The Reserved Alternative Investment Fund (RAIF) – an unregulated fund that falls under the category of alternative investment funds, was established through legislation passed by the Luxembourg Parliament in July 2016.
This new investment vehicle positions Luxembourg as an attractive and innovative country for fund initiators, and it offers a flexible legal structure that is easy to navigate and does not involve excessive bureaucracy. It also expands the vast options available for private equity firms and alternative investment fund managers operating in Luxembourg.
Important Aspects of the RAIF in Luxembourg
The term “RAIF” refers to “Reserved Alternative Investment fund“, an unregulated fund classified within the alternative investment funds category.
To be categorized as a RAIF, it is necessary to adhere to the definition of an alternative investment fund as outlined in the law of 12 July 2013, which implements the AIFM Directive (EU Directive 2011/61/EU). According to the AIFM Law, an alternative investment fund comprises collective investment undertakings, including their investment compartments, that
- (a) raise capital from multiple investors to be invested according to a specific investment policy for the investors’ benefit, and
- (b) are exempt from authorization in accordance with Article 5 of Directive 2009/65/EC.
Being an unregulated entity, the RAIF operates without the need for pre-approval or prudential oversight from the financial supervisory authority of Luxembourg (CSSF). This means that the launch of a RAIF does not require approval from the authority, and the RAIF can be marketed immediately after incorporation.
Changes to the RAIF‘s activities, such as investment policy, the launch of new compartments or share classes, or liquidation, also do not require clearance from the supervisory authority. This streamlined process facilitates a faster “time to market.”
RAIFs are exclusively available to individuals categorized as “well-informed investors“. Such investors include institutional investors, professional investors, or other individuals who have provided written confirmation of their commitment to the well-informed investor status. Additionally, they are required to invest a minimum of EUR 125,000 in the RAIF or undergo an evaluation conducted by a reputable financial institution or AIFM to verify their proficiency, expertise, and experience in evaluating investments in the RAIF.
Legal Type and Forms
RAIFs can be established in two primary legal structures. The first option is a contractual form known as a common investment fund (FCP – fonds commun de placement), which is managed by a management company. The other option is a corporate structure, which can be an investment company with variable capital (SICAV ) or an investment company with fixed capital (SICAF).
Various corporate structures are available, including:
- public or private limited liability companies (SA or SARL)
- cooperative companies (SCOSA),
- partnerships limited by shares (SCA),
- partnerships (SCS), or
- special limited partnerships (SCSp).
The management of a RAIF‘s assets is exclusively assigned to an external alternative investment fund manager (AIFM) who is duly authorized by the CSSF and operates under the regulations set forth in the AIFM Directive.
The AIFM can be based in Luxembourg, another EU Member State, or a third country, provided it has obtained the necessary authorization under the AIFM Directive. The AIFM must fully comply with the directive and perform essential functions such as portfolio and risk management, adhering to all relevant provisions of the AIFM Directive.
Eligible Assets and Risk Diversification
The RAIF Law takes inspiration from the established regulations governing specialized investment funds (SIFs) under the law of 13 February 2007. And it incorporates the well-defined diversification guidelines that are already in place for SIFs.
A RAIF can invest in a wide range of assets, without any specific restrictions, including unconventional assets like wine, art, or diamonds. However, it must adhere to the risk diversification rules outlined in the CSSF circular 07/309. These regulations establish a limitation on investments in securities of the same category from a single issuer, limiting it to a maximum of 30% of the RAIF’s overall assets or commitments. Each sub-fund of a collective investment umbrella is treated as a separate issuer to ensure liability segregation.
Furthermore, it should be emphasized that the RAIF is restricted from holding a short position that exceeds 30% of its asset value in securities of the same type issued by the same entity, resulting from any short sales. And when utilizing financial derivative instruments, appropriate diversification of underlying assets must be maintained. Counterparty risk in over-the-counter transactions should also be limited based on the counterparty’s quality and qualification.
Alternatively, the RAIF Law allows the RAIF to choose the risk capital vehicle (SICAR) regime, enabling unrestricted investments in risk capital targets without risk-spreading requirements.
Each RAIF is required to appoint a depositary bank based in Luxembourg (or a Luxembourg branch of an EU depositary bank), establish a central administration situated in Luxembourg, and engage the services of an external auditor.
Other service providers, such as an investment manager, distributor, or paying agent, can be appointed, even if they are not based in Luxembourg.
The Issuing Document
RAIFs are required to create an issuing document that provides investors with the necessary information to make informed investment decisions, including an understanding of associated risks. The issuing document must declare that the RAIF is exempt from prudential supervision in Luxembourg.
Regarding the tax regime, if the RAIF decides to operate under the SIF (Specialized Investment Fund) regime, it will receive identical tax treatment as SIFs. So it will only be liable for the annual subscription tax at the rate of 0.01%. However, if the RAIF chooses the SICAR regime, it will be subject to the standard corporate income tax rate of 24.94%.
On the other hand, it may benefit from double tax treaties concluded by Luxembourg, the “EU parent-subsidiary directive,” and provisions regarding participation exemption. RAIFs under the SICAR regime are exempt from withholding tax on dividend payments and net wealth tax.
The management services rendered to the RAIF by the AIFM are not subject to value-added tax (VAT) in Luxembourg, thus enjoying an exemption from such taxation.
Importance of the RAIF in Luxembourg
The RAIF holds significant importance in the Grand Duchy of Luxembourg for several reasons:
- International recognition: Luxembourg has a longstanding reputation as a leading financial center, known for its expertise in the asset management industry. The introduction of RAIFs also further enhanced Luxembourg’s position as a hub for alternative investment funds, attracting fund managers and investors from around the world.
- Flexibility and efficiency: it offers a high degree of flexibility, allowing for the creation of various types of investment funds, including private equity, real estate, hedge funds, and venture capital funds.
- Attractive alternative to the SIF: prior to the introduction of RAIF, the Specialized Investment Fund (SIF) was the primary alternative investment fund structure in Luxembourg. While SIFs require authorization and ongoing supervision by the Luxembourg regulator (CSSF), RAIFs do not. This exemption from direct supervision makes RAIFs a more efficient option for fund managers, reducing the time and costs associated with regulatory compliance.
- Attraction of well-Informed investors: it is designed for “well-informed investors,” including institutional investors and professional investors. This focus on well-informed investors ensures that the RAIF attracts investors who can make informed investment decisions.
- Eligible asset and risk diversification: tapplicable to specialized investment funds (SIFs). It can invest in a wide range of assets without specific restrictions, subject to compliance with risk diversification rules. This flexibility allows the RAIF to consider unconventional assets and promotes investment diversification.
- European Passport: one of the key advantages of the RAIF is the European passport it enjoys. This implies that RAIFs can be promoted to well-informed investors across the European Union, eliminating the requirement for cumbersome preliminary procedures. This passporting privilege expands the RAIF’s market reach and facilitates cross-border investments.
Overall, the RAIF plays a crucial role in positioning Luxembourg as an innovative and competitive jurisdiction for fund initiators.
To set up your investment fund in Luxembourg, let’s go ahead and contact your Damalion expert now.