Understanding the differences between the reserved alternative investment funds said RAIF and the Luxembourg SICAR (société d’investissement à capital variable) helps investors make the right choice of the most relevant investment vehicle to structure their investments in Europe.
In recent years, Luxembourg has excelled in developing an attractive and robust alternative investment fund industry. As of June 2021, the net assets under management in Luxembourg investment funds amounted to EUR 5.49 billion, continuously growing by an impressive 16.10% year-on-year. While this data only displays regulated funds, as the majority of alternative funds in the Grand Duchy are unregulated, is inarguably a success to say the least. Truly, this feat along makes Luxembourg in a league of its own. Being the world’s second largest fund center, following the United States, the country entices more initiators from jurisdictions all over the globe.
Luxembourg is renowned as a prime mover in the implementation of the European fund regulation since 1988, including the European Union’s Alternative Investment Fund Managers Directive (AIFMD). Additionally, the country played a crucial tole in launching markets for international fund distribution due to its stellar track record of developing investment products that allow firms to establish their business successfully in the Grand Duchy.
Characterized by a highly-regulatory framework, with a continuously evolving legislation adapting to the needs of the market, Luxembourg is a premier destination for foreign initiators looking to open an investment vehicle in the European Union.
An Overview on the Alternative Investment Fund Managers Directive
Implemented in 2013, the Alternative Investment Fund Managers Directive (AIFMD), developed the country’s first regulated environment specifically created for alternative investment funds worldwide. The Alternative Investment Fund Managers Directive (AIFMD) changed the way the global alternative industry runs.
Luxembourg’s main regulating authority, the Commission for the Supervision of the Financial Sector (CSSF) grew its expertise in alternative investment funds (AIFs) and alternative strategies, in a strong competitive position, contributing to its strength and pivotal role as a prime platform for alternative investment funds from various jurisdictions. Additionally, the Commission for the Supervision of the Financial Sector (CSSF) is internationally recognized, with the aim to harmonize the struct regulatory and supervisory framework for all activities of alternative investment fund managers (AIFMs) located in the European Union.
Under the Alternative Investment Fund Managers Directive (AIFMD), initiators benefitted from a passport that provides management services to alternative investment funds to market, allowing them to market to well-informed investors in the EU on the basis of a single authorization.
Reserved Alternative Investment Fund (RAIF) in Luxembourg
- Introduced by the Law of 23 July 2016 (RAIF Law)
- The Reserved Alternative Investment Fund (RAIF) regime was implemented to allow fund managers to structure alternative investment funds that combine the legal and tax features of a Specialized Investment Fund (SIF) and an Investment Company in Risk Capital but under an unregulated structure.
- It aims to alleviate the planning uncertainly that typically develops during fund launches.
- Reserved Alternative Investment Fund (RAIF) eliminates the need for prior authorization and continuous oversight of the Commission for the Supervision of the Financial Sector (CSSF)
Key Features of a Reserved Alternative Investment Fund (RAIF)
Legal Form
- A Reserved Alternative Investment Fund (RAIF) may be constituted as a common investment fund, Investment Company with Variable Capital (SICAV), or an Investment Company with Fixed Capital (SICAF)
- It can be close-or open-ended, and may be established as a stand-along fund or as an umbrella structure made up of several sub-funds or compartments.
Capital
- Net assets must reach EUR 1.25 million within 12 months following its formation.
Supervision
- Is not subject to the approval of the Commission for the Supervision of the Financial Sector (CSSF).
- Managed by an external Alternative Investment Fund Manager (AIFM). Activities must be approved by the Commission for the Supervision of the Financial Sector (CSSF).
Investment Restrictions
- May invest in any asset class and investment policy strategy.
Disclosure Requirements
- Must prepare a prospectus, a packaged retailed and insurance-based investment products (PRIIP) Key Information Document (KID) if the vehicle will be open to retail-type investors and an annual report.
- Not required to prepare and submit a semi-annual report.
Key Limitations
- Reserved Alternative Investment Funds are deemed to appoint an external Alternative Investment Fund Manager, which can be established in Luxembourg, in another European Union Member State, or in a non European Union country.
Risk Diversification
- Reserved Alternative Investment Funds (RAIFs) are subject to mandatory risk spreading, which means the following:
- A Reserved Alternative Investment Fund cannot invest more than 30% of its assets in securities of the same kind issued by the same entity.
- Shore sales may not leading to a Reserved Alternative Investment Fund holding a short position in securities of the same kind and issued by the same legal entity, representing more than 30% of its assets.
- Where financial derivative instruments were invested, a Reserved Alternative Investment Fund must establish comparable spread of risk by an appropriate diversification of an underlying asset.
The risk diversification provisions enumerated above are not applicable to Reserved Alternative Investment Funds that opted for the tax regime for Investment Company in Risk Capital, and therefore restricted to investing in risk capital.
Eligible Investors
- Well-informed investors with the capability to assess all risks associated with operating such an investment vehicle.
- Taxation of Reserved Alternative Investment Funds (RAIFs) are limited to well-informed investors with the ability to assess the accompany risks investing in such a vehicle.
Investment Company in Risk Capital (SICAR) in Luxembourg
- Luxembourg Investment Company in Risk Capital (SICAR) was designed for investments in venture capital and private equity.
- Primarily developed to promote raising funds from investors that understand the heightened risks that accompanies investments in risk capital. This is applicable in cases of lower liquidity, lower credit quality, and higher price volatility, with expectations of a better return.
- Governed by the law of 15 June 2004 (SICAR Law) and divided into two parts: (1) General provisions applicable to all investment companies in risk capital (2) and specific provisions applicable to investment companies in risk capital qualifying as alternative investment funds (AIFs), which automatically makes them under the supervision and management of an alternative investment fund manager (AIFM).
Taxation
- All investment company in risk capital (SICAR) are fully taxable entities if established as a company, but exempt from income tax and capital gains derived from risk capital securities, and eligible to the benefits of double taxation treaties.
Marketing
- Investment companies in risk capital that qualify as alternative investment funds (AIFs) and managed by a European union authorized Alternative Investment Fund Manager (AIFM) can benefit from passport allowing them to market investment companies in risk capital shares or partnership interests to well-informed investors within the European Union through a regulator notification regime.
- Investment companies in risk capital (SICARs) that qualify as alternative investment funds (AIFs) but do not benefit from the AIFM Law are deemed to appoint an alternative investment fund manager.
Eligible Assets
- Investment companies in risk capital (SICARs) are deemed to invest in capital.
- Risk capital is characterized by the following elements, including (1) high risk associated with relevant assets, (2) intention to develop target entities, and an (3) exit strategy.
- May only marginally hold financial derivative instruments on an exceptional basis.
Eligible Investors
- Well-informed investors with the capacity to assess risks associated with in investment in such a vehicle.
Key Features
- Investment Company in Risk Capital is constituted as a corporate entity with a fixed or variable capital.
- It must be established as a stand-alone fund or an umbrella structure with multiple compartments or sub-funds.
Capital
- Share capital, including premiums, must be at EUR 1 million within 12 months following its establishment and approval by the Commission for the Supervision of the Financial Sector (CSSF).
Investment Limitations
- The Investment Company in Risk Capital Law (SICAR Law) does not contain investment restrictions and does not impose any borrowing limits.
- It is not required to comply with risk diversification rules.
Disclosure Documents
- An investment company in risk capital must prepare a prospectus, a packaged retailed and insurance-based investment products (PRIIP) Key Information Document (KID) if open for retail investors.
- Annual reporting is a requirement.
- Not required to prepared a semi-annual report.
Damalion consists of an extensive global service network of professionals engaged in full legal, regulatory, accounting, and taxation services. We have the knowledge and experience of the dynamics of alternative investment funds in Luxembourg. Our team excels in cross-border company and fund formation. We work tirelessly across all premier investment jurisdictions, with Luxembourg being one of them. Damalion works closely with clients and colleagues in various industries, giving us a competitive edge in the alternative investment fund market. Our knowledge of the Luxembourg market means we can fully customize transactions based on tax and marketing advantages. To learn more, reach out to a Damalion expert today.
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.
Luxembourg Reserved Alternative Investment Fund (RAIF) vs société d’investissement en capital à risque (SICAR) — what each vehicle is, who uses them, how supervision and the Alternative Investment Fund Manager (AIFM) differ, depositary and risk-spreading rules, tax posture (subscription tax vs risk-capital treatment), legal forms (special limited partnership (SCSp), common limited partnership (SCS), société anonyme (SA), société à responsabilité limitée (Sàrl), and common fund (FCP)), and an easy setup with Damalion from term sheet to first close.
For sponsors, entrepreneurs, family offices and professional investors • Damalion facilitates formation and coordination alongside your legal and tax advisors. You approve; the Commission de Surveillance du Secteur Financier (CSSF), the Alternative Investment Fund Manager (AIFM) and banks decide where required.
Last updated:What are the Reserved Alternative Investment Fund (RAIF) and the société d’investissement en capital à risque (SICAR)?
Reserved Alternative Investment Fund (RAIF): a Luxembourg alternative investment fund that is not directly supervised by the CSSF but must appoint an authorized AIFM. It can be set up as a corporate vehicle, a partnership (SCSp/SCS), or a common fund (FCP).
Société d’investissement en capital à risque (SICAR): a risk-capital investment vehicle supervised by the CSSF. It targets investments in risk capital and may adopt corporate or partnership forms (including SCSp and SCS).
Key differences at a glance
| Criterion | Reserved Alternative Investment Fund (RAIF) | Société d’investissement en capital à risque (SICAR) |
|---|---|---|
| Regulatory status | Not directly supervised by the CSSF; must have an authorized AIFM. | Authorized and supervised by the CSSF. |
| AIFM and passport | Requires an authorized AIFM to use the AIFMD passport. | Operates as an AIF; the passport is available via an authorized AIFM. |
| Depositary and administration | Depositary bank and administrator appointed under AIFMD rules. | Depositary bank and administrator required under SICAR law and AIFMD where applicable. |
| Risk-spreading | Standard RAIF applies risk-spreading similar to SIF practice; a risk-capital RAIF may adopt risk-capital rules. | Focused on risk-capital investments; specific rules on eligible assets and risk policy. |
| Tax posture (high-level) | Two tracks: (i) “SIF-like” with 0.01% subscription tax; or (ii) “risk-capital” track mirroring SICAR treatment. | Fully taxable in principle but income and gains from qualifying risk-capital are exempt; no subscription tax. Treaty access depends on facts and substance. |
| Legal forms | Corporate (SA/SCA/Sàrl), partnerships (SCSp/SCS), or common fund (FCP). | Corporate or partnership forms, including SCSp and SCS. |
| Compartments | Yes — multi-compartment structures with segregated assets and liabilities. | Yes — multi-compartment structures available. |
| Investors | “Well-informed investors.” | “Well-informed investors.” |
| Valuation and NAV | Valuation policy under AIFMD; periodic NAV and reporting via the AIFM. | Valuation under the SICAR framework; where AIFMD applies, AIFM valuation/reporting rules are followed. |
Tax snapshot
- RAIF — “SIF-like” track: 0.01% annual subscription tax on net assets; generally exempt from corporate income tax and municipal business tax on fund income.
- RAIF — “risk-capital” track: follows SICAR-like regime for qualifying risk-capital income and gains.
- SICAR: in principle fully taxable entity; however, income and gains from qualifying risk-capital are exempt; no subscription tax. Withholding-tax, treaty access and anti-abuse tests are fact-dependent.
- Substance and treaty access: board cadence, Luxembourg decision-making and documentation support access to treaties where relevant; assess case-by-case.
Legal forms, governance and documents
- Forms: SA, Sàrl, SCA, SCSp, SCS, and (for RAIF) FCP.
- Governance pack: LPA for partnerships, constitutional documents for corporates, depositary and administration agreements, valuation and conflicts policies, side-letter register and best-terms handling.
- Operational rails: cash controls, payment approvals, registrar, notice mechanics, NAV calendar and reporting workflow.
How to proceed — Damalion setup support
- Scope and investor map. Strategy, use of compartments, risk-spreading or risk-capital posture, target investors and minimums.
- Choose the wrapper. RAIF or SICAR; confirm risk policy and tax track.
- Line up providers. AIFM, depositary bank, administrator, auditor, legal and tax counsel. Damalion facilitates shortlists and onboarding.
- Draft the pack. LPA/statutes, offering document, valuation and conflicts policies, side-letters protocol.
- Operational test. Mock commitment, capital call, NAV cut-off and distribution run-through.
- First close. Execute agreements, activate banking rails, align the reporting calendar.
Related reading
Frequently asked questions
Is a RAIF supervised by the CSSF?
Is a SICAR supervised?
Who can invest in these vehicles?
Do both require a depositary bank?
Can a RAIF avoid risk-spreading?
How do taxes differ in practice?
Which legal forms are most common?
Can I use compartments?
How is NAV determined?
Is EU passporting available?
Can a RAIF switch between tax tracks?
How long does formation usually take?
What documents anchor governance?
What about substance and treaty access?
How does Damalion help?
