Being the largest investment fund hub in Europe and the second largest in the world after the U.S, Luxembourg provides a wide range of investment fund structures capable of accommodating all sorts of needs from fund sponsors and well investors.
The introduction of the reserved alternative investment fund (RAIF) by the law of 23 July 2016 pertaining to reserved alternative investment funds (the RAIF Law) is another step towards boosting the attractiveness of the Luxembourg investment fund and asset management climate.
Overview of the Reserved Alternative Investment Fund
The RAIF is an investment fund that can invest in all kinds of assets. It qualifies as an alternative investment fund and is not subject to CSSF product authorization. The RAIF was introduced to enable fund sponsors to structure a type of alternative investment fund that incorporates the legal and tax features of the well-known “specialized investment funds (SIF)” and SICAR regimes but one that remains unregulated.
RAIFs are subject to the Luxembourg Law of 23 July 2016 (the RAIF Law).
Eligible investors
Investment in a RAIF is restricted to well-informed investors that are able to sufficiently assess the risks related to an investment in such a vehicle. These are classified as:
- professional investors,
- institutional investors, and
- investors who have verified in writing that they adhere to the “well-informed” investor status.
And who either invest a minimum of EUR 125,000 in the RAIF or have been evaluated by a credit institution, investment firm, or management company which authorizes the investor’s expertise, experience, and proficiency in sufficiently appraising an investment in the RAIF.
Legal form
The RAIF may be formed in the following forms:
- A fonds commun de placement (FCP): the FCP has no legal personality and must be managed by a Luxembourg management company.
- A société d’investissement à capital variable (SICAV) or société d’investissement à capital fixe (SICAF): the creation of such a corporate entity requires the drafting of instruments of incorporation.
These legal forms may be set up as a single fund or as an umbrella structure with an unlimited number of compartments.
Supervision
The RAIF is itself not subject to authorization by the Commission de Surveillance du Secteur Financier (CSSF). But the RAIF must be managed by an authorized external alternative investment fund manager (AIFM), the CSSF is informed about the RAIF’s activities through its manager which is subject to formal reporting requirements.
Capital
The net assets of a RAIF must be at least EUR 1.250.000, and this minimum must be attained within a period of twelve months following its authorization.
Disclosure requirements
A RAIF must formulate a prospectus – a PRIIP Key Information Document (KID) if retail investors can make investments and a yearly report. There is no commitment to prepare a semi-annual report.
Appointment of an AIFM
RAIFs are obliged to assign an authorized external AIFM, implying that they cannot be internally managed. The AIFM can be in Luxembourg, in another EU Member State, or in a third country. If the RAIF is managed by a management company, it can be assigned as AIFM.
Marketing
A RAIF can be marketed to professional and eligible investors within the EU through a regulator-to-regulator notification regime.
Risk diversification
A RAIF is subject to obligatory risk-spreading, meaning that:
- A RAIF may not invest more than 30% of its assets in securities of the same type administered by the same issuer.
- Short sales may not result in a RAIF holding a short position in securities of the same type issued by the same body, which represents over 30% of the assets.
- Where financial derivative instruments are invested, a RAIF must ensure a similar spread of risk by a reasonable diversification of the underlying assets. With the same purpose, the counterparty risk in an OTC (over-the-counter) transaction must be restricted depending on the quality and the qualification of the counterparty.
The risk diversification rules do not apply to any RAIF that has opted for the SICAR tax regime and is accordingly restricted to investing in risk capital.
Default tax regime
The tax regime related to RAIFs mirrors the Specialized investment fund regime. This indicates that the RAIF will only be subject, at fund level, to a yearly subscription tax charged at a rate of 0.01% of its net assets. Depending on the investment assets, some privileges from subscription tax apply, in order to prevent duplication of this tax.
Irrespective of the legal form assigned for the RAIF, it is not subject to the following tax:
- corporate income tax,
- municipal business tax, and
- net wealth tax,
Also, distributions of profits by the RAIF do not give rise to a withholding tax.
VAT
Management services provided to the RAIF are by principle subject to VAT exemptions in Luxembourg.
To setup your Reserved Alternative Investment Fund in Luxembourg, let’s go ahead and contact your Damalion experts today.
