The lender landscape in Luxembourg acquisition finance transactions is characterised by a mix of financial institutions and alternative lenders. International banks and traditional financial institutions continue to have a central role in cross-border transactions where global banking groups arrange, underwrite and syndicate facilities. A large number of these transactions are structured using finance documentation governed by English or New York law, reflecting the international nature of the sponsor and lender base, with Luxembourg providing the toolbox and the mechanics to structure an agile borrowing entity and a robust local security package. Alongside these institutions, a number of Luxembourg-based and regional commercial banks remain active, mostly focusing on domestic or mid-market deals and transactions involving long-standing client relationships within the local financial ecosystem.

At the same time, alternative lenders and private credit providers have taken on a greater role in the lending market. Debt funds and direct lending platforms frequently compete with, and in some cases replace, traditional financing methods in mid-market leveraged buyouts and sponsor-backed acquisitions. The ability to offer flexible structures, faster execution and implementation, and tailor-made covenant packages has positioned them as an attractive counterparty and an increasingly competitive source of capital for private equity sponsors. Luxembourg’s prominent role for structuring investment funds has further supported this development, with many private credit funds and lending platforms being established or managed from Luxembourg and actively deploying capital into European acquisition finance transactions.

The Luxembourg acquisition finance market includes both corporate financing transactions and sponsor-driven leveraged buyouts, reflecting the jurisdiction’s role as a structuring platform. Many multinational groups use Luxembourg entities as holding or acquisition vehicles through which financing arrangements are implemented, particularly where transactions involve multiple jurisdictions and lender groups. In practice, leveraged buyouts often involve Luxembourg holding companies established within private equity structures, acting as borrowers, primary security providers or guarantors under the relevant finance facilities. Large-cap transactions are typically arranged and underwritten by international banks before syndication to institutional lenders, while mid-market deals are increasingly funded by direct lenders or club arrangements.

In acquisition finance transactions involving Luxembourg entities, the governing law of the main finance documents generally follows that of the lender and sponsor base. Facility agreements and intercreditor arrangements are typically governed by foreign law, most commonly English or New York law, particularly in cross-border transactions or where international banks and debt funds participate in the financing. This approach is common, as market participants frequently rely on well-established documentation standards and financing practices developed in those jurisdictions.

The position differs in relation to security over assets located in Luxembourg. In line with the lex rei sitae principle, security over Luxembourg assets, such as shares in Luxembourg companies, bank accounts held with Luxembourg institutions and certain receivables, as well as Luxembourg-located rights and assets, is documented under Luxembourg law. In practice, alongside foreign law-governed finance documentation, lenders typically expect Luxembourg law governed pledges over the shares of Luxembourg holding companies and other key local assets forming part of the acquisition structure.

Facility agreements in acquisition finance transactions involving Luxembourg entities are often based on Loan Market Association (LMA) standard documentation. These templates are familiar to lenders and borrowers, particularly in syndicated and sponsor-backed cross-border transactions. In some cases, where US lenders are involved, Loan Syndications and Trading Association (LSTA) standard documentation may also be used.

In practice, the language used in financing documentation reflects the international nature of the transaction and the parties involved. English is the most commonly used language, particularly in cross-border acquisition finance transactions involving international banks, private equity sponsors or alternative lenders. French and, less often, German may also be used in certain transactions, to reflect Luxembourg legal concepts or specific local requirements of the transaction.

Legal opinions are typically delivered as a condition precedent in acquisition finance transactions. In practice, it is customary in Luxembourg for the borrower’s counsel to confirm matters such as the capacity and authority of the borrower/guarantor to enter into the transaction documents and the lender’s counsel provides opinions on the validity and enforceability of Luxembourg law-governed security documents. Depending on the structure of the deal and the financing aspects, opinions may also address issues such as governing law, jurisdiction, the enforceability of foreign judgments, and tax matters.

Role in Acquisition Finance Structures

Senior loans are typically the main layer of external financing in acquisition structures involving Luxembourg entities and are commonly used to fund the purchase of the target company and to refinance existing debt within the group. In many transactions, the borrower is often a Luxembourg holding or acquisition vehicle established specifically for the investment’s purposes. This entity typically sits above the target group and channels the funds through the acquisition structure in accordance with the mechanics and the specific goals of the financing.

Typical Luxembourg Holding Structures

Acquisition structures include a number of corporate layers, with Luxembourg entities typically used as holding or intermediate financing vehicles. At the top of the structure there is often a Luxembourg holding company owned by the sponsor or investor group, with one or more intermediate companies beneath it to support the security package expected by lenders. Luxembourg companies used in these roles are usually non-regulated corporate vehicles.

Funding Within the Structure

Luxembourg entities within the acquisition structure are usually financed directly or indirectly by their parent, usually located in a foreign jurisdiction, by a combination of equity and intra-group debt. Equity funding may take the form of share capital, share premium or reserves contribution, while intra-group loans are commonly used for such purposes. External debt can take various forms depending on the transaction, investment needs and market conditions and the financing package may include instruments such as mezzanine debt, second ranking loans, PIK instruments or debt securities issued within the structure.

Types of Luxembourg Entities

The type of Luxembourg entities used in the structure depends on its respective role in the transaction. Holding or acquisition vehicles are most often incorporated as limited liability companies, such as a S.à r.l. (société à responsabilité limitée) or S.A. (société anonyme). These vehicles remain unregulated entities and are usually positioned beneath the sponsor or parent entity within the acquisition structure. Where the sponsor has established a Luxembourg-domiciled fund, a SCSp (société en commandite spéciale) is frequently used as the fund vehicle above the holding structure.

Position Within the Structure

Mezzanine financing, while less prevalent in the current market following the rise of unitranche facilities provided by direct lenders, remains relevant in certain larger or more complex acquisition structures. It is typically subordinated to the senior facilities, both in terms of payment and ranking of security, and therefore carries a higher level of risk. In practice, mezzanine lenders usually sit closer to shareholders than to senior lenders and their returns are generally driven by specific mechanisms such as payment-in-kind (PIK) interest or instruments that provide access to the equity value of the investment, including warrants or similar rights. The subordination of mezzanine debt to the senior facilities is typically governed by an intercreditor agreement, which regulates the ranking of payments, enforcement rights and the relationship between the senior lenders and mezzanine providers (see 4. Intercreditor Agreements for insights on intercreditor arrangements).

Typical Features

Mezzanine instruments can take many forms depending on the specific transaction and the types of investors involved. They may be structured as subordinated loans, notes or other debt instruments. They are often combined with features that link the lender’s return to the performance of the investment. PIK interest is also being used, allowing accrued interest to be capitalised rather than be paid in cash during the life of the loan.

Bridge loans are commonly used in acquisition finance structures where funding is required swiftly but the longer-term financing has not yet been finalised or even secured. In Luxembourg acquisition structures, the borrower is typically the acquisition or holding vehicle that will subsequently form part of the long-term financing structure. Bridge loans allow the borrower to complete the acquisition while awaiting the finalisation of terms and implementation of the permanent financing, for example, through the issuance of notes or other debt instruments. They are typically short-term facilities, often with a maturity of 12 months or less, and are usually subject to mandatory prepayment once the permanent financing is put in place. In transactions involving investment funds, bridge loans are also commonly used to cover the period before capital is drawn from investors, sometimes referred to as subscription lines or capital call facilities.

Bonds are often used as part of acquisition financing, most commonly in larger transactions allowing borrowers to access capital markets alongside or instead of traditional financing sources. In many structures involving Luxembourg entities, an acquisition vehicle or intermediate holding company may issue bonds as part of the transaction, with the proceeds used to fund the structure or refinance existing indebtedness. The terms and conditions of these instruments are typically governed by New York law, reflecting common international capital markets practice. The Luxembourg law of 10 August 1915 on commercial companies, as amended (the “Company Law”) offers flexibility in this respect, as Luxembourg companies may issue bonds governed by foreign law and, where appropriate, to disapply the provisions of the Company Law relating to bondholder meetings and bondholder representation.

Similarly, high-yield debt securities transactions are common as, although Luxembourg does not have its own market, it remains a very active jurisdiction for such issuances. The Luxembourg Stock Exchange is the leading venue in Europe for the listing of high-yield debt securities, and foreign groups who wish to structure their financing special purpose entities efficiently choose Luxembourg’s business-friendly environment for high-yield debt securities issuances.

In Luxembourg acquisition finance structures, funding is most commonly provided through loan facilities, but debt securities may also be used depending on the size of the transaction and market conditions, sometimes in combination with a syndicated facility. These instruments are often issued on a private placement basis to a limited group of professional investors.

Asset-based financing involving Luxembourg entities is relatively uncommon where the underlying assets are located in Luxembourg, given the country’s limited industrial base. In practice, where the underlying assets are located in other jurisdictions, Luxembourg companies are more often used as holding or financing vehicles in structures, with the financing structure generally following standard acquisition finance arrangements and common international practice. A growing area of relevance in the Luxembourg context is NAV (Net Asset Value) financing, whereby credit facilities are extended to investment fund vehicles based on the value of the fund’s underlying portfolio. These facilities are typically used by private equity and credit funds to provide liquidity, fund add-on acquisitions or bridge capital call periods, and are commonly structured through Luxembourg SCSp or SICAV (société d’investissement à capital variable) vehicles.

Intercreditor agreements are common in acquisition finance transactions involving Luxembourg entities, especially where the structure includes various levels of debt or different categories of lenders. These agreements are often governed by foreign law, most commonly English law, in line with the governing law of the main finance documents. In Luxembourg-based acquisition structures, they typically regulate matters such as the ranking and priority of creditors, the allocation of payments and enforcement proceeds, restrictions on enforcement as well as the appointment of a security agent to hold Luxembourg law security on behalf of the lender group.

Intercreditor agreements are often used in bank and bond transactions, as financing structures sometimes require a framework to govern the rights and priorities of the various lenders and creditors involved, particularly in syndicated lending transactions. Master intercreditor agreements are also increasingly used to provide such a framework for the different financing instruments within the overall structure.

Hedge counterparties may participate in the intercreditor agreement, especially when hedging arrangements are included in the financing structure. Their claims are typically treated as senior, alongside those of the senior credit providers, and specific types of payments under the hedging arrangements are regulated and generally permitted. However, the ability of hedge counterparties to terminate hedging transactions may be subject to certain restrictions under the intercreditor agreement provisions.

In acquisition finance transactions involving Luxembourg entities, the borrower or obligor is often a holding or finance company and its assets typically consist of shares of the holding company, bank account(s) held by the holding company with a Luxembourg-based bank and intercompany receivables. Accordingly, the structure of the security package is determined by the location of the relevant assets.

Luxembourg law offers a broad range of efficient tools as the Luxembourg security package is bankruptcy proof and can be easily and swiftly enforced through out-of-court enforcement procedures. In practice, lenders most frequently rely on pledges, assignments and transfers by way of security, while mortgages are used for real estate. The applicable legal regime depends largely on the nature of the underlying asset.

The main driver of the Luxembourg security package efficiency and robustness is the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the “Collateral Law”). This legislation provides a particularly creditor-friendly toolbox for security over Luxembourg companies’ assets and is widely used in acquisition finance structures. Security governed by the Collateral Law benefits from many practical advantages, such as the possibility to conclude agreements under private seal, without registration or publication requirements, the broad definition of eligible and in-scope collateral, straightforward perfection requirements and strong protection against the effects of insolvency proceedings affecting the security provider.

The Collateral Law recognises three principal categories of financial collateral arrangements:

• pledges over financial collateral (gages);
• transfer of ownership by way of security interest (transfert de propriété à titre de garantie); and
• the repurchase agreement (mise en pension), with pledges being by far the most commonly used form of security in acquisition finance transactions.

Shares

Taking security over shares or other equity instruments of the holding company is a central feature of most Luxembourg security packages and is typically expected by the lenders. A pledge may be granted over existing and future shares as well as related rights such as dividends or voting rights. Typically, a share pledge agreement is entered into between the shareholder (as pledgor), the Luxembourg holding company (as company) and the security agent acting on behalf of the lenders (as pledgee). The typical agreement generally governs the exercise of voting rights during the life of the pledge, entitlement to distributions, various representations and covenants including restrictions on transfers of the pledged shares and, most importantly, the applicable enforcement mechanics, including the possibility of appropriation. See 5.7 General Principles of Enforcement for details on the available enforcement methods. Overall, share pledges are particularly important in acquisition finance structures as enforcement allows lenders to obtain control of the holding company and underlying investment through the pledged shares.

Bank Accounts

Pledges over bank accounts are another standard feature of Luxembourg security packages. Such pledges typically cover cash accounts (or securities accounts) held by a Luxembourg holding company with a financial institution located in Luxembourg. Depending on the terms agreed between the parties, typically aligned with the main financing documentation, the account(s) may continue to operate normally, be blocked or remain subject to control mechanisms. To ensure the effectiveness of the security, the account bank will usually acknowledge the pledge, and, at the same time, waive any prior security interest or general lien it may have over the account.

Receivables

Security may also be granted over intercompany receivables, including in particular intra-group loans or shareholder receivables owed to the Luxembourg holding company. This type of security is usually created with a pledge over claims and typically covers any present and future claim (créance), including any associated income, payments made or to be made in respect of such claim, accrued interest and any proceeds. It also includes any powers, rights, title and benefits attaching to any such claims that the security provider holds or will hold against the debtor Luxembourg holding company. In fund financing transactions, the scope of receivable security may extend to capital commitments owed by investors, which are considered and treated as claims under Luxembourg law.

Inventory

Security over inventory (gage sur fonds de commerce) is relatively uncommon in Luxembourg acquisition finance structures. In practice, this type of security is rarely used, as the legal framework governing such pledges is more restrictive and requires specific authorisations, which makes this type of collateral less attractive. Lenders typically rely instead on security over financial assets or receivables where possible.

Intellectual Property Rights

Luxembourg law provides for the granting of security over certain registered intellectual property rights, including patents, trade marks, designs and copyrights, and the creation of such security may take the form of a pledge agreement. Depending on the type of intellectual property involved, registration with the relevant authority may be required and, as a result, pledges over trade marks and designs are registered with the Benelux Office for Intellectual Property (BOIP), whereas pledges over patents must be registered with the Luxembourg patent register. Other types of intellectual property rights that have not been formally registered may be secured through private agreements.

Movable Assets

In acquisition finance transactions, the granting of security over movable assets, other than financial instruments or receivables, is uncommon. If such security is required, it may take the form of a commercial pledge (gage commercial) governed by the Luxembourg Commercial Code. It is worth mentioning that certain specialised movable assets are subject to specific regimes, such as aircraft or large vessels that may require security in the form of a specific type of mortgage to be registered in the relevant registry.

Real Property

In Luxembourg, security over real estate typically takes the form of a mortgage (hypothèque) and may only be granted over immovable property existing at the time of its creation. A mortgage must be formally established through a notarial deed and officially registered with the competent authorities, the Registration Administration and the Mortgage Registry. The registration process involves payment of registration fees and the mortgage must be renewed periodically, typically every ten years, in order to preserve its ranking and remain enforceable against third parties.

Under Luxembourg law, security interests are created and documented through written agreements signed under private seal between the parties. In acquisition finance transactions, the most commonly used security interests fall within the scope of the Collateral Law, which intentionally provides enhanced flexibility in terms of form requirements. These arrangements and any related close-out netting and set-off arrangements may be evidenced in writing or by any other method recognised under the Luxembourg Commercial Code. The Collateral Law also allows such agreements to be created and documented in electronic form or any other durable medium, provided that the collateral subject to the respective security can be clearly identified.

In addition to the agreement itself, the creation of the security interest must be evidenced, typically through the registration of the collateral in favour of the secured party or a designated third party, such as a security agent acting on behalf of the lenders. In essence, where the collateral consists of claims in cash form or book-entry securities, it is typically sufficient to demonstrate that the assets have been credited to a designated account or otherwise placed under the control of the secured party (or the designated third party). The specific perfection requirements depend on the type of asset involved and may include registrations in the company shareholder registers, delivery of notices of pledge and receipt of acknowledgements from account banks or debtor companies, or other forms of evidence showing that the collateral has been validly granted. Luxembourg generally does not require the registration of most security interests in public registers, an approach that ensures the confidentiality of the various financing structures and the respective participants. A notable exception is the mortgage, which must be established and documented through a notarial deed and registered with the competent mortgage registry.

No single central registry for the registration of the security interests exists in Luxembourg. Instead, the steps required to perfect and register security for the benefit of the secured party or of a designated third party primarily depend on the nature of the asset and the type of security granted. In acquisition finance transactions, the security package is most commonly created under the Collateral Law. This regime relies on control, notification or registration in internal records rather than public filings. While security agreements typically cover both existing and future assets, where additional collateral is later acquired by the security provider, the relevant records or registers may need to be updated to reflect the extension of scope and confirm the applicability of the security.

Shares and Other Securities

Security over shares or other equity or debt securities is perfected through entries in the relevant registers. Perfection is achieved by recording the pledge in the share register or the relevant register of securities maintained by the issuing company at the folio corresponding to the holder of the relevant in rem and economic rights, as applicable, and where bearer instruments are deposited with a custodian, perfection typically occurs through an entry in the depositary’s register. In practice, the issuing company is most commonly a party to the pledge agreement; alternatively, it may simply be notified of the existence of the pledge.

Bank Accounts

Security over bank accounts is typically perfected through the notification by the security provider of the creation of the pledge over its account(s) held in Luxembourg to the account bank. In practice, the security provider notifies the account bank, which is in turn requested to sign and return an acknowledgment notice. Through this acknowledgement, the account bank waives its prior lien over the account in order to enable a first-ranking pledge in favour of the secured party (or the designated third party acting on behalf of the secured party).

Receivables

Security over receivables, including intra-group loans or shareholder receivables owed to the Luxembourg holding company in particular, is made opposable to third parties through notification of the debtor of the pledge or by making the debtor a party to the security agreement. In some cases, receivables owed by third parties may not be formally notified at the time the pledge is created.

Book-Entry Financial Instruments

Under the Collateral Law, book-entry securities in Luxembourg are considered financial instruments and can be pledged as collateral. Depending on the structure of the arrangement, the pledge can be perfected in several ways, most commonly by entering into the pledge agreement where the custodian itself is a party (or, if it is not a party, having the custodian acknowledge the pledge), or recording the pledge in the relevant securities account, or placing the securities under the control of the pledgee or a designated third party.

Other Assets

Under Luxembourg law, certain categories of assets are governed by specific registration regimes. Security over intellectual property rights typically requires registration with the competent intellectual property registry, depending on the right’s type. Security over assets, such as aircraft or vessels, must be registered in the competent asset register. In the case of real estate, security takes the form of a mortgage, which must be established by notarial deed before a Luxembourg notary and be registered with the Registration Administration and the Mortgage Registry. Accordingly, the steps required to perfect security in Luxembourg depend on the type of collateral involved and the statutory framework applicable to the relevant asset.

Under Luxembourg law, the ability of a company to grant security or guarantees in favour of its parent company or its parent’s creditors (an upstream security), is mainly assessed from a corporate law perspective. In essence, the company must act within the limits of its corporate object as defined in its articles of association and the transaction must serve the corporate interest of the guarantor/security provider company.

Luxembourg companies cannot simply grant guarantees or security in favour of third parties, including for the benefit of other affiliated entities of the same corporate group, unless the transaction can reasonably be considered to benefit the company itself. Assessing and determining whether such benefit exists is a fact-specific test, typically carried out by the company’s management body. Directors of the guarantor/security provider company must therefore evaluate the circumstances of the transaction and ensure that the contemplated transaction is advantageous, whether directly or indirectly, to the company.

Provided that the company’s articles of association permit such transactions and that its management body determines the granting of the guarantee or security is in the company’s corporate interest, Luxembourg law allows companies to provide guarantees or security for the obligations of other group entities. In practice, the analysis typically takes into account the overall interest of the group, especially if the company is part of an integrated financing structure. However, the assessment remains focused on whether the transaction is justified from the perspective of the company granting the security.

See 5.6 Other Restrictions for further details on the applicable limits and relevant assessments.

Financial Assistance Framework

Financial assistance is generally restricted under Luxembourg law, preventing situations where a company provides funds, loans, guarantees or security for the purpose of enabling a third party to acquire shares issued by that company. In practice, this restriction aims to protect the company’s capital, as well as its creditors, by preventing a company from indirectly financing and ultimately acquiring its own shares. The financial assistance regime applies to public limited liability companies (sociétés anonymes – S.A.), simplified public limited liability companies (sociétés anonymes simplifiées – SAS) and corporate partnerships limited by shares (sociétés en commandite par actions – SCA) but not to private limited liability companies (sociétés à responsabilité limitée – S.à r.l.). In a nutshell, providing funds to a purchaser, granting loans to finance the acquisition, providing guarantees in favour of lenders financing the acquisition, or granting security over the company’s assets for that purpose, are subject to strict requirements and must satisfy a specific test, commonly referred to as the “whitewash procedure”.

Whitewash Procedure and Net Asset Test

Financial assistance is not absolutely restricted but is only permitted where specific conditions are satisfied, such as complying with the requirements that (i) the transaction is being carried out on fair market terms, subject to appropriate applicable interest and taking of collateral, (ii) the corporate interest of the company is assessed and taken into consideration and (iii) the assessment of the creditworthiness of the third party receiving the financial assistance. The board of directors of the company must also prepare a written report explaining the terms and reasons for the transaction, the interest of the company, and any consideration on the potential liquidity and solvency risks. The report must be submitted to the shareholders’ meeting and filed with the Luxembourg register of commerce and companies and published in the Recueil électronique des sociétés et associations and the transaction must ultimately be approved by the shareholders at a qualified majority. In addition to the to the above requirements, the company must comply with a net asset test, under which (i) the financial assistance must not cause the company’s net assets to fall below its share capital and non-distributable reserves and (ii) the non-distributable reserve should be equal to the amount of the financial assistance granted.

Exceptions

The financial assistance provided by banks and other credit institutions in the ordinary course of business or transactions effected with a view to acquire shares by employees of the company or of related group entities with a controlling relationship over the company in question are not subject to the above conditions. However, the net asset test typically remains applicable.

Other than the financial assistance rules, Luxembourg law provides for several general corporate law limitations on the granting of guarantees and security. These restrictions are not based on a single provision but rather from broader principles of Company Law. The validity of guarantees or security interests is typically assessed with reference to corporate power, corporate authority and corporate benefit and these must be evaluated at the level of each Luxembourg entity involved in the transaction.

Corporate Power

Limits on the corporate power of Luxembourg companies may arise either from statutory rules or from the provisions contained in its articles of association or, as applicable, in its shareholders’ agreement.

Statutory limits

Questions sometimes arise as to whether a Luxembourg company may grant guarantees or security in support of obligations of other group entities without receiving direct monetary compensation. An act that is purely gratuitous would normally fall outside the scope of the company’s commercial purpose.

Over time, legal commentary and practice have taken a broader view of this principle and the benefit obtained by the company does not necessarily have to be immediate or monetary. Indirect advantages, strategic benefits within a group or expected future gains may also be relevant in assessing whether the transaction serves the company’s interests, and as a result, intra-group guarantees and security may be considered acceptable on the basis that these are reasonably justifiable by the broader interests of the group or the company’s participation in it. Nevertheless, if there is no credible basis for concluding that the company derives any benefit from the arrangement, a guarantee or security could still be questioned. In such cases, the validity of the transaction or the conduct of the company’s management may come under scrutiny.

Limits arising from the articles of association

The articles of association determine the scope within which the management of a Luxembourg company is authorised to act and describe the activities that the company may pursue, defining the framework of its corporate powers. Luxembourg entities used in acquisition structures commonly have an object focused on the holding and management of participations in other companies. In practice, these clauses usually authorise the company to grant guarantees or security in connection with the obligations of entities in which it holds an interest, including upstream or cross-stream arrangements.

Where the wording of the object clause does not clearly cover such actions, the transaction may technically fall outside the company’s corporate purpose. Even where a transaction exceeds the stated corporate object, the company will generally remain bound by the relevant commitment vis-à-vis third parties acting in good faith. However, the directors or managers involved in approving the transaction may face potential liability if they authorised an act that clearly falls outside the scope of the company’s corporate powers. The articles of association may also restrict certain actions to the consent of the shareholder(s), particularly in joint ventures.

Corporate Authority

The decision to approve a transaction generally and to grant guarantees or security in particular falls within the responsibility of the board of directors or managers of the Luxembourg company, unless the articles of association provide otherwise. In taking such decisions, the board is expected to assess all relevant aspects of the proposed transaction and to ensure that it has sufficient information to make an informed judgement. This assessment typically includes reviewing the key financial and contractual terms of the financing arrangement.

In such cases, the board usually examines elements such as the interest terms applicable to the underlying obligations, the repayment schedule and maturity profile, the scope of representations and warranties, the existence of negative pledge clauses and other covenants, as well as the potential impact of the transaction on the company’s financial position. These factors are particularly relevant when evaluating whether the transaction is consistent with the company’s corporate interest.

In practice, the board resolutions usually record the analysis carried out by the directors or managers and the considerations supporting the company’s participation in the transaction. The board often approves the financing structure together with the main transaction documents and may grant a power of attorney to one or more directors, managers or authorised representatives to finalise negotiations and execute the documentation on behalf of the company.

Corporate Benefit

A Luxembourg company must act in its own corporate interest when entering into any transaction, including the granting of guarantees or security. Although the concept is not defined in statutory terms, it is well established in Luxembourg legal thinking and case law as a practical limit on what the company may properly undertake. The assessment is not abstract and it typically depends on the facts of the particular transaction and must be made at the level of the Luxembourg entity itself.

In straightforward cases, the analysis may be relatively simple. A company will often be able to justify its involvement where the financing directly benefits it, where the borrowed funds are on-lent to it or one of its subsidiaries, or where the support is granted in favour of a direct or indirect subsidiary. In those situations, the benefit may be immediate, indirect or expected in the future, and it does not have to take the form of a separate fee.

The position becomes more sensitive in acquisition finance structures involving upstream or cross-stream guarantees and security. Luxembourg law does not contain a full statutory regime on group interest, but in practice the existence of a genuine group rationale is an important part of the analysis. The company’s management will generally look at whether the transaction supports a common economic or financial objective within the group, whether the company can reasonably expect to derive a benefit from it, and whether the burden assumed remains proportionate to its financial means.

In practice, guarantee limitation wording is commonly included to cap the company’s exposure, although such wording does not by itself establish corporate benefit. Indeed, it is market practice in Luxembourg to limit the upstream and cross-stream guarantees to a certain percentage of the net assets of the Luxembourg companies (usually between 80% and 95%) increased by the intra-group financing granted to the Luxembourg company (if any).

Lenders are allowed to enforce guarantees or security under the conditions and circumstances defined in the relevant financing documents. In practice, these enforcement triggers follow common international standards and generally include events such as non-payment, the opening of insolvency proceedings, breaches of local law or contractual obligations.

Procedures for Enforcement

The enforcement process depends on the nature of the guarantee or security involved. Guarantees are normally called through a notice to the guarantor in accordance with the terms of the guarantee agreement.

For traditional security interests, such as mortgages or civil and commercial pledges, enforcement usually involves the sale of the secured assets through a public auction procedure. In such cases, the debtor must typically receive prior formal notice before the enforcement process can begin.

A different regime applies to pledges governed by the Collateral Law, which offers a more flexible enforcement framework. Under this regime, the pledgee may choose among several enforcement methods, which generally include:

• appropriation of the pledged assets, at a value to be determined (before or after appropriation) in accordance with the pre-agreed valuation method, or at market price with respect to listed financial instruments or, for investment fund units, at the most recently published net asset value;
• sale of the pledged assets by private sale in a commercially reasonable manner at arm’s length;
• sale through a public auction or stock exchange sale;
• application to the court for an order that the pledged assets be retained by the pledgee until full and final payment of its claim, based on a valuation prepared by a court-appointed expert;
• set-off of the pledged assets against the secured obligations, where applicable; and
• requesting payment directly from a third-party debtor where the collateral consists of cash or monetary claims.

In parallel, the security agreement may also provide for “soft enforcement” methods. Modalities will vary depending on the nature of the security, and upon the occurrence of an enforcement event, the pledgee may be entitled to:

• in the case of a security over shares, take control of the shares of the holding company through the exercise of all voting rights of the pledgor shareholder entity (including the option of replacing the existing management) and receive any distributions to be paid out by such company to the pledgor; and
• in the case of security over account(s) or claims, request the account bank or the debtor to pay out any amount standing to the credit of the pledged accounts or instruct the debtor to pay directly to the pledgee any amounts owed to the pledgor.

Effect of Insolvency Proceedings on Enforcement

The opening of insolvency proceedings generally affects the creditor ranking and may allow certain transactions to be challenged if they were concluded during the suspect period (période suspecte). In essence, this is determined by the court and may extend up to six months prior to the declaration of bankruptcy, with an additional period of up to ten days preceding it. See 7.2 Claw-Back Risk for further details.

However, security arrangements falling within the scope of the Collateral Law benefit from a specific protective regime. Notwithstanding the opening of insolvency proceedings, such security is typically excluded under the terms of the relevant security arrangements from the bankruptcy estate and may therefore continue to be enforced, without court involvement or even any prior notification requirement. Such arrangements also benefit from a protection against claw back.

Guarantees granted by Luxembourg companies are commonly used in acquisition finance transactions and are often included directly in the main credit agreement. Luxembourg law generally recognises three main types of guarantees, each with different legal features and practical implications for both lenders and guarantors.

First Demand Guarantee (Garantie à Première Demande)

A first demand guarantee typically operates as an autonomous payment undertaking by the guarantor in favour of the beneficiary. The guarantor’s obligation is independent from the underlying loan obligations, which means that defences arising from the loan agreement cannot normally be raised against the beneficiary. It is typically documented in writing under private seal and does not require registration or filing formalities, functioning as a standalone commitment to pay upon demand. From a lender’s perspective, the autonomous nature of the obligation provides a high level of certainty and facilitates enforcement, as payment is not dependent on disputes relating to the underlying debt. It is essential that the documentation clearly reflects the independent nature of the guarantee and if the undertaking appears too closely connected to the underlying obligations, there is a risk that it could be recharacterised as a suretyship, which would allow the guarantor to rely on borrower-related defences. Ultimately, the choice between these different forms of guarantee typically depends on the level of protection sought by the lenders, the intended enforcement mechanics and the broader structure of the financing.

Suretyship (Cautionnement)

A suretyship is an accessory guarantee of the borrower’s principal obligation. The guarantor’s commitment exists only to the extent that the underlying debt is valid and enforceable. Accordingly, the guarantor may rely on certain defences available to the borrower. In essence, the guarantor’s liability mirrors the borrower’s obligations under the finance documents, with the arrangement being typically documented by a written agreement under private seal, not requiring additional formalities. The concept is common under Luxembourg law and is usually preferred where the parties intend the guarantee to remain closely linked to the underlying debt. However, from the lender’s perspective, as the guarantee is accessory in nature, enforcement may be more complex, as the guarantor may rely on certain defences connected with the underlying debt and respective obligations.

Professional Payment Guarantee (Garantie Professionnelle de Paiement)

The professional payment guarantee was introduced by the Luxembourg law of 10 July 2020 relating to professional payment guarantees (garanties professionnelles de paiement) (the “Law on Professional Payment Guarantees”) to provide a flexible guarantee regime in Luxembourg. The parties may expressly subject their agreement to this law and are given significant contractual freedom with respect to the guarantee’s role and operation within the structure. This type of guarantee must be evidenced in writing and expressly governed by the Law on Professional Payment Guarantees, and the parties may determine the conditions under which the guarantee may be called, including situations that are not strictly linked to a payment default. This regime offers a high degree of flexibility and legal certainty as it allows the parties to exclude certain defences, clearly define the scope of the guarantor’s obligations and address matters such as the continuation of the guarantee in the event of insolvency proceedings affecting the debtor company. To benefit fully from this framework and mitigate the risk of requalification of the guarantee, in particular the risk that it could be recharacterised as a suretyship, which would be less favourable to the beneficiary, the guarantee must be carefully drafted and include an express reference to the Law on Professional Payment Guarantees, ensuring that it falls within the scope of the professional payment guarantee regime. In practice, most Luxembourg law-governed guarantees in financing transactions are now governed by the Law on Professional Payment Guarantees.

Under Luxembourg law, certain general conditions need to be met by the guarantor in order to proceed with the granting of a valid guarantee, including corporate capacity and authority, the existence of corporate benefit and compliance with applicable financial assistance restrictions. See 5.6 Other Restrictions for details of the applicable restrictions.

The provision of a guarantee by a Luxembourg company generally requires consideration in order to support the company’s corporate interest and benefit, however such consideration does not necessarily need to take the form of a specific guarantee fee and may arise from the broader advantages of the financing arrangement or other monetary considerations.

Unlike certain other jurisdictions, Luxembourg law does not recognise the principle of “equitable subordination”.

Under Luxembourg insolvency law, certain types of transactions entered into before the opening of bankruptcy proceedings may be challenged if they occurred during the so-called suspect period (période suspecte), which precedes the formal declaration of bankruptcy. This period is typically determined by the court and corresponds to the time when the debtor effectively ceased payments. Moreover, transactions concluded up to ten days before the beginning of the suspect period may also fall within the scope of review. In practice, these rules are particularly relevant in acquisition finance transactions, as they may affect guarantees, the granting of security or certain payments made by the borrower. See 5.7 General Principles of Enforcement for insights on the applicable enforcement procedure.

Suspicious Transactions

The Luxembourg Commercial Code identifies certain types of transactions that, if concluded during the suspect period (or the preceding ten days, as applicable), may automatically be declared void. These typically include:

• transfers of assets or transactions entered into without adequate consideration, such as waivers, gifts, or transactions at a significant undervalue;
• payments of debts that were not yet due at the time they were made;
• payments of due debts made through non-ordinary means, such as transfers in kind, contractual set-off or other unusual methods of payment; and
• the granting of security for obligations that were previously unsecured.

In addition to these automatically void transactions, a court may also set aside transactions concluded outside the suspect period if they were entered into with the intention of defrauding creditors or improperly reducing the debtor’s assets.

Debt Set-Off

Luxembourg law also addresses the treatment of set-off in an insolvency context. Legal set-off of debts owed by two parties to each other that are both due and payable, ie, reciprocal debts, generally remains valid during the suspect period. Contractual set-off is more restricted unless the claims arise from a closely connected relationship or common cause.

In practice, certain financing arrangements benefit from strong statutory protection. Overall, security interests governed by the Collateral Law are generally considered insolvency-remote, and the same law recognises the validity of set-off and netting arrangements notwithstanding the opening of insolvency proceedings. Similarly, professional payment guarantees continue to operate despite the insolvency of the debtor. For this reason, in Luxembourg acquisition finance structures, these mechanisms are often used to effectively mitigate claw-back risk.

Other than in respect of mortgage or security taken over specialised movable assets, there are no mandatory registration duties in Luxembourg. However, one of the parties may voluntarily elect to register documents in Luxembourg. Such registration is subject to a fixed registration duty of EUR75 payable to the Luxembourg VAT Administration.

Withholding Tax Regime

No Luxembourg withholding tax is due on arm’s length interest payments made by a Luxembourg resident borrower to a corporate lender (resident or not). Withholding tax may apply only in few specific cases, inter alia:

• withholding tax on certain interest income paid by Luxembourg based paying agents to Luxembourg resident individuals (so-called RELIBI regime); and
• interest paid on certain instruments with equity features (in the case of requalification of the instrument or part of it into equity by Luxembourg tax authorities for tax purposes.

Financing agreements usually include a gross-up clause ensuring that the lender receives its payment under the agreement without any deduction in respect of withholding tax. Given that Luxembourg withholding tax might apply only in rather specific and largely hypothetical cases, such provisions are of limited relevance.

Qualifying Lender Concept

Gross-up clauses often include the concept of a Qualifying Lender, limiting the obligation of a borrower to gross up the payments under the financing agreement only in respect of lenders that qualify as Qualifying Lenders and meet certain conditions or fulfil certain obligations.

In Luxembourg, a Qualifying Lender often refers to a lender that meets one of the following conditions:

• it is beneficially entitled to interest payments and such payments can benefit from an exemption from Luxembourg withholding tax; or
• it is tax resident in a jurisdiction that has concluded a double tax treaty with Luxembourg providing for an exemption or reduced rate of withholding tax on interest.

As mentioned above, Luxembourg does not generally impose withholding tax on interest payments. Therefore, the Qualifying Lender concept is relevant in cases where withholding tax is due in another (usually source) jurisdiction and less so in respect of Luxembourg withholding tax.

Luxembourg tax law does not provide for a specific thin capitalisation rule. A long-established practice was to apply a debt-to-equity ratio of 85:15 whereby the deductibility of the interest would be denied on debt in excess of such ratio. However, such practice is no longer considered appropriate. Instead, transfer pricing rules are applied on a case-by-case basis to determine the applicable ratio.

On the other hand, a deduction of excess interest is governed by the Anti-tax Avoidance Directive (ATAD, Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market). Under ATAD, exceeding borrowing costs deductibility is capped by the interest deduction limitation rule. Pursuant to this regime, interest expenses in excess of interest income are deductible only up to the higher of 30% of EBITDA or EUR3 million.

Certain expenses borne in the context of financing (eg, arrangement fees) are considered economically equivalent to interest expenses and must be taken into account when computing the amount of exceeding borrowing costs.

The interest deduction limitation rule excludes, upon request and subject to specific anti-abuse rules, certain types of borrowers from the application, such as (but not limited to) securitisation vehicles within the meaning of Article 2(2) of EU Regulation 2017/2402, standalone entities, alternative investment funds (AIF) managed by an alternative investment fund manager as defined in Article 4(1)(b) of EU Directive 2011/61/EU or an AIF supervised under the applicable national law, single worldwide group companies, which are entities that (i) are not part of a consolidated group for financial purposes and (ii) are not considered autonomous stand-alone entities, where the ratio of the single entity equity over its total assets is equal to or higher than the corresponding group ratio (or up to 2% lower than the group ratio), etc.

Acquisitions involving regulated entities in Luxembourg require particular consideration from both a regulatory and financing perspective. The sectors and respective transactions most commonly affected include credit institutions, professionals of the financial sector (PSFs), investment funds and insurance or reinsurance undertakings. The CSSF, the competent authority for the financial sector, and the Commissariat aux assurances (CAA), for insurance activities, primarily exercise oversight of these entities.

In practice, notification to and approval by the relevant regulator is generally required where a transaction involves the acquisition or disposal of a qualifying holding in a regulated entity, and, depending on the level of participation, respective prior approval may be necessary. The proposed shareholder is typically subject to a regulatory assessment taking into account factors such as the reputation, professional integrity and financial capacity of such entity. This assessment can affect transaction planning, as the completion of the acquisition is often dependent on obtaining the relevant regulatory approval.

Luxembourg has adopted a national screening mechanism pursuant to the law of 14 July 2023 establishing a mechanism for screening foreign direct investments which may affect security or public order. It applies to investments made by foreign investors intended to gain control over a Luxembourg entity active in certain sectors considered critical, including the energy sector, transport sector, aerospace and defence, media sector, and health sector. Prior to such investment becoming effective, a notification must be made to the Luxembourg Ministry of Economy. If the latter considers that the contemplated transactions may affect national security or public order, it will trigger a so-called screening procedure to assess the contemplated transactions. In such case, the investment cannot be performed until the screening procedure has been finalised and approval has been granted by the Ministry of Economy.

Specific Takeover Regime

In cases where the target company is listed, the applicable regulatory framework will largely depend on the place of its registered office and the exchange on which the shares are admitted to trading. Although a number of listed companies are incorporated in Luxembourg, their shares are often listed on international listing venues such as the New York Stock Exchange or the Frankfurt Stock Exchange, meaning that the takeover and financing rules of the relevant jurisdiction generally apply in addition to Luxembourg law.

If the shares of the Luxembourg public company are listed on an EU regulated market, the law of 19 May 2006 on public takeovers (the “Takeover Law”) applies and sets the relevant rules and requirements. In such case, matters regarding company law, including issues referring to the level of voting rights conferring control, exemptions from the obligation to launch a takeover bid, employee information requirements and any applicable squeeze-out or sell-out procedures following a takeover bid, are governed by Luxembourg law.

Under this regime, a person who, alone or acting in concert, acquires voting securities representing 33.3% of the voting rights in a target company must launch a mandatory offer for the remaining shares at a fair price. In such cases, the bidder is required to prepare an offer document and submit it to the CSSF according to the procedure and modalities set out in the Takeover Law. The key threshold is the acquisition of 33.3% of the voting rights in the target, which triggers the obligation to launch a mandatory bid. The process is strictly determined by the Takeover Law. Voluntary offers, ie, offers falling outside of the scope of the mandatory bid, are subject to less regulation.

Funding

Under this framework, a bidder must ensure that it is able to satisfy in full any cash offered and must take appropriate measures to secure the implementation of the offer before the respective announcement of the bid. As a result, the offer document must also include information regarding the financing of the transaction. In practice, even though the legislation does not impose a formal “certain funds” requirement, bidders typically secure firm financing commitments in advance in order to demonstrate that the offer can be completed, in line with market practice in other EU countries.

Squeeze Out

The Takeover Law provides that, when as a result of an offer (mandatory or voluntary) addressed to all of the holders of voting securities of the target, the bidder holds voting securities representing not less than 95% of the share capital conferring voting rights to which the offer relates and 95% of the voting rights in the target, the bidder may require the holders of the remaining voting securities to sell those securities to the bidder. The price offered for such securities must be a “fair price”, to be determined in accordance with the requirements of the Takeover Law.

In addition to the squeeze-out mechanism provided for by the Takeover Law, an alternative squeeze-out mechanism is provided for by the law of 21 July 2012 on the squeeze-out and sell-out of securities of companies admitted or having been admitted to trading on a regulated market or which have been subject to a public offer.

Beyond the aspects discussed above, there are no other major considerations of particular relevance to acquisition finance transactions in Luxembourg.