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Luxembourg RAIF Vs Luxembourg SICAR: What are the Differences?

by | Apr 7, 2022 | Investment funds

Luxembourg SICAR VS Luxembourg RAIF: What are the differences?

Understanding the differences between the reserved alternative investment funds said RAIF and the Luxembourg SICAR (société d’investissement à capital variable) helps investors make the right choice of the most relevant investment vehicle to structure their investments in Europe.

In recent years, Luxembourg has excelled in developing an attractive and robust alternative investment fund industry. As of June 2021, the net assets under management in Luxembourg investment funds amounted to EUR 5.49 billion, continuously growing by an impressive 16.10% year-on-year. While this data only displays regulated funds, as the majority of alternative funds in the Grand Duchy are unregulated, is inarguably a success to say the least. Truly, this feat along makes Luxembourg in a league of its own. Being the world’s second largest fund center, following the United States, the country entices more initiators from jurisdictions all over the globe. 

Luxembourg is renowned as a prime mover in the implementation of the European fund regulation since 1988, including the European Union’s Alternative Investment Fund Managers Directive (AIFMD). Additionally, the country played a crucial tole in launching markets for international fund distribution due to its stellar track record of developing investment products that allow firms to establish their business successfully in the Grand Duchy. 

Characterized by a highly-regulatory framework, with a continuously evolving legislation adapting to the needs of the market, Luxembourg is a premier destination for foreign initiators looking to open an investment vehicle in the European Union. 

An Overview on the Alternative Investment Fund Managers Directive

Implemented in 2013, the Alternative Investment Fund Managers Directive (AIFMD), developed the country’s first regulated environment specifically created for alternative investment funds worldwide. The Alternative Investment Fund Managers Directive (AIFMD) changed the way the global alternative industry runs.

Luxembourg’s main regulating authority, the Commission for the Supervision of the Financial Sector (CSSF) grew its expertise in alternative investment funds (AIFs) and alternative strategies, in a strong competitive position, contributing to its strength and pivotal role as a prime platform for alternative investment funds from various jurisdictions. Additionally, the Commission for the Supervision of the Financial Sector (CSSF) is internationally recognized, with the aim to harmonize the struct regulatory and supervisory framework for all activities of alternative investment fund managers (AIFMs) located in the European Union. 

Under the Alternative Investment Fund Managers Directive (AIFMD), initiators benefitted from a passport that provides management services to alternative investment funds to market, allowing them to market to well-informed investors in the EU on the basis of a single authorization. 

Reserved Alternative Investment Fund (RAIF) in Luxembourg 

  • Introduced by the Law of 23 July 2016 (RAIF Law)
  • The Reserved Alternative Investment Fund (RAIF) regime was implemented to allow fund managers to structure alternative investment funds that combine the legal and tax features of a Specialized Investment Fund (SIF) and an Investment Company in Risk Capital but under an unregulated structure. 
  • It aims to alleviate the planning uncertainly that typically develops during fund launches. 
  • Reserved Alternative Investment Fund (RAIF) eliminates the need for prior authorization and continuous oversight of the Commission for the Supervision of the Financial Sector (CSSF)

Key Features of a Reserved Alternative Investment Fund (RAIF) 

Capital

  • Net assets must reach EUR 1.25 million within 12 months following its formation. 

Supervision 

  • Is not subject to the approval of the Commission for the Supervision of the Financial Sector (CSSF). 
  • Managed by an external Alternative Investment Fund Manager (AIFM). Activities must be approved by the Commission for the Supervision of the Financial Sector (CSSF). 

Investment Restrictions

  • May invest in any asset class and investment policy strategy.

Disclosure Requirements

  • Must prepare a prospectus, a  packaged retailed and insurance-based investment products (PRIIP) Key Information Document (KID) if the vehicle will be open to retail-type investors and an annual report. 
  • Not required to prepare and submit a semi-annual report. 

Key Limitations

  • Reserved Alternative Investment Funds are deemed to appoint an external Alternative  Investment Fund Manager, which can be established in Luxembourg, in another European Union Member State, or in a non European Union country. 

Risk Diversification

  1. A Reserved Alternative Investment Fund cannot invest more than 30% of its assets in securities of the same kind issued by the same entity. 
  2. Shore sales may not leading to a Reserved Alternative Investment Fund holding a short position in securities of the same kind and issued by the same legal entity, representing more than 30% of its assets. 
  3. Where financial derivative instruments were invested, a Reserved Alternative Investment Fund must establish comparable spread of risk by an appropriate diversification of an underlying asset. 

The risk diversification provisions enumerated above are not applicable to Reserved Alternative Investment Funds that opted for the tax regime for Investment Company in Risk Capital, and therefore restricted to investing in risk capital. 

Eligible Investors

  • Well-informed investors with the capability to assess all risks associated with operating such an investment vehicle. 
  • Taxation of Reserved Alternative Investment Funds (RAIFs) are limited to well-informed investors with the ability to assess the accompany risks investing in such a vehicle. 

Investment Company in Risk Capital (SICAR) in Luxembourg 

  • Luxembourg Investment Company in Risk Capital (SICAR) was designed for investments in venture capital and private equity. 
  • Primarily developed to promote raising funds from investors that understand the heightened risks that accompanies investments in risk capital. This is applicable in cases of lower liquidity, lower credit quality, and higher price volatility, with expectations of a better return. 
  • Governed by the law of 15 June 2004 (SICAR Law) and divided into two parts: (1) General provisions applicable to all investment companies in risk capital (2) and specific provisions applicable to investment companies in risk capital qualifying as alternative investment funds (AIFs), which automatically makes them under the supervision and management of an alternative investment fund manager (AIFM).

Taxation 

  • All investment company in risk capital (SICAR) are fully taxable entities if established as a company, but exempt from income tax and capital gains derived from risk capital securities, and eligible to the benefits of double taxation treaties.

Marketing

  • Investment companies in risk capital that qualify as alternative investment funds (AIFs) and managed by a European union authorized Alternative Investment Fund Manager (AIFM) can benefit from passport allowing them to market investment companies in risk capital shares or partnership interests to well-informed investors within the European Union through a regulator notification regime. 
  • Investment companies in risk capital (SICARs) that qualify as alternative investment funds (AIFs) but do not benefit from the AIFM Law are deemed to appoint an alternative investment fund manager. 

Eligible Assets

  • Investment companies in risk capital (SICARs) are deemed to invest in capital. 
  • Risk capital is characterized by the following elements, including (1) high risk associated with relevant assets, (2) intention to develop target entities, and an (3) exit strategy. 
  • May only marginally hold financial derivative instruments on an exceptional basis. 

Eligible Investors

  • Well-informed investors with the capacity to assess risks associated with in investment in such a vehicle. 

Key Features

  • Investment Company in Risk Capital is constituted as a corporate entity with a fixed or variable capital. 
  • It must be established as a stand-alone fund or an umbrella structure with multiple compartments or sub-funds. 

Capital

  • Share capital, including premiums, must be at EUR 1 million within 12 months following its establishment and approval by the Commission for the Supervision of the Financial Sector (CSSF). 

Investment Limitations 

  • The Investment Company in Risk Capital Law (SICAR Law) does not contain investment restrictions and does not impose any borrowing limits. 
  • It is not required to comply with risk diversification rules. 

Disclosure Documents

  • An investment company in risk capital must prepare a prospectus, a  packaged retailed and insurance-based investment products (PRIIP) Key Information Document (KID) if open for retail investors. 
  • Annual reporting is a requirement. 
  • Not required to prepared a semi-annual report. 

Damalion consists of an extensive global service network of professionals engaged in full legal, regulatory, accounting, and taxation services. We have the knowledge and experience of the dynamics of alternative investment funds in Luxembourg. Our team excels in cross-border company and fund formation. We work tirelessly across all premier investment jurisdictions, with Luxembourg being one of them. Damalion works closely with clients and colleagues in various industries, giving us a competitive edge in the alternative investment fund market. Our knowledge of the Luxembourg market means we can fully customize transactions based on tax and marketing advantages. To learn more, reach out to a Damalion expert today. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.