Reserved Alternative Investment Fund (RAIF) FAQs - Damalion - Independent consulting firm.

The introduction of the Reserved Alternative Investment Fund (RAIF) regime on 23 July 2016 is yet another huge step towards boosting the attractiveness of Luxembourg as an investment fund and asset management jurisdiction, as per Directive 2011/61/EU relating to the scope of the alternative investment fund managers directive (AIFMD).

1. Is the Reserved Alternative Investment Fund (RAIF) similar to the Specialized Investment Fund (SIF)?

While the Reserved Alternative Investment Fund (RAIF) is similar to the Specialized Investment Fund (SIF) regime, the former does not require direct supervision by the Luxembourg Commission for the Supervision of the Financial Sector (CSSF). Instead, the Reserved Alternative Investment Fund (RAIF) regime is dedicated to the incorporation of alternative investment funds (AIFs) that appoint a duly authorised alternative investment fund manager (AIFM) instead.

The Reserved Alternative Investment Fund (RAIF)  is a revolutionary investment vehicle in the Luxembourg investment landscape due to its distinct structuring features that include sub-funds of segregated compartments that are made available to Luxembourg non-regulated funds.

2. What are the advantages of choosing Reserved Alternative Investment Fund over traditional fund structures in Luxembourg?

  • The Reserved Alternative Investment Fund (RAIF) offers other structuring solutions to initiators who are setting up alternative investment funds (AIFs) to effectively avoid a double layer of regulation.
  • Regardless of whether a Reserved Alternative Investment Fund is set up in Luxembourg or at another EU member nation, it will be supervised and managed by an alternative investment fund manager (AIFM)
  • A Reserved Alternative Investment Fund (RAIF) is subject to the same regime as Specialized Investment Fund (SIF) but without the intervention of the Luxembourg Commission for the Supervision of the Financial Sector (CSSF).
  • The Reserved Alternative Investment Fund (RAIF) regime synchronizes the existing regime with a clear focus on management supervision as opposed to product supervision.
  • Alternative Investment Funds may only be subject to the supervision and management of a duly authorized alternative investment fund manager (AIFM), and have the option of establishing themselves either asa regulated product, such as in the case of Part II Undertakings for Collective Investments in Transferrable Securities (UCITS), Specialized Investment Fund (SIF), and Investment Company in Risk Capital or as unregulated products, such as a Limited Partnership (SCS), Special Limited Partnership (SCSp), or a Reserved Alternative Investment Fund (RAIF).

3. What are the key features of a Reserved Alternative Investment Fund?

  • Reserved Alternative Investment Funds (RAIFs) are not subject to any kind of supervision or oversight by the Luxembourg Commission for the Supervision of the Financial Sector (CSSF) or any other supervisory authority.
  • Keeping the above fact in mind, an initiator can establish a Reserved Alternative Investment Fund (RAIF) without any prior approval by the Luxembourg Commission for the Supervision of the Financial Sector (CSSF). However, any requirements imposed by the Alternative Investment Fund Directive (AIFMD) to alternative fund managers are deemed to be fulfilled.

4. What are the criteria in appointing an alternative investment fund manager for a Reserved Alternative Investment Fund?

An alternative investment fund manager appointed by the Reserved Alternative Investment Fund must meet the following criteria:

  • Be duly authorised to function as an alternative investment fund manager of funds pursuing the relevant investment strategy. It is important to note that the authorization for alternative investment fund manager is only limited to certain structures only, including hedge funds or private equity strategies.
  • If the alternative investment fund established in another EU member state or another eligible country carry passporting rights in Luxembourg and other EU member nations.
  • If an alternative investment fund manager utilises the marketing passporting scheme, the constitutive and issue documents of Reserved Alternative Investment Fund (RAIF) must be submitted to the relevant supervisory authority. In case a Reserved Alternative Investment Fund (RAIF) is based in Luxembourg, there is no need for review of pertinent fund documents by the Luxembourg Commission for the Supervision of the Financial Sector (CSSF), although they have the right to refuse passporting rights to an alternative investment fund (AIF) if the documents submitted to the Luxembourg Commission for the Supervision of the Financial Sector (CSSF) restrict the management of a fund of the type of relevant alternative investment fund (AIF).
  • To remove any doubt, no regulatory approvals are necessary in relation to any of the steps to be performed during the life cycle of a Reserved Alternative Investment Fund (RAIF).

5. What types of legal forms are available for Reserved Alternative Investment Funds in Luxembourg?

A Reserved Alternative Investment Fund (RAIF) may be established as one of the following:

  • Common Fund (FCP)
  • Investment Company with Variable Capital (SICAV)
  • Public Limited Liability Company (SA)
  • Corporate Partnership Limited by Shares (SCA)
  • Private Limited Liability Company (SARL)
  • Limited Partnership (SCS)
  • Special Limited Partnership (SCSp)

6. What are the Available Umbrella Structures Available under the Reserved Alternative Investment Fund Act?

Any Reserved Alternative Investment Fund (RAIF) may opt for an umbrella structure, which in turn enables them to launch ring-fenced sub-funds or compartments on occasions. Each compartment corresponds to a distinct part of the assets and liabilities of the Reserved Alternative Investment Fund.

Reserved Alternative Investment Fund Compartments may display the features listed below:

  • Each compartment can feature its own investment policy
  • All provisions governing the issue and redemption of interests and/or securities can be customized to each specific compartment. With this in mind, it is possible the following funds under one umbrella:
  1. Open-ended and close-ended funds
  2. Fully funded sub-funds and sub-funds with a drawdown capital structure
  3. For Reserved Alternative Investment Funds structured as limited partnerships or special limited partnerships, sub-funds using partnership accounts

All rules pertaining to a Reserved Alternative Investment Fund’s compartments are freely determined in a Reserved Alternative Investment Funds issue document. It is also important to remember that the liquidation of a sub-fund does not trigger the liquidation of other sub-funds within the Reserved Alternative Investment Fund (RAIF).

A Reserved Alternative Investment Fund (RAIF) may appoint a different investment manager for each of its sub-funds. Following this governance scheme, each sub-fund can have its own investment committee or separate advisory board. Despite this, the managing body for structures such as SA, SCA, SCS, and SCSp that consists of general partners, board of directors, as well as depositary, central administration agent, and statutory auditor must be one and the same at the level of a Reserved Alternative Investment Fund as a whole.

Other characteristics of a Reserved Alternative Investment Fund are as follows:

  • Individual sub-funds can have their own fee structure and distribution.
  • Individual sub-funds can be reserved for one or more investors.
  • Cross-investments between sub-funds under the same Reserved Alternative Investment Structure are allowed, given certain conditions are met.
  • A Reserved Alternative Investment Fund (RAIF) and automatically, its sub-funds can feature two or more security types where assets can be invested in common, but are subject to varying fee structures, marketing targets, distribution policies, and hedging provisions.

7. What are the eligibility requirements for potential investors in a Reserved Alternative Investment Fund structure?

Investments for Reserved Alternative Investment Funds (RAIFs) are limited to well-informed investors only. Under the Reserved Alternative Investment Fund (RAIF) Law, a well-informed investor is one or more of the following:

  • Institutional investors
  • Professional investors
  • Investors that confirm in writing that he or she is a well-informed investor
  • An investor who can commit to a minimum share of EUR 125,000 in the Reserved Alternative Investment Fund
  • An investor that obtains a certificated delivered by a financial institution, investment firm, Undertakings for Collective Investments in Transferrable Securities management company, or an alternative investment fund manager certifying an investor’s expertise, experience, and capacity to evaluate and appraise their investments in a Reserved Alternative Investment Fund structure.

Directors and other individuals involved in the management of a Reserved Alternative Investment Fund (RAIF) may also invest even if they do not fall into any of the categories mentioned above.

8. What type of tax regime is the Reserved Alternative Investment Fund structure follow?

Simply put, Reserved Alternative Investment Funds are subject to a dual tax regime. The following provisions are some of the general tax provisions for Reserved Alternative Investment Fund vehicles in Luxembourg:

  • A Reserved Alternative Investment Fund (RAIF) is subject to the same tax regime applicable to Specialized Investment Funds (SIFs). Under this regime, Reserved Alternative Investment Funds (RAIFs( are exempt from corporate income tax and other taxes in Luxembourg with the exemption of subscription tax assessed at 0.01% per annum.
  • Subscription tax is also applied to Reserved Alternative Investment Funds (RAIFs) structured as limited partnerships (SCS) and special limited partnerships (SCSp)
  • Exemption from subscription tax under certain conditions can be given to a Reserved Alternative Investment Fund (RAIF):
    1. Assets are invested in other Luxembourg Undertakings for Collective Investment, Specialized Investment Funds, and Reserved Alternative Investment Funds
    2. Reserved Alternative Investment Funds whose sole objective is collective investment in money market initiatives and the placement of deposits with credit institutions
    3. Reserved Alternative Investment Funds investing in pension pooling fund vehicles
    4. Reserved Alternative Investment Funds investing in microfinance institutions
  • Optional tax regime is applicable to Reserved Alternative Investment Funds (RAIFs) that invest in risk capital. These funds may request for a special tax regime- one that is applicable to investment companies in risk capital (SICARs) and are therefore exempt from subscription tax.
  • All Reserved Alternative Investment Funds structured as a private limited liability company (SARL), public limited liability company (SA) and corporate partnership limited by shares (SCA) that opt for a special tax regime will be fully taxable, and therefore allows them to gain access to double tax treaties. Additionally, these legal structures may also be exempted from all oncome and capital gains realized from securities.
  • All income generated from pending investments in risk capital are also exempted, given the cash will be investment in risk capital within a period of 12 months
  • Reserved Alternative Investment Funds (RAIFs) that choose to be under a special tax regime may be exempt from net wealth tax, except for payment of minimum net wealth tax applicable to fully taxable Luxembourg companies.
  • Reserved Alternative Investment Funds established as a limited partnership (SCS) or special limited partnership (SCSp) are deemed to be fully tax transparent, therefore exempting them from direct taxes imposed by the Luxembourg Parliament.
  • Umbrella structures within a Reserved Alternative Investment Fund (RAIF) cannot elect a special tax regime. Therefore, it is impossible to have  a special tax regime for each umbrella structure, where certain compartments are subject to general tax regime while others are subject to special tax regime.

The statutory 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 verifying that a Reserved Alternative Investment Fund (RAIF) has invested in risk capital over a relevant period. The report will be filed before the Luxembourg direct tax administration.

9. Why are Reserved Alternative Investment Funds required to comply with the risk spreading principle?

Reserved Alternative Investment Funds (RAIFs), except for those that invest in risk capital and opted for a special tax regime are required to adhere to the risk-spreading principle.

  • There are no fixed guidelines in terms of minimum level of diversification that must be upheld in a Reserved Alternative Investment Fund (RAIF) portfolio.
  • A Reserved Alternative Investment Fund (RAIF) may not invest more than 30% of its gross assets in a single asset class.
  • The 30% restriction is not applicable to securities investments guaranteed by an OECD member state or local authorities within the EU, or by public organizations encompassing EU, regional, or worldwide scope.
  • The 30% restriction is also waived for collective investment initiatives that are assessed with risk diversification requirements to applicable Reserved Alternative Investment Funds (RAIFs)
  • Reserved Alternative Investment Funds (RAIFs) investing in infrastructure enjoys a relaxed risk diversification requirement. They are considered sufficiently diversified in they have at least two investments with no single investment representing more than 75% of its gross assets.

1. What are the requirements for Reserved Alternative Investment Fund (RAIF) incorporation?

Constitutive documents will depend on a Reserved Alternative Investment Fund (RAIF) structure:

  • Management regulations for common fund
  • Articles of incorporation for private limited liability company (SARL), public limited liability company (SA), or corporate partnership limited by shares (SCA)
  • Limited Partnership Agreement for limited partnerships (SCS) and special limited partnerships (SCSp)
  • Articles of incorporation are established by a notarial deed.
  • Management regulations and limited partnership agreements are typically established by a private hand.
  • Establishment of a Reserved Alternative Investment Fund (RAIF) must be recorded by notarial deed within five business days of its establishment.
  • A Reserved Alternative Investment Fund (RAIF) incorporation must be published within 15 days of their recording by notarial deed, together with determination of their appointment alternative investment fund manager (AIFM)
  • All Reserved Alternative Investment Funds (RAIFs) are officially listed with Luxembourg’s trade and companies register within 20 business days of notarial deed recording.

10. Can other investment structures be converted into a Reserved Alternative Investment Fund (RAIF)?

  • Part II Undertakings for Collective Investment, (UCI) Specialized Investment Fund (SIF), and investment company in risk capital may convert to Reserved Alternative Investment Fund (RAIF) to take advantage of its speedy time to market in the case of launching sub-funds
  • Unregulated limited partnerships may convert to Reserved Alternative Investment Fund (RAIF) to take advantage of its umbrella structure
  • Conversion of regulated funds are typically subject for approval by the Commission for the Supervision of the Financial Sector (CSSF), amendment on a fund’s constitutive documents, and amendments of a fund’s prospectus.
  • Conversion of an unregulated limited partnership into a Reserved Alternative Investment Fund (RAIF) requires amendments made to the limited partnership agreement.
  • It is also possible to convert a non-Luxembourg entity into a Reserved Alternative Investment Fund (RAIF), given authorized re-domiciliation is allowed under the existing laws of their country of origin. If not, conversion to a Reserved Alternative Investment Fund (RAIF) may be enforced by way of contributions in kind, a merger, or another mechanism.
  • Conversion is only allowed if an entity is fully compliant with the alternative investment fund manager directive (AIFMD) through the appointment of a duly authorized fund manager functioning as an external alternative investment fund manager.

As a reputable independent consulting firm, Damalion will be your trusted partner in doing business in Luxembourg. You can rely on expert advice from our team of Damalion experts to provide you with all the necessary information you need to make well-informed investment decisions whether to establish a Reserved Alternative Investment Fund or another investment structure such as a securitization vehicle. Thanks to our expansive network of service providers in Luxembourg, our years of experience in the market, and greater understanding of the Luxembourg investment landscape, you can rest assured that we will always have your best interests in mind. Reach out to a Damalion expert today if 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.