What is RAIF in Luxembourg?
The Reserved Alternative Investment Fund (RAIF) is a form of investment fund that can invest in a wide range of assets. It is an alternative investment fund (AIF) and does not require CSSF product clearance. It is important to differentiate the RAIF and the Specialized investment fund -learn more about RAIF vs SIF.
On July 23, 2016, the RAIF law was passed, entering a new flexible and fiscally efficient regime in the Luxembourg fund platform. Naturally, the RAIF product has proven to be a popular choice, accounting for more than half of all Luxembourg PE funds. It combines the SICAR-regime (investment company in risk capital) and the SIF-regime (respectively 2004 and 2007 law) in a special legal framework addressed to authorized AIFM (alternative investment fund managers) based in Luxembourg or any EU country with a passport for fund management.
Overall, not only will initiators be able to establish the RAIF without the need for CSSF clearance, but they’ll also benefit from the appealing structuring elements that are currently only available to regulated AIFs (umbrella structure, variable capital, specific tax regime). It is a versatile and appealing solution for investors in alternative (non-UCITS) funds of all types.
The RAIF can invest in any asset class, including:
- real estate,
- private equity,
- hedge funds,
- debt acquisition,
- loan origination,
- infrastructure and so on.
The RAIF Law considerably reduces “time to market” by easing the regulatory burden on alternative investment fund managers (AIFM) in establishing AIFs.
As previously stated, Reserved Alternative Investment Funds are not subject to CSSF approval prior to deployment. As a result, they are not subject to CSSF’s direct continuous supervision. RAIFs must choose an authorized external Alternative Investment Fund Manager (AIFM) who is in charge of asset management and fund supervision.
Investment in a Reserved Alternative Investment Fund is restricted to “well-informed” investors who can appropriately analyze the risks involved with such a vehicle. These include institutional investors, professional investors, and individuals who have confirmed in writing that they are “well-informed” investors. And, they have either invested a minimum of EUR 125,000 in the RAIF or been appraised by a credit institution, investment firm, or management organization that confirms the investor’s ability, experience, and understanding in appropriately assessing an investment in the RAIF.
- There is no CSSF approval.
- The CSSF does not directly supervise RAIFs, but the RAIF must appoint an external authorized AIFM who is supervised by its supervisory authority. If the external AIFM is formed in Luxembourg, the CSSF will supervise it.
Overview of available legal forms
- The contractual form of a common fund (FCP) or the corporate form of an investment company are both permissible under RAIF’s legal structure flexibility (SICAV).
- In the case of a corporation, various types of partnerships (corporate – SCA-, Common Limited Partnerships – SCS-, and special limited partnership– SCSp) as well as several configurations are available: public limited company (SA), simplified limited company (S.A.S.), private limited company (S. à r.l.), cooperative company organized as a public limited company (S.A. – SCOSA).
- The FCP or SICAV/SICAF can be set up as a single fund or as a structure with an unlimited number of compartments.
A RAIF’s net assets cannot be less than EUR 1.250.000. This minimum must be met within twelve months of its authorization. At the time of subscription, at least 5% of the capital must be paid up.
Tax regime / Fiscal advantages
- The default tax regime for RAIFs is the same as for SIFs. This means that the RAIF will only be subject to an annual subscription tax of 0.01 percent of its net assets at the fund level (calculated on the last day of each quarter). However, based on the underlying investments, several exceptions may apply. RAIFS investing in other funds that are already subject to subscription tax, for example, are exempt from subscription tax.
- Regardless of the legal structure chosen for the RAIF, it is not subject to corporate income tax, municipal business tax, or net wealth tax, and gains distributed by the RAIF are not subject to withholding tax.
- Furthermore, no withholding tax is imposed on RAIF distributions in Luxembourg, unless the EU Saving Directive applies (i.e. if it is an FCP), and no taxation is levied on capital gains earned or income received by investors.
- In Luxembourg, no registration charges or other transfer taxes are payable on the RAIF’s issuance of shares or units.
- Management services offered to a RAIF are VAT-free in Luxembourg (exception made for technical services).
- Finally, RAIFS set up in the form of an investment firm may benefit from a significant number of double tax treaties.
- A RAIF can also opt for a SICAR tax regime if its main goal is to invest in risk capital asset. In this situation, it is not liable to subscription tax, pays ordinary income tax (unless a tax exemption applies), and requires auditor confirmation that it invests only in risk capital.
Reasons for its popularity
Other factors contributing to its popularity include:
- Speed to market: Unlike the SIF and SICAR vehicles, the RAIF is not subject to the dual regulation, in which the CSSF regulates and supervises both the manager and the fund. As a result, a RAIF does not require CSSF permission prior to launch, allowing it to be brought to market very fast.
- Passporting: As it is managed by an authorized AIFM, a RAIF can benefit from distribution passporting advantages. As a result, its shares can be distributed to large investors all around Europe.
- Investor protection: Due to RAIF’s flexibility, it can switch to the SIF or SICAR regimes if extra investor protection is needed at the fund level. Similarly, SIFs and SICARs can abandon their regulatory status in order to be included in the RAIF model.
The administration of the fund
As mentioned, the RAIF has to be managed by an external authorized AIFM situated in Luxembourg, in another European country or a neighboring country (having AIFMD management passport).
Lawyers, portfolio managers (investment advisers), administrators and/or registrars and transfer agents, domiciliation agents, distributors, and paying agents are typical RAIF service providers.
The RAIF’s management body is determined by the legal form selected and the related articles of association. In any case, it is preferable to have one or more directors based in Luxembourg and to hold regular meetings in the Grand Duchy.
If you require more information on the Reserved Alternative Investment Fund (RAIF) in Luxembourg, please contact our financial consultants, who can assist you in establishing a fund based on your business interests.
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