What is Securitisation?
Securitisation is the process whereby illiquid assets are turned into fungible, negotiable financial instruments or “Security” that represents an ownership position in the collateral assets. Such illiquid assets are commonly packaged together into a pool which can then be marketed whole, or can be split up into tranches to tailor the Security for risk tolerances and to improve the liquidity of the security within the market.
The Securitisation process involves the transfer of assets (“Securitisation Assets”) belonging to a transferring party (“Originator”) to a Securitisation Vehicle (“SV”) in order to raise funds or transfer risks associated with said Assets. The SV is then in a position to issue financial instruments to the market, generating funds in the process. Securitisation is an ideal way to raise finance and to afford various protections to Assets.
Securitisation in Malta
The Securitisation Act 2006 enabled the process of securitisation in Malta and provides a flexible and robust framework with which to structure SVs and to achieve tax-neutrality on your Securitised Assets.
The Malta Financial Services Authority (“MFSA”) takes a broad approach when considering what an SV may be. Such SVs may take the form of:
- a company, including an investment company;
- a commercial partnership;
- a trust created by a written instrument; or
- any other legal structure which the MFSA may, by notice, permit to be used for a securitisation transaction,
and that is established under the laws of Malta or those of a jurisdiction recognised by the MFSA.
Such SVs will not, on the whole, be considered to be Collective Investment Schemes as defined in the Investment Services Act 1994.
Once Securitisation Assets are transferred from the Originator to the SV, such transfer shall be treated as final, absolute and binding on the Originator. As such, the SV will be considered to be separate and independent from the Originator.
This provides protection to the SV and the Securitised Assets during bankruptcy proceedings, or any other proceedings under the Companies Act 1995 or any other law, which are brought against the Originator.
This protection is extended to any cash flow or any other assets of the SV, including any payments due by the underlying debtors in connection with the Securitised Assets.
However, as the SV may delegate the management responsibility for the day to day administration of the SV and, as such, the securitised assets to any third party – the SV is able to pass the management of said assets back to the Originator, without any license requirement. Further to this, the underlying debtor shall continue to enjoy all rights under the assigned contract against the Originator and not the SV.
The objects and purposes of SVs are solely limited to such matters which are necessary to carry out transactions to implement the securitisation transaction and ancillary acts to support or administer its activities. This limitation is designed to protect the SV from incurring liabilities that are unrelated to the securitisation transaction.
The Securitisation Act is designed to simplify the process of Securitisation and enables a broad-spectrum approach to the transfer of Securitisation Assets, or the risk associated with such assets, from the Originator to an SV.
This transfer can take any form including, without limitation, by novation, sale, assignment and declaration of trust. Securitisation is also considered to have taken place when the Originator obtains a loan or other such facility from an SV.
Parties to a securitisation transfer are free to choose any law to govern contracts relating to the securitisation transfer.
In addition, an SV does not usually require a licence from the MFSA in order to act in or from Malta – unless the SV will be issuing financial instruments to the public on a continuous basis. However, the MFSA is to be notified, through submission of the Notice Form, before the date of commencement of business of the SV.
At WDM International, we deliver opinions on Maltese taxation in relation to international finance transactions where this complements more general advice on structuring or tax compliance.
An SV is generally subject to income tax on its worldwide income and gains at the standard rate. However, the amount subject to taxation can be reduced through deductions allowed under the Securitisation Transactions (Deductions) Rules 2011. As such, it is therefore, possible to reduce or even negate the tax paid in Malta by the SV.
In determining the total income of an SV, it is possible to utilise the following deductions, to reduce the amount on which tax would have to be paid:
- sums payable by the SV to the Originator – for the transfer of Securitisation Assets to, or the assumption of risks by, the SV;
- premiums, interests or discounts in relation to financial instruments issues, or funds borrowed, by the SV to finance the acquisition of Securitisation Assets or the assumption of risks;
- any expenditure incurred by the SV in respect of the day-to-day administration of the SV itself – including where expenses are generated by a third party who has been delegated with the administration of the SV, including collection of any claims.
Once these deductions have been made – if there remains any taxable income at the level of the SV, then the SV can opt to further deduct an amount equal to the remaining total of remaining taxable income.
In other words, there will be effectively no chargeable income on the SV.
This “Optional Deduction” may be utilised solely provided that the Commissioner for Revenue is satisfied that the Originator has given his irrevocable written consent to the exercise of the option in relation to the contract.
Where the Optional Deduction is utilised, then the tax burden will instead lie with the Originator and the chargeable income will arise where the Originator is tax resident. If the Originator is resident in Malta for income tax purposes, then he will be taxed in Malta at the standard rate. Where the Originator is not tax resident in Malta, then no tax obligations will arise in Malta.
In addition, non-Maltese resident investors are not usually obliged to pay tax in Malta on income derived from an SV, as Malta does not levy a withholding tax on payments made to non-Maltese residents who are issued Securities by an SV.
V.A.T., usually payable at 18% for services rendered or deemed to be rendered to an SV in Malta, may be exempt where the services rendered consist of discretionary management of the investment portfolio.
SVs shall account separately for different securitisation contracts such that they may determine the chargeable income for each contract separately. Where an SV is constituted as a company, an amount equivalent to the additional deduction available shall be allocated to the final tax account of the SV. As such, any distribution of profits by the SV from the final tax account would not be subject to further tax in Malta.
In order to restrict ‘group relief’, the 2011 Rules restrict the transfer of operating losses made by an SV to another company forming part of the same group of companies and vice versa. Losses can also no longer be deducted for any period where the entity can no longer be considered an SV. The 2011 Rules also set out an anti-abuse provision to nullify any advantage brought about through structuring an SV in order to reduce their liability to tax in a manner that is not consistent with the rules.
Securitisation Cell Companies
With the introduction of the Securitisation Cell Companies Regulations 2014, the MFSA has created a supplementary framework to that provided by the Securitisation Act, enabling the creation of new protected cell company structures that are able to operate as SVs. A securitisation cell company (“SCC”) allows for the launch of multiple securitisation transactions, or insurance-linked securities, without incurring any risk of cross-contamination between the different sets of creditors and investors.
An SCC is able to achieve this as the assets and liabilities of each cell comprised in an SCC shall, for all intents and purposes of law, be treated as a patrimony separate from the assets and liabilities of each other cell of the securitisation cell company, and from the assets and liabilities of the securitisation cell company itself.
Like a more traditional company structure, an SCC will still be one company with one board of directors, and one set of memorandum and articles of incorporation. But the unique structure available, with a core and an unlimited number of cells, helps ring-fence assets and liabilities of each cell, so as to be only available to the creditors and shareholders (where present) of the particular cell.
In addition to company incorporation and tax advice, WDM International would be able to assist in relation to corporate governance and good standing including the provision of a registered office and company secretarial, administration, trustee and fiduciary services.