The Luxembourg Reserved Alternative Investment Fund (RAIF), introduced by the Law of 23 July 2016, offers a versatile and efficient investment structure for sophisticated investors. Unlike other funds, the RAIF does not require direct supervision by Luxembourg’s financial authority, the CSSF. Instead, it is managed by an authorized Alternative Investment Fund Manager (AIFM), allowing for quicker establishment while benefiting from the robust regulatory framework provided by the EU’s Alternative Investment Fund Managers Directive (AIFMD). This regulatory structure ensures investor protection and legal compliance while maintaining flexibility.
Legal Forms of the RAIF
The RAIF’s structural flexibility allows investors to choose among different legal forms depending on their investment objectives and preferences. The following are the most common legal forms a RAIF can adopt:
- Fonds Commun de Placement (FCP): An unincorporated co-ownership structure without legal personality. This is typically used for collective investments, where investors hold undivided shares in the fund’s assets.
- Société d’Investissement à Capital Variable (SICAV): A variable capital investment company commonly used in Luxembourg’s fund structures. Its flexibility allows it to issue and redeem shares according to investor demand.
- Limited Partnerships (SCS and SCSp): These partnerships are highly favored for private equity and venture capital investments. They can be structured as fully regulated or unregulated entities, depending on the level of investor sophistication.
Each legal form offers various benefits regarding governance, liability, and taxation, allowing RAIFs to meet a wide range of investor requirements.
Tax Regime
One of the most appealing features of the RAIF is its advantageous tax regime, which can differ based on the legal form and investment strategy. Generally, a RAIF is subject to an annual subscription tax of 0.01% of its net assets if it follows the regime similar to a Specialized Investment Fund (SIF). However, if the RAIF elects to follow the venture capital model, akin to a Société d’Investissement en Capital à Risque (SICAR), it may be fully subject to corporate tax, with an exemption on capital gains and qualifying dividends.
In addition, RAIFs that are structured as limited partnerships (SCS or SCSp) can be fully tax-transparent, meaning they are not subject to corporate taxes in Luxembourg, but income is taxed at the investor level based on their respective jurisdictions.
RAIFs also benefit from the Luxembourg double tax treaty network, which can help reduce withholding taxes on income and capital gains generated abroad. This, coupled with Luxembourg’s favorable tax environment, provides substantial benefits for international investors seeking tax efficiency in their investments.
Risk Diversification and Regulatory Flexibility
RAIFs must generally adhere to the principle of risk diversification unless they restrict their investment strategy to risk capital. Risk diversification rules are loosely defined but generally follow guidelines provided by the CSSF for Specialized Investment Funds. Typically, no more than 30% of a RAIF’s gross assets can be invested in a single asset, unless exceptions apply (e.g., state-backed securities).
Furthermore, the RAIF offers substantial flexibility regarding its investment policies. It can be structured as an umbrella fund with multiple compartments, allowing various strategies to be pursued under a single legal entity. However, all compartments within the umbrella must adhere to the same tax regime chosen for the RAIF.
Types of Investments optimized by the Luxembourg RAIF
The RAIF’s versatility extends to the types of investments it can hold. As a multi-purpose investment vehicle, it is suitable for a wide range of asset classes, including:
- Private Equity and Venture Capital: The RAIF is an ideal structure for private equity investments, often using the limited partnership form to provide investors with flexibility regarding capital commitments and returns.
- Real Estate: Many RAIFs are designed to invest in real estate assets, taking advantage of Luxembourg’s favorable tax regime to reduce taxation on income and gains derived from property investments.
- Debt and Credit Funds: RAIFs can invest in a broad range of debt instruments, including syndicated loans, bonds, and other credit products. They are particularly suited to alternative lending and private credit strategies.
- Hedge Funds: The RAIF can be used to structure hedge funds, offering both open-ended and closed-ended strategies. With no direct regulatory oversight, hedge fund managers benefit from the flexibility to implement complex strategies.
- Infrastructure and Sustainable Investments: RAIFs are increasingly popular for infrastructure projects, particularly in sectors like renewable energy, utilities, and transportation. Given the growing focus on Environmental, Social, and Governance (ESG) criteria, RAIFs are frequently used to structure investments in sustainable energy and other socially responsible projects.
The RAIF as an Efficient Alternative
The RAIF has rapidly become one of Luxembourg’s most popular investment vehicles due to its unique combination of regulatory efficiency, tax benefits, and investment flexibility. It allows institutional and well-informed investors to benefit from the advantages of the AIFMD framework, without the delays caused by direct CSSF oversight. Investors can therefore deploy capital more quickly while still enjoying the protections of a regulated AIFM.
In terms of costs, setting up a RAIF is more efficient than a fully regulated fund, as it does not require prior approval from the CSSF. Additionally, the RAIF’s ability to adopt different legal forms and tax regimes makes it a highly adaptable vehicle for diverse investment strategies, ranging from private equity and venture capital to real estate and debt markets.
Luxembourg’s RAIF is an attractive, flexible, and efficient investment vehicle, particularly suited for institutional and sophisticated investors. With its broad range of legal forms, favorable tax regimes, and the ability to invest in a wide variety of assets, the RAIF is increasingly becoming the go-to structure for asset managers and investors alike. Whether you are looking to invest in private equity, real estate, infrastructure, or hedge funds, the RAIF offers a streamlined path to achieving your financial objectives, backed by the solid regulatory framework of Luxembourg’s AIFM law.
Damalion supports international investors to structure their investments throughout Luxembourg RAIF. Check out our RAIF guide. Finding a custody bank is among our facilitating service to support your success with the Luxembourg RAIF. Please contact your Damalion expert now.
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.
