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Tax Regime of Luxembourg Reserved Alternative Investment Fund (RAIF) 

by | May 10, 2022 | Tax

Luxembourg Reserved Alternative Investment Fund (RAIF) Tax Regime

On 14 July 2016, the Parliament of Luxembourg approved Bill of Law no. 6929 introducing the Reserved Alternative Investment Fund (RAIF) which aims to revolutionize the fund landscape in the Grand Duchy. This new regime somewhat replicates the applicable regime to Specialized Investment Fund (SIF) with an attractive tax regime, but does not involve direct supervision by the Commission for the Supervision of the Financial Sector (CSSF). This was developed for the structuring of alternative investment funds (AIFs) that appoint a duly authorized alternative investment fund manager (AIFM). 

  • The Reserved Alternative Investment Fund (RAIF) is an innovative investment tool as it offers various structuring features, including segregated compartments available to non-regulated funds. It’s an excellent solution that helps alternative investment fund managers (AIFMs) avoid double taxation layer of regulations. 
  • The Reserved Alternative Investment Fun (RAIF) structure is an excellent solution for duly authorized investment fund managers, regardless of whether a fun was established in Luxembourg or in another EU Member State. 
  • Most importantly, the Reserved Alternative Investment Fund (RAIF) is adjusted to complement the new regulatory focus, which has shifted its focus from product supervision to management supervision. 
  • Under the Reserved Alternative Investment Fund (RAIF), all alternative investment funds will be under the direct supervision through their respective authorized alternative investment fund manager (AIFM) to set up themselves as regulated products (Part II UCIs, SIFs, or SICARs) or unregulated products (SCSps or RAIFs).
  • Adopting the Reserved Alternative Investment Fund (RAIF) improves the appealing quality of Luxembourg as a jurisdiction for the establishment of Alternative Investment Funds (AIFs) by extending the range of investment vehicles available to foreign investors. 

Reserved Alternative Investment Fund (RAIF) Tax Regime

The Reserved Alternative Investment Fund (RAIF) is subject to a dual tax regime, including:

I. General Tax Regime

  • Reserved Alternative Investment Funds (RAIFs) are subject to the same tax regime as Specialized Investment Vehicles (SIFs).
  • Under the general tax regime, the Reserved Alternative Investment Fund (RAIF) is exempt from corporate income tax and other taxes in Luxembourg, with the exclusion of subscription tax levies on their net assets at a rate of 0.01%
  • Subscription tax is applicable to Reserved Alternative Investment Fund (RAIF) established as a Limited Partnership (SCS) and Special Limited Partnership (SCSp). 
  • Reserved Alternative Investment Funds (RAIFs) are exempt from subscription tax in the following cases:

A- If the assets are invested in other Luxembourg Undertakings for Collective Investments (UCIs), Specialized 

Investment Funds (SIFs), and Reserved Alternative Investment Funds (RAIFs), given that are already assessed 

with subscription tax. 

B- If the sole objective of a Reserved Alternative Investment Fund (RAIF) is collective investment in money market 

instruments and placement of deposits in credit institutions. 

C- If the Reserved Alternative Investment Fund (RAIF) is investing in pension pooling fund vehicles. 

D- If the Reserved Alternative Investment Fund (RAIF) is investing in micro-financing institutions.

II. Optional Tax Regime 

  • This is meant for Reserved Alternative Investment Funds (RAIFs) investing in risk capital Reserved Alternative Investment Funds (RAIFs) except for common investment fund. 
  • Companies investing in risk capital are entitled to a special tax regime, that which is identical to those applicable to SICARs, which makes exempt from subscription tax. 
  • All Reserved Alternative Investment Funds (RAIFs) in the form of a public limited liability company (SA), partnership limited by shares (SCA), and private limited liability company (SARL) that chose to be under a special tax regime will be fully taxable. This means that they can gain access to double taxation treaties and may be exempt from their tax base, with all income and capital gains derived from securities. 
  • All income generated by cash pending investments in risk capital are exempted, provided cash is invested in risk capital within a period of 12 months. 
  • Reserved Alternative Investment Funds (RAIFs) that choose to be under a special tax regime will be exempt from net wealth tax, with the exception of a minimum net wealth tax applicable fully taxable Luxembourg companies since 1 January 2016. 
  • Minimum amount of net wealth tax to be paid is EUR3,210 for Reserved Alternative Investment Funds (RAIFs) holding fixed financial assets, cash, and securities. 
  • Reserved Alternative Investment Funds (RAIFs) under the form of a limited partnership (SCS) and special limited partnership (SCSp) may opt to be under a special tax regime will be fully tax-transparent and assessed with direct taxes in Luxembourg. 
  • For a limited partnership (SCS) or special limited partnership (SCSp) structure to benefit from the optinal tax regime, constitution of documents for a Reserved Alternative Investment Fund (RAIF) must include the following meet the following criteria. 

A- It’s sole purpose is investment in risk capital. 

B- It is subject to Article 48 of the RAIF Law, which sets out the special tax regime.

Under the Reserved Alternative Investment Fund (RAIF) Act, the concept of risk capital is not clearly defined. However, the government suggests the bill of law clarify that reference should be made to the guidelines as per Commission for the Supervision of the Financial Sector (CSSF) in its 06/241 circular of 5 April 2006 on the concept of risk capital applicable to SICARs. 

  • In the case of umbrella Reserved Alternative Investment Funds (RAIFs), the election of the special tax regime must be made at the RAIF level as a whole. 
  • Keeping this in mind, it is impossible to have, within the same umbrella, certain compartments that are subject to the general tax regime and others subject to the special tax regime. 
  • The auditors of a Reserved Alternative Investment Fund (RAIF) that chose the special tax regime must submit a report at the end of each financial year, certifying that a Reserved Alternative Investment Fund (RAIF) has invested in risk capital over a given period. 
  • The financial report must be communicated to the Luxembourg direct tax administration. 

Reserved Alternative Investment Fund Risk Spreading Principle

  • All Reserved Alternative Investment Funds (RAIFs) must adhere to the risk-spreading principle, unless they exclusively invest in risk capital and have opted to be under special tax treatment. 
  • A Reserved Alternative Investment Fund (RAIF)  does not provide any strict guidelines concerning minimum level of diversification that must be maintained in its portfolio. 
  • All Reserved Alternative Investment Funds (RAIFs) must refer to the guidelines provided by the Commission for the Supervision of the Financial Sector (CSSF) in its 07/309 circular on risk spreading in the context of Specialized Investment Funds (SIFs). 
  • Individual Reserved Alternative Investment Funds (RAIFs)  and its sub-funds must not invest more than 30% of its gross assets in a single asset. 
  • The 30% restriction is not applicable to securities investments or those guaranteed by an OECD Member State or local authorities. 
  • This limitation is also waved for collective investment schemes subject to risk diversification requirements that are applicable to that of Reserved Alternative Investment Funds (RAIFs) or its sub-funds. 
  • Reserved Alternative Investment Funds (RAIFs) and individual sub-funds can invest in infrastructure assets from a relaxed risk diversification requirement. An investment vehicle is considered sufficiently diversified if they have at least two investments with no single investment representing more than 75% of gross assets. 
  • A Reserved Alternative Investment Fund (RAIF) will greatly benefit from an initial ramp-up period to comply with the above mentioned risk diversification rules.

Setting up an investment vehicle such as a Luxembourg RAIF can be made simple and straightforward with the help of our experts at Damalion. As a premier business consulting firm, we will help save you time and money with our skilled experts with you at every turn. While establishing your company in Luxembourg presents many challenges, we will prepare you in putting your best foot forward with expert advice from people with the experience and expertise in RAIF formation. Damalion is your right choice. Our team consists of a global service network, we have a team of service providers, including lawyers, consultants, and accountants with extensive knowledge in providing company formation assistance, bank account opening, bookkeeping, accounting, management, and taxation advice, just to name a few. We will be your reliable partner in your investment journey in Luxembourg, so you can grow your business globally. Get in touch with a Damalion expert today, so we can get to know you and your needs better. 

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.