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Luxembourg RAIF: The ultimate flexible Investment vehicle to achieve your goals

by | Sep 6, 2024 | Investment funds

RAIF: Luxembourg’s Versatile Fund for Sophisticated Investors

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:

  1. 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.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
   

Damalion – Luxembourg

Luxembourg RAIF — clear overview of who can invest, how it is formed, roles (AIFM, depositary, administrator, auditor), diversification, tax options, umbrella/compartments, marketing in the EU, and practical steps from idea to first close.

For asset managers, entrepreneurs, family offices, private equity, venture capital, debt funds, real estate funds and institutional investors • Damalion helps you scope the structure and coordinate providers. Authorisations, approvals and acceptance remain at the discretion of the competent parties.

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What is a RAIF?

The Reserved Alternative Investment Fund (RAIF) is a Luxembourg alternative investment fund for well-informed investors. It is not directly supervised by the CSSF. It must appoint an authorised external AIFM established in the EU. The RAIF can be formed as a partnership (SCS/SCSp), corporate fund (SICAV/SICAF), or FCP, with the option to use an umbrella with compartments.

Key points at a glance

Topic Summary
Eligible investors Professional or other well-informed investors (including those committing at least EUR 125,000 or assessed as experienced by a regulated entity).
Supervision No direct CSSF authorisation of the RAIF. Mandatory appointment of an authorised AIFM. Ongoing AIFMD compliance at manager level.
Minimum capital EUR 1,250,000 within 12 months of registration.
Depositary Luxembourg depositary. For non-custodiable assets, a professional depositary of assets other than financial instruments may be used where allowed.
Diversification Risk spreading required unless choosing the risk capital model. Common market practice: no more than 30% gross assets in a single risk (subject to exceptions).
Tax Default “SIF-like” route: 0.01% subscription tax (some exemptions). Optional “SICAR-like” route for risk capital (CIT with exemptions for qualifying risk capital income). Partnerships can be tax-transparent.
Forms SCSp/SCS, SICAV/SICAF, FCP. Umbrella with segregated compartments permitted.
Marketing Distribution via the AIFM under AIFMD rules to professional investors; national rules apply for other categories.
Reporting Annual report; AIFMD reporting by the AIFM; SFDR/Taxonomy disclosures where applicable.

Legal forms you can choose

  • SCSp or SCS (limited partnerships): flexible terms; often tax-transparent.
  • SICAV/SICAF (company with variable/fixed capital): familiar corporate governance.
  • FCP (contractual fund): co-ownership without legal personality.
  • Umbrella with compartments: ring-fenced strategies under one fund with one prospectus.

Core roles and responsibilities

  • AIFM: authorised EU AIFM responsible for portfolio and risk management, AIFMD reporting and marketing notifications.
  • Depositary: safekeeping/oversight of cash flows and certain controls; located in Luxembourg.
  • Administrator: NAV, investor register, transfer agency and reporting.
  • Auditor: annual audit of the financial statements.
  • Directors/GP: governance of the RAIF or its general partner, depending on the form.
  • Compliance and reporting: offering document, annual report, AIFMD Annex IV (via AIFM), and SFDR disclosures when relevant.

Tax routes

Route How it works Typical use
SIF-like Subscription tax 0.01% on NAV (certain exemptions, e.g., for some money market or microfinance strategies). No CIT, MBT or NWT at fund level in most cases. Broad strategies with diversification.
SICAR-like (risk capital) Subject to corporate taxes but exempt on qualifying risk capital income and gains; no subscription tax. Private equity/venture capital investing in risk capital.
Partnership (SCSp/SCS) Tax-transparent at fund level; investors taxed per their own rules; possible municipal business tax if conducting commercial activity at fund level. Private equity, debt, real assets with LP-style terms.

From idea to first close

  1. Pick the form and decide on umbrella vs single fund.
  2. Appoint an authorised AIFM and agree on portfolio/risk scope.
  3. Select the depositary, administrator and auditor in Luxembourg.
  4. Draft documents: LPA/articles or management regulations, offering document, and policies.
  5. Confirm tax route (SIF-like, SICAR-like, or transparent partnership).
  6. Set up bank and cash controls with clear signatory rules.
  7. Register the RAIF on the official RAIF list and complete initial investor onboarding.
  8. Market under AIFMD via the AIFM to permitted investors.

Frequently asked legal questions

Who may invest in a RAIF?
Professional investors and other well-informed investors, including those investing at least EUR 125,000 or certified as experienced by a regulated entity.
Is the RAIF authorised by the CSSF?
No. The RAIF is not authorised by the CSSF. It must appoint an authorised external AIFM which is supervised under AIFMD.
Is an AIFM always required?
Yes. A RAIF cannot be self-managed. An authorised EU AIFM is mandatory and is responsible for portfolio/risk management and AIFMD compliance.
What is the minimum capital?
EUR 1,250,000 to be reached within 12 months after the RAIF is registered on the official list.
What diversification rules apply?
Risk-spreading is required unless the RAIF opts for the risk capital model. Market practice often follows a 30% limit per single risk, subject to exceptions set out in the offering document.
What are the tax options?
(i) SIF-like subscription tax at 0.01% on NAV (with exemptions); (ii) SICAR-like route for risk capital (corporate taxes with exemptions for qualifying income); or (iii) tax-transparent partnership (SCSp/SCS).
Can a RAIF be an umbrella with compartments?
Yes. Compartments have segregated assets and liabilities. The offering document should describe ring-fencing and any cross-compartment guarantees.
Which depositary is required?
A Luxembourg depositary. For assets other than financial instruments, a professional depositary of assets other than financial instruments may be used where conditions are met.
What documents are mandatory?
Constitutive documents (LPA/articles/management regulations), offering document, AIFM agreement, depositary agreement, administration agreement, and internal policies. Annual audited financial statements are required.
How is marketing carried out in the EU?
Through the AIFM using AIFMD marketing or notification procedures to professional investors. Local rules apply for other investor types.
Does SFDR apply?
Yes, if the RAIF is an AIF managed by an EU AIFM, SFDR and the EU Taxonomy may apply to disclosures depending on the strategy and claims.
Is a PRIIPs KID required?
Only where the product is made available to retail investors in a jurisdiction that requires a KID. RAIFs are generally for professional/well-informed investors.
What are typical timelines?
Once documents and providers are ready, onboarding and RAIF registration can be completed in weeks. Bank account opening and investor onboarding may affect timing.
Can non-EU managers use a RAIF?
Yes, but an authorised EU AIFM must be appointed. Third-country marketing follows national private placement or other available regimes.
Are valuations regulated?
Valuation policies must comply with AIFMD. The AIFM ensures proper and independent valuation; an external valuer may be appointed where appropriate.
How are conflicts of interest managed?
Conflicts policies must be in place at the AIFM and fund level. Related-party transactions should be on arm’s-length terms and disclosed.
What is the auditor’s role?
A statutory auditor audits the annual financial statements and may review valuation and control environments in line with applicable standards.
Are side letters allowed?
Yes, subject to disclosure and equal treatment principles under AIFMD and the fund’s documents.
Can the RAIF invest in crypto or other novel assets?
Only if permitted by the offering document, the AIFM’s licence and risk framework, and subject to depositary and regulatory constraints. Additional AML/CFT and custody considerations apply.
What happens if diversification is breached?
Remedial steps should be taken in line with the offering document and policies. The AIFM oversees corrective action and investor reporting.

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