Setting up a Luxembourg Reserved Alternative Investment Fund (RAIF)
Legal framework : Reserved Alternative Investment Fund (“Fonds d’Investissement Alternatif réservé in French”)
Following the European Union (EU) regulation 2011/61/UE1, the European investment fund sector saw a critical new set of rules applicable to alternative investment fund managers (AIFM) a few years ago.
This new regulatory framework attempts to govern AIFMs, but it also indirectly influences alternative investment funds (AIFs) by putting duties on them.
As a result, Luxembourg-regulated AIFs are subject to two layers of supervision by supervisory and regulatory authorities:
- The first layer is directly supervised by the Luxembourg financial sector’s supervisory body (Commission de Surveillance du Secteur Financier, or CSSF), which oversees, among other things, Luxembourg-regulated investment funds.
- Second layer: via the applicable AIFMs’ regulatory authorities.
The creation of the reserved alternative investment fund (RAIF) arose from the observation that a double layer of authorisation and supervision provides more excellent investor protection, which may not be necessary for experienced investors seeking speed, cost reduction, and flexibility when selecting their investment platform.
To accommodate such an initiator, the Luxembourg parliament passed the legislation on reserved alternative investment funds (the RAIF Law) on July 23, 2016, establishing a new vehicle that meets the needs of a particular sort of investor without being overseen by the CSSF.
The RAIF is not subject to CSSF monitoring per se and does not need its permission, which is the regime’s cornerstone.
LAUNCH A RESERVED ALTERNATIVE INVESTMENT FUND
● Registration and Establishment
According to the RAIF Law, the creation of a RAIF shall be attested by a notarial deed within 5 (five) business days of such establishment. The latter must then be recorded in the Luxembourg Trade and Companies Register (Registre de Commerce et des Sociétés, the RCS or Luxembourg Business Register – LBR-) for publishing in the Luxembourg central electronic platform of official publication (Recueil Électronique des Sociétés et Associations, the RESA).
A RAIF must also be registered on a list maintained by the Luxembourg RCS within 20 (twenty) days following the notarial deed. The Grand-Ducal Regulation of 1st August 2016 modifying the Grand-Ducal Regulation of 23rd January 2003 implementing the 19th December 2002 on the RCS and the accounting and annual accounts of enterprises, as amended, contains further information concerning information to be disclosed in the LBR.
The stakeholders of the Reserved Alternative Investment Fund (RAIF)
● Legal types of forms
A RAIF may be established as a common fund (fonds commun de placement – FCP) or as a variable share capital investment company (société d’investissement à capital variable – SICAV). The RAIF Law also allows the RAIF’s initiator to choose an investment company with fixed share capital (société d’investissement à capital fixe – SICAF).
The most often used legal forms in Luxembourg (i.e. the FCP and the SICAV).
⦁ FCP
An FCP is a contractual structure with no legal personality that a management firm must handle.
Investors in FCP purchase units that represent a piece of the FCP. Their obligation is restricted to the amount for which they have paid.
The management rules constitute the FCP’s foundation document. They govern the connection between the management firm and the investors and the latter’s rights and duties.
Due to the FCP’s lack of legal identity, all decisions concerning its operations are taken by the management company on its behalf.
In response to questions over whether Luxembourg management firms may manage a RAIF, the Luxembourg legislation of July 16, 2019, stated that a RAIF set up as an FCP can be managed by Luxembourg management businesses authorised under chapters 15, 16, or 18 of the UCI Law.
The primary legislation also made it possible to convert a RAIF as an FCP into a RAIF in the form of a SICAV.
In contrast to the SICAV, investors in an FCP do not have voting rights unless the management laws allow them.
⦁ SICAV
A SICAV is a corporation with its own legal identity from a corporate aspect.
A RAIF-SICAV can be formed as a public limited liability company (société anonyme), a corporate partnership limited by shares (société en commandite par actions), a common limited partnership (société en commandite simple), a special limited partnership (société en commandite spéciale), a private limited liability company (société à responsabilité limitée), or a cooperative company organised as a public limited liability company (société cooperative)
A RAIF-SICAV is also controlled by the Law of Commercial Companies of August 10, 1915, as modified (the 1915 Law), subject to any derogations allowed for in the RAIF Law. In line with the RAIF Law’s reasoning, it has several provisions that deviate from the 1915 Law, providing the freedom required for the RAIF and handling the SICAV’s specificities.
The distinguishing feature of a RAIF founded as a SICAV over a SICAF is the variability of its share capital, which is always equal to the company’s net asset value. As a result, without any corporate action and the necessity for the SICAV to declare the variation of its share capital in any formal legal notice and publication, the share capital automatically fluctuates based on the number of subscriptions and redemptions made.
⦁ Sub-funds
The RAIF Law allows for the incorporation of various sub-funds into a RAIF. The sub-fund establishment may be cost-effective and add to the RAIF’s overall flexibility.
Each sub-fund corresponds to a unique portion of the RAIF’s assets and liabilities. As a result, unless otherwise indicated in the RAIF’s constitutive papers, the rights and duties of investors and creditors relating to a certain sub-fund are confined to the assets of that sub-fund.
⦁ Cross-investments
The RAIF Law permits cross-investments in a RAIF, which means that a sub-fund may invest in another sub-fund of the same RAIF under specific conditions.
It should be highlighted in this regard that the RAIF Law does not ban multiple charging of management fees or master-feeder arrangements within the same RAIF.
This option of cross-investment and the associated requirements are not needed to be stated in the RAIF’s articles of incorporation but only in its issuing document.
⦁ Classes
It is possible to construct several classes of shares, units, or partnership interests inside a RAIF or any of its sub-funds. Such classes may have distinct features, particularly fees, currency, and distribution strategy.
Umbrella and sub-funds
Regardless of the legal structure selected, a RAIF may be structured as an umbrella structure with one or more compartments, each with its portfolio of assets and liabilities. This is a first for an unregulated fund structure under Luxembourg legislation since before, only Luxembourg-regulated funds such as SIFs, SICARs, or Part II UCIs could be founded with several sub-funds. The sub-fund specifications in the RAIF’s issuing document should lay out each respective sub-investment fund’s policy and operating terms (issue/redemption of securities/interests rules, distribution rules, fee structure; eligible investors, etc. these terms may differ from one another).
The liquidation of one sub-fund does not result in the closure of the umbrella structure as a whole (unless no other active sub-fund remains). Creditors’ rights to a given compartment will be confined to that compartment’s assets unless the RAIF’s entire articles stipulate otherwise. Cross-investments across sub-funds will also be permitted under certain circumstances.
Formalities to register a Luxembourg RAIF
Processes to establish a RAIF are minimised, although a public notary will be required.
The articles of Association for RAIFs registered as a SICAV/F in the form of an S.A., S.à r.l., or a notarial deed must approve S.C.A. In all other cases, such as when the RAIF is founded as an FCP, an SCS, or an SCSp, a notarial document verifying that the entity has been lawfully constituted must be set up within five business days after the RAIF’s establishment.
The creation of the RAIF must be registered with the Luxembourg Register of Commerce and Corporations (RCS) for it to be published in the RESA (Recueil Electronique des Sociétés et Organisations), the official electronic platform for central publishing of companies and associations. The name of the external AIFM selected to run the RAIF will be included in the publication. Within twenty business days of signing the notarial deed, the RAIF will also be registered on an official RAIF list held by the LBR (RCS).
● The Investors
The RAIF Law requires that shares, units, or partnership interests in a RAIF be retained for well-informed investors (investisseurs avertis).
The term “well-informed investor” refers to the following categories:
- an institutional investor;
- any experienced investor; or
- any other investor who has indicated in writing that they are a well-informed investor and:
- who makes a RAIF investment of at least EUR 125,000; or
- who has undergone an evaluation by an appropriate credit institution, investment firm, management business, or an approved AIFM, verifying their skill, experience, and knowledge in correctly analysing an investment in the RAIF.
These conditions do not apply to executives or other persons who administrate a RAIF.
It is crucial to highlight that the idea of well-informed investors, which is unique to Luxembourg, does not exclude the possibility of having retail individuals as investors in a RAIF within the meaning of the relevant European rules. As a result, in the presence of retail investors, the rules of the European PRIIPs Regulation may apply.
A RAIF must have adequate resources to guarantee that it complies with eligibility standards about the investor aforementioned.
● The Financial Investments
The assets of a RAIF may reflect the legislator’s concession of freedom to the RAIF.
Unless a RAIF’s only aim is the collective investment in risk capital (as mentioned further below), it may invest in any form of asset to disperse investment risk. The legislator specifies that the RAIF and its representatives may be guided by the risk-spreading principle included in CSSF Circular 07/309, which is relevant to the SIF since the RAIF Law does not offer information concerning the notion of risk-spreading. This concept states that a SIF may not invest more than 30% of its assets or obligations in securities of the same kind issued by the issuer.
The governing body will ensure that the risk-spreading regulation is followed.
⦁ AIFM
Internal versus External
While the AIFM Law allows an AIF to have either an internal or external AIFM, the RAIF Law stipulates that a RAIF is an AIF that must be managed externally by an approved AIFM alone.
AIFM third-party
A third-party AIFM is a service provider authorised as an AIFM and provides services in that capacity. This option to select a third-party AIFM eliminates the need to establish one’s AIFM, saving time and money.
The AIFM may be appointed by the RAIF or on behalf of the RAIF. The AIFM must, at the very least, be in charge of asset portfolio management and RAIF risk management.
For the time being, the AIFM may be founded in Luxembourg or any other European Economic Area (EEA) member state.
When the so-called “AIFMD passport” becomes accessible to certain third-country AIFMs, i.e. those headquartered outside the EEA, they will be allowed to operate as an AIFM of a RAIF.
The EU Commission is actively working on extending the AIFMD passport to AIFMs from other countries.
⦁ Central administration
The RAIF Law stipulates that the central administration be based in Luxembourg. This implies that some operations must be undertaken in Luxembourg, including the computation of the net asset value and the issuance and redemption of securities.
However, it does not preclude the RAIF from delegating these administrative and accounting tasks to a third party based in Luxembourg.
In case, some responsibilities are delegated outside of Luxembourg, the final decision must be made in Luxembourg (e.g. the calculation of the net asset value of a RAIF can be performed out of the European Economic Area ( EEA ), but it will have to be validated by the central administration agent located in Luxembourg). Any delegation must be evaluated individually and validated with the CSSF.
Furthermore, it is vital to note that a RAIF may seek asset management support from investment advisors based in other countries.
⦁ Depositary
A depositary should be entrusted with cash monitoring, asset safeguarding, and RAIF supervision in line with the terms of the AIFM Law.
Such a depositary must have a registered office in Luxembourg; or the depositary must create a branch in Luxembourg in case its registered office is in the EU.
It must be a credit institution or an investment business as defined by the Luxembourg legislation on the financial sector of 5 April 1993, as modified. If an investment business meets the standards outlined in the AIFM Law, it may also function as a depositary.
Furthermore, the RAIF Law authorises professional depositaries of assets other than financial instruments (as specified in the AIFM Law) to function as RAIF depositaries.
This will only be permissible for a RAIF that has no redeemable rights for 5 (five) years after the first investments and that either:
- does not often invest in assets that must be held in custody under the AIFM Law; or
- Generally invests in issuers or non-listed firms to gain control of such entities following AIFM Law.
The AIFM Law specifies the additional objectives and liabilities of a RAIF depositary.
⦁ Auditor
The RAIF Law requires an independent auditor (réviseur d’entreprises agréé, the Auditor) to assess a RAIF’s yearly accounts.
The Auditor must show sufficient professional experience to execute this role by demonstrating that they have previously conducted similar audit tasks for UCIs, SIFs, or SICARs.
The RAIF appoints and compensates the Auditor.
Marketing and passport
The RAIF benefits from the so-called AIFMD passport if an authorised EU AIFM manages it or a third country AIFM authorised under chapter II of the EU directive 2011/61/EU, subject to the application of article 66, paragraph 3, of the EU directive 2011/61/EU where the management of the RAIF is performed by an AIFM established in a third country.
Following a simple notice to the applicable regulatory body, a RAIF may offer its units, shares, or partnership interests on a cross-border basis to professional investors (as defined in the AIFMD) throughout the EU. This makes it simple to market within the EU.
Tax structure
⦁ General regime
In Luxembourg, unlike Specialized Investment Funds (SIFs), the RAIF is not subject to income or wealth tax (impôt sur la fortune). A RAIF will not be taxed if it receives income or makes capital gains.
The RAIF, on the other hand, is subject to an annual subscription tax (taxe d’abonnement) of 0.01% based on the RAIF’s total net assets evaluated at the end of each quarter.
The RAIF Law includes several exclusions from the yearly subscription tax (taxe d’abonnement).
⦁ Option for the SICAR regime
The tax scheme outlined above does not apply to a RAIF, which states in its founding documents:
- that its only goal is to invest its cash in risk capital; and
- that it is subject to the RAIF Law’s special tax regulations governing this other tax regime.
Here, the RAIF will be subject to the same tax system as SICAR and will not be required to follow the risk-spreading concept.
In addition, the RAIF’s auditor should provide an annual report declaring that the RAIF complied with its risk capital investment policy during the previous fiscal year. This report must be sent to the direct Tax Administration.
Any RAIF subject to this tax system is subject to the corporation and municipal business tax at a combined average rate of 24.94 per cent (the financial year 2019).
Income received from securities in risk capital owned by a RAIF, on the other hand, is free from Luxembourg income tax. Similarly, any income from selling, donating, or liquidating such securities is entirely deductible.
Advantages
● About SIF and SICAR
The RAIF’s characteristics are similar to those of the SIF and SICAR, but the CSSF does not supervise it. This lack of oversight means:
- Because there is just one layer of supervision at the AIFM level, there are fewer regulatory limitations at the RAIF level.
- Time to market and set-up expenses are decreased, not just from the setup but also when additional sub-funds are launched; and
- Amendments to the RAIF document do not need to be authorised by the CSSF in advance.
● About alternative Investment Fund (AIF) with AIFM
According to the RAIF Law, a RAIF may be formed with numerous compartments, each compartment corresponding to a different portion of the RAIF’s assets and liabilities. Still, an unregulated AIF cannot be structured with multiple compartments.
Another benefit of the RAIF is its appealing neutral tax regime. Indeed, its tax processing is less costly to structure than the one applicable to an unregulated investment fund.
Why Luxembourg
Luxembourg is a hospitable corporate jurisdiction that pays special attention to the financial industry’s requirements to remain one of the top financial centres in the European Union and the world’s second-biggest investment fund location.
As a result, Luxembourg created this highly flexible, time-to-market investment platform to meet the demands of initiators and round out the large array of Luxembourg options in this field.
We will continue to be accessible for any information you may need in this regard and accompany you throughout your business endeavours.
To setup your Luxembourg Reserved Alternative Investment Fund in Luxembourg, please contact your Damalion expert now.
