How to Incorporate a RAIF: the Luxembourg Reserved Alternative Investment Fund - Damalion - Independent consulting firm.

On 28 July 2016, the new law of 23 July 2916 delineating the Reserved Alternative Investment Fund (RAIF) was published in Luxembourg’s Official Journal. This was implemented following the law’s adoption by the Luxembourg Parliament. The Reserved Alternative Investment Fund (RAIF) Law took effect three days after its official publication date.

The Reserved Alternative Investment Fund (RAIF) Law further strengthens the pool of investment tools in the Grand Duchy. It answers the crucial need to provide investors, domestic and international, with a beneficial alternative to other fund jurisdictions in Europe and other parts of the globe.

The law was enacted during the emergence of a rapidly changing regulatory landscape for alternative investment fund managers. The Reserved Alternative Investment Fund (RAIF) reflects the Grand Duchy’s shift away from double layer supervision, by allowing the creation of an alternative investment fund (AIF), including all the features of a regulated investment, but without needing any prior authorization from the Luxembourg Commission for the Supervision of the Financial Sector (CSSF). Instead, a Reserved Alternative Investment Fund (RAIF) will be indirectly supervised by an alternative investment fund manager (AIFM).

The Reserved Alternative Investment Fund (RAIF) is a welcome development for fund initiators looking to offer investors an investment product with the beneficial features of a specialized investment fund (SIF) or an investment capital with risk capital (SICAR) while also enjoying the benefits of a quick set up, light regulatory intervention, and flexibility to amen constitutive documents without the approval of a Commission for the Supervision of the Financial Sector (CSSF).

Reserved Alternative Investment Fund (RAIF) Background

The rationale for the legislative development that inspired Reserved Alternative Investment Fund (RAIF) is firmly rooted in the recent shift in the European Union’s regulatory focus from regulating the funds themselves to alternative investment fund managers.

Following the adoption of Directive 2011/61/EU on Alternative Investment Fund Managers Directive (AIFMD) into the national laws prevailing across EU member states, questions arose among stakeholders about the need for a double licensing to access non-retail investors through the pan-European passporting scheme, given that the Alternative Investment Fund Managers Directive (AIFMD) is not, in essence, a product regulation, and as such it was not made to directly regulate Alternative Investment Funds (AIFs).

Under the new Reserved Alternative Investment Fund (RAIF) Law, the Alternative Investment Fund Managers Directive (AIFMD) does not necessitate Alternative Investment Funds to be subject to any produce laws or direct regulatory supervision by authorities. This has inspired the development of a new generation of fully compliant, unregulated alternative investment funds (AIFs) which can be marketed across the EU, thanks to the licensing granted to the Alternative Investment Fund Manager.

In Luxembourg, the introduction of the Reserved Alternative Investment Fund (RAIF) Law bolsters the trend by providing a specific regulatory framework. as alternative investment funds will not require direct supervision by the Commission for the Supervision of the Financial Sector (CSSF) while actively benefiting from the Alternative Investment Fund Managers Directive (AIFMD) regulatory regime which allows managers of Reserved Alternative Investment Funds (RAIFs) direct access to investors across Europe utilizing the Alternative Investment Fund Manager passporting scheme.

Key Features of a Reserved Alternative Investment Fund

In accordance with the Reserved Alternative Investment Fund Law, which is similar to the Specialized Investment Fund to many of its facets), the Reserved Alternative Investment Fund will feature the following characteristics:

Scope and Eligible Investors

The Reserved Alternative Investment Fund (RAIF) regime is available to all diversified Luxembourg Alternative Investment Funds, are only reserved for well-informed investors, and whose constitutive documents provide there are subject to the Reserved Alternative Investment Fund (RAIF) Law.

Similar to a Specialized Investment Fund (SIF), a well-informed investor is defined as one or more of the following:

  • Institutional organizations
  • Professional investors
  • Other investors

All well-informed investors must confirm their status as well-informed investors in writing, invest a mininum of EUR 125,000, or have expertise, experience, and knowledge to appraise the contemplated investment verified by a credit institution, investment firm, Undertaking for Collective Investments for Transferrable Shares (UCITS) management firm, or an Alternative Investment Fund Manager.

Supervision

In contrast to Specialized Investment Fund (SIFs) and Investment Company in Risk Capital (SICAR), a Reserve Alternative Investment Fund (RAIF) is not subject to the approval of the Commission for the Supervision of the Financial Sector (CSSF) prior authorization or ongoing supervision.

Alternative Investment Fund Managers (AIFMs) may market the Reserved Alternative Investment Funds (RAIFs) as soon as the documentation has been put into plce and the external authortized Alternative Investment Fund Manager has been appointed and will ensure a speed to market that is unmatched by existing regulated alternative investment funds in Luxembourg.

Management

  1. Reserved Alternative Investment Funds can be managed by an external authorized fund manager who does not require to be an authorized alternative investment fund manager (AIFM) in Luxembourg.
  2. An alternative investment fund manager will be managing the Reserved Alternative Investment Fund in pursuant to the provisions of the Alternative Investment Fund Managers Directive (AIFMD).

Reserved Alternative Investment Fund (RAIF) Legal Forms

Like a Specialized Investment Fund, a Reserved Alternative Investment Fund may take the form of a Luxembourg common fund (FCP) or an investment company with variable capital (SICAV), or any other form, including an investment company with fixed capital. In the case of an investment company in risk capital (SICAR), a Reserved Alternative Investment Fund may take on the following legal forms:

  • Public Limited Liability Company (SA)
  • Private Limited Liability Company (SARL)
  • Corporate Partnership Limited by Shares (SCA)
  • Common Limited Partnership (SCS)
  • Special Limited Partnership (SCSp)
  • Cooperative Company set up as a public limited liability company (SCoSA)

Regardless of legal form, the minimum capital requirement is set at EUR 1.25 million, an amount which must be reaches by the Reserved Alternative Investment Fund within 12 months from its date of incorporation.

Flexible Structuring of Reserved Alternative Investment Fund

One of the characteristics that separate Reserved Alternative Funds (RAIFs) from other unregulated Alternative Investment Funds (AIFs) is that a Reserved Alternative Investment Fund (RAIF) may be structured as a multi-compartment vehicle or umbrella fund. In this set up, the sub-fund may feature its own category investors, investment policy, separate fees, distribution structure, and rules governing the issue and redemption of securities and interests, also called the ring-fencing approach.

A sub-fund may release a separate prospectus of offering document between compartments of the same Reserved Alternative Investment Fund umbrella, given certain conditions are met.

Setting up your Luxembourg RAIF

  1. A Reserved Alternative Investment Fund’s constitution must be recorded and verified by a notary public within five working days from its date of incorporation.
  2. A notary public must assess the legality of the constitution, the capacity to determine its founders, and the compliance with applicable rules pertaining to money laundering and financing of terrorism activities.
  3. Common Limited Partnerships (SCS) and Special Limited Partnerships (SCSp) are required to submit a notarized affidavit, which represents an addition administrative step in their incorporation.
  4. Within 15 days from the date of notarizing an affidavit, the note on the constitution of a Reserved Alternative Investment Fund (RAIF) must be filed before the Luxembourg Trade and Companies Register for publication purposes.
  5. Within 20 days from the date of the notarized affidavit, a Reserved Alternative Investment Fund must be entered into a separate list safeguarded by the Luxembourg Trade and Companies Register.

Depositary

Reserved Alternative Investment Funds must appoint a depositary which has a registered office or a branch based in Luxembourg.

Conversion

The Reserved Alternative Investment Fund (RAIF) Law allows for existing investment vehicles, be it regulated or unregulated, to convert into Reserved Alternative Investment Funds if certain conditions are met.

  1. Investors must approve the conversion and the entity must be Alternative Investment Fund Managers Directive compliant.
  2. Investment vehicles such as Part I Undertaking for Collective Investments, Specialized Investment Funds, or Investment Company in the Risk Capital must obtain Commission for the Supervision of the Financial Sector (CSSF) approval and amend the fund’s constitutive documents and the fund’s offering document.
  3. For unregulated structures, changes must be made to the limited partnership agreement.
  4. A non-Luxembourg entity may convert into a Reserved Alternative Investment Fund (RAIF) if it can be domiciled under the laws of its home country. Conversion may only be realized by way of a merger that can be made as contribution in kind or other mechanism.
  5. A Reserved Alternative Investment Fund may also be converted into a regulated investment company.

Information to Investors

  1. A Reserved Alternative Investment Fund is required to produce an offering document which must contain visible statements on its cover page that the fund is not subject to the supervision of the Commission for the Supervision of the Financial Sector (CSSF).
  2. Investor disclosure is a requirement under the Alternative Investment Fund Managers Directive (AIFMD) and made available to investors.
  3. A Reserved Alternative Investment Fund (RAIF) must submit an audited annual report for each financial year and must be available to investors.

Reserved Alternative Investment Fund Marketing

  1. A Reserved Alternative Investment Fund (RAIF) will benefit from the pan-European passporting scheme and made available to Alternative Investment Fund Managers. This allows them to market the Reserved Alternative Investment Fund (RAIF) to professional investors in the European Union.
  2. When marketing to investors outside the European Union, the marketing of a Reserved Alternative Investment Fund (RAIF) must comply with existing national placement rules for each jurisdiction.
  3. Close-ended Reserved Alternative Investment Fund (RAIF) are deemed to adhere to the Law of 10 July 2005 regarding prospectus for securities if it wishes to carry out public offering or admission to trading activities.

Reserved Alternative Investment Fund (RAIF) Taxation Regime

  1. Reserved Alternative Investment Fund (RAIF) is not subject to Luxembourg taxes, including wealth tax, income tax, and taxes on the income realized by the Reserved Alternative Investment Fund (RAIF).
  2. Reserved Alternative Investment Fund (RAIF) is subject to annual subscription tax of 0.01% calculated on total net assets of the Reserved Alternative Investment Fund (RAIF) valued at the end of each quarter.
  3. Optional regime similar to those applied to investment companies in risk capital (SICARs) may be applied to Reserved Alternative Investment Fund (RAIF) under the following conditions:
  1. A Reserved Alternative Investment Fund (RAIF) will need to disclose the objective is to exclusively invest  in risk capital.
  2. A Reserved Alternative Investment Fund (RAIF) is subject to provisions under the Reserved Alternative.

Investment Fund (RAIF) Law, which provides an alternative tax regime

  1. Reserved Alternative Investment Funds (RAIFs) engaged in risk capital will be subject to general corporation taxes in Luxembourg, including municipal business tax, corporate income tax, and solidarity surcharge.
  2. Income derived from securities held by a Reserved Alternative Investment Fund (RAIF), income from the sale, contribution, or liquidation will be fully exempt.
  3. Reserved Alternative Investment Funds (RAIFs) engaged in risk capital may benefit from the expensive network of double tax treaties contracted by Luxembourg with other countries.
  4. A Reserved Alternative Investment Fund (RAIF) structured as an umbrella fund will be subject to applicable tax treatment, as well as its sub-funds. This means it is impossible for certain sub-funds to be assessed with the subscription tax regime.

Damalion is a professional consulting firm with extensive experience in assisting investors and fund initiators in structuring a Reserved Alternative Investment Fund (RAIF) in Luxembourg. Utilizing our extensive network of professionals involved in the company and investment setup, and management activities, we ensure well-informed investors are provided with outstanding support from start to finish. Reach out to a Damalion expert today should you wish to learn more about our full suite of consulting services.

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.