification of existing principles Possibility to enter into pledge agreement with representative acting for the account of one or

more beneficiaries

Bankruptcy of representative has no impact on benficiaries of the pledge

Pledge extends to sale proceeds of pledged assets (and any other claom replacing the pledgedassets)

Right of use for the pledgor and, unless otherwise provided in the agreement, pledgor maydispose of the pledged assets in the normal course of business

Pledgee has right of inspection


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Impact on existing and new security Existing security

– Preservation of rank in case of registration prior to 1 January 2019

– Business pledge mandates can still be used

– Other security interests over movable assets: pledgee retains it rights

New security

– No longer business pledge mandates

– 100 % of inventory

– Pledge on business assets no longer prerogative of EU credit institution

– Receivables pledge: in general no registration


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National Pledge Register Electronic, online National Pledge Register so that a pledge on movable assets (tangible and

intangible) can be created between pledgor and pledgee and perfected by registering thepledge and without dispossession or loss of control of the pledged assets.

National Pledge Register also used for retention of title arrangements.

Access to National Pledge Register via Belgian ID-card or ad-hoc agent.


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Fees National Pledge RegisterMax. amount liabilities secured by the

pledge or sales price for an ROTFees charged

Consultation by pledgor/buyer not applicable free of charge

Consultation by other persons not applicable EUR 5

Registration

less or equal to EUR 10 000 EUR 20

between EUR 10 000.01 and 25 000 EUR 50



more than EUR 500 000 EUR 500

Modification

less or equal to EUR 10 000 EUR 12

between EUR10 000.01 and 25 000 EUR 30




Removal in fullless or equal to EUR 10 000 EUR 8





Subordination or transfer not applicable EUR 10


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Any questions?


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Contacts

Simmons & Simmons LuxembourgRoyal Monterey26A Boulevard RoyalL-2449 Luxembourg


Pierre-Régis DukmedjianPartner - TaxT: +352 26 21 16 12E: [email protected]

Louis-Maël CogisPartner Financial Market - Country Head LuxembourgT: +352 26 21 16 14E: [email protected]

mailto:[email protected]


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Many thanks for your attention

CONFIDENTIALITY NOTICE:The information contained inthis presentation is confidential,privileged and only for theinformation of UBS and may notbe used, reproduced in whole orin part or distributed to any thirdparty without prior writtenconsent of Simmons &Simmons Luxembourg LLP.

© Simmons & Simmons LLP 2019.

This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices.Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name “Simmons & Simmons” or one or more of those practices as the context requires. The word “partner” refers to a member of Simmons &Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP’s affiliated practices. For further information on the international entities and practices, refer to simmons-simmons.com/legalresp. Simmons &Simmons LLP is a limited liability partnership registered in England & Wales with number OC352713 and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority.A list of members and other partners together with their professional qualifications is available for inspection at the above address.

Documents

Developments in financing transactions Luxembourg & Belgium