The Reserved Alternative Investment Fund and How to Set Up a RAIF in Luxembourg

The Reserved Alternative Investment Fund or RAIF offers a highly appealing solution for implementing alternative investment strategies that can be leveraged by local and foreign investors. This regime was introduced by the Grand Duchy in 2016 with the primary aim of boosting the attractiveness of the country’s investment fund and asset management landscape, complementing the implementation of Directive 2011/61/EU on alternative investment fund managements (AIFMD).

In essence, the RAIF has to comply with the requirements included in the Directive 2011/61/EU of the European Parliament and of the Council of Alternative Investment Fund Managers and its transposition laws of 2013. With this in mind, investment vehicles are able to obtain a European passport for its benefit. In essence, RAIF is a Luxembourg undertaking for collective investment (UCI) with the aim of amassing investment funds in asset from with the application of the principle of spreading risks; hence giving investors promising benefits in managing their own assets.

The shares are exclusively reserved for well-informed investors—an eligible investor who has stated in writing that he or she complies with the definition of a well-informed investor under the RAIF law. A well-informed investor must be aware of the risks related to the prospective investment, with investment amounting to at least €125,000. Additionally, an individual is eligible to be a well-informed investor upon assessment by a credit institution within the scope of the Banking Laws, by an investment company, or a UCITS management firm. Finally, he or she should show proof of the necessary knowledge and experience to be able to evaluate the feasibility and growth possibilities of investing in any given AIF.

• RAIF Formation

A RAIF may be established in the following legal forms:

• Standard contractual form (common fund)
• Corporate form (SICAV and SICAF)

1. Public Limited Liability Company
2. Partnership Limited by Shares
3. Common Limited Partnership
4. Special Limited Partnership
5. Private Limited Liability Company
6. Cooperative Public Limited Company

Regardless of preferred legal form, RAIFs are required to comply with the general provisions of the Luxembourg laws on companies. The company is to be managed by an authorised AIFM established locally or in other EU Member States.

• Why is RAIF a Suitable Vehicle in Luxembourg

1. Presents greater flexibility while reaping the benefits of becoming an EU passport holder
2. High efficiency and proactiveness of various Luxembourg authorities
3. Economic stability of Luxembourg
4. Outstanding professionalism in the financial sector

• Eligible Assets and Diversification

Similar to the Special Investment Fund (SIF) regime, RAIFs may invest in any type of legally acquired asset. Additionally, any type of investment strategy is allowed without any pre-determined restrictions, with the condition that an RAIF manager has the ability to effectively spread-out investment risks. While the RAIF law is unclear on the definition and scope of diversification requirement, further clarity can be found in the legislative explanatory notes referring to the SIF regime and related Circular CSSF 07/309 in relation to spreading risks by SIFs. With these things in mind, the following are applicable to RAIFs:

1. A RAIF is not allowed to invest more than 30% of its assets or commitments in securities of the same nature issued by the same issuer. Furthermore, every sub-fund of a targeted umbrella project for collection investment shall be considered as a separate issuer. This condition is only applicable if the principles relating to liabilities segregation among various sub-funds is ensured.
2. Short sales must not lead to the RAIF holding a short position in securities of the same kind and issued by the same issuer, which may represent more than 30% of a RAIF’s total assets.
3. When utilising financial derivative tools, the RAIF must establish even risk spreading through the right diversification strategies of its underlying assets. On the other hand, the risk in an over-the-counter transaction is only limited according to the quality and eligibility of the other party.

• The Amended Company Law for RAIFs in Luxembourg

The modernisation of the Company Law recognises old practices, respects the contractual freedom of shareholders, and the legal certainty relating to third parties. The modernised legislations of the Company law aim to relax the regime involving shares without the voting rights by public limited companies or SAs. This paves the way for preserving the rights of shareholders who are looking to uphold their economic rights within a company. Moreover, RAIFs may issue shares below the par value or even with unequal values.

The rules that influence private limited liability companies (S.à r.l.) have been modified and include increase in the number of maximum shareholders from 40 to 100, issuance of tracking shares, and the inclusion of authorised share capital clause that allows the board of managers to increase the share capital with a few specific limitations. Finally, an S.à r.l. now has the ability to issue redeemable and profit shares with or without voting rights resulting in greater flexibility and growth among investors.

The modernisation of the Company Law, along with its many changes has made S.à r.l. function similar to an SA in some aspects. A new legal form called société par actions simplifiée was introduced in the amended Company Law which complies with the same set of rules such as those that govern SAs.

• Luxembourg RAIF Tax Regime

Like a Common Investment Fund, a RAIF is treated tax transparent. In the real world setting, Luxembourg tax authorities consider that the RAIF income will only be transferred to its investors once profits are completely distributed.

Essentially, RAIF under the SICAV or SICAF form should be transparent for tax reasons.

Additionally, RAIF that are incorporated as a SICAV or SICAF will be categorised under the common limited partnership form or a special limited partnership—both of which are tax transparent in nature.

• Exemptions from Luxembourg Income Taxes

By rule, RAIFs are exempt from Luxembourg income taxes such as corporate income tax, net wealth tax, and municipal tax. This means they are not entitled to any tax credits.

Any dividend or interest payment received by a RAIF from investments will be subject to foreign withholding taxes, and possibly take advantage of tax treaties but only to a certain extent.

There is no withholding tax to be applied on RAIF contributions.

No stamp duty is imposed on share issues or transfers.

The taxation on foreign investors will be subject to their respective countries of residence.

According to article 46 of the RAIF Law, a RAIF is required to pay an annual subscription tax of 0.01% of the value of its net assets. This tax may be paid on a quarterly basis and based on the net asset value calculated at the end of each quarter. The RAIF Law exempts subscription tax on the portion of assets invested in other Luxembourg UCIs that are subject to this tax, certain institutional funding, microfinance funding, and pension pooling funding.

• Optional Tax Regime for RAIF Investing in Risk Capital

A special tax regime similar to that applicable to SICAR can be applied provided that their documents state their primary aim is to invest their funds in risk capital assets and that all requirements of the Company Law are applicable to them. Investing in risk capital translates to direct and indirect contribution of assets to entities in view of their launch, development, and listing on a stock exchange. To that end, RAIFs or RAIF compartments do not need to spread investment risks.

Compliance with the risk capital investments has to be certified on an annual basis and approved by an auditor of the RAIF.

For RAIFs under special regime, there will be no subscription tax assessed. These RAIFs are fully taxable for corporate income tax, municipal business tax, and solidarity surcharge set at 24.94% in Luxembourg. A few exceptions apply:

• Any income obtained from securities, or any income from the sale, liquidation, and contribution will be fully exempted.
• Any income from assets held during risk capital investment is not considered taxable income provided they are invested in risk capital within a year.

These RAIF are required to pay a minimum net wealth tax of EUR 3.2103.

RAIF under the common limited partnership form or a special limited partnership that chose the special tax regime should be fully transparent. As a result, these RAIFs are not subject to any kind of Luxembourg direct taxes.

• Value Added Tax

SICAV and SICAF are considered taxable persons for VAT purposes. The management company and common investment fund are considered as one legal entity for VAT purposes.

The management services obtained by RAIFs, including investment consulting, portfolio management, and other administrative services are exempt from Luxembourg VAT.

No VAT is payable in Luxembourg in relation with the issue of shares, units, or partnerships made by a RAIF.

• Tax Authority Regulatory Agency

The primary tax authority responsible for tax regulations of RAIFs is the Administration de l’Enregistrement et des Domaines. If this agency deems a RAIF is involved in operations that fall outside the framework activities authorised by the Law, then tax provisions of the RAIF Law shall be non-applicable.

A fine of 0.2% may be levied on the amount of assets of a RAIF.

• Taxation of the Management Company

The management company that handles a FCP-RAIF is fully taxable for corporate income tax, municipal business tax, and net wealth tax.

• The Benefits of RAIFs from Current Tax Treaties

SICAV and SICAF can take advantage of double tax treaties as stated in the bilateral agreements from different nations. Therefore, some countries with existing double tax treaties with the Grand Duchy and those that have not been verified as of late may still benefit from double tax treaties.

In some cases, some SICAFs or SICAVs may be unable to benefit from other double tax treaties concluded by Luxembourg.

Any RAIF investing in risk capital which chose to be under a special tax regime may also benefit from double tax treaties.

By rule, any SICAV or SICAF under the common limited partnership form or special limited partnership form will be unable to benefit from double tax treaties.

• Steps on How to Set Up a RAIF in Luxembourg

To establish a RAIF in Luxembourg, a qualified investor must contribute at least EUR 125,000 into the collective fund. The fund per se is not required to obtain authorisation from the CSSF, but it must be fully registered under the Chamber of Commerce in Luxembourg, with its constitutive documents clearly stating its operational capacity is limited to investment in risk capital only.

The Luxembourg RAIF should be under the direct supervision of an authorised AIFM—an individual who can be a Luxembourg or EU resident. Third country citizens may also assume the task of fund managers given they meet the AIFM requirements. RAIFs may be used in the following legal forms:

• Cooperatives
• Partnerships
• Public or private companies
• SIFs
• SICARs
• UCIS funds

A RAIF must be fully registered with the Luxembourg Chamber of Commerce within 10 days from its date of founding.

The RAIF structure truly reflects the desire of Luxembourg to enhance the supervision of alternative investments. If you want to take part in the many growth opportunities presented by the RAIF Law, our company formation specialists here at Damalion will assist you in establishing any type of company you wish in Luxembourg.