On 14 July 2016, the Luxembourg Parliament adopted a new law (the “RAIF Law”) introducing a new vehicle to the toolbox of Luxembourg investment vehicles, the so-called Reserved Alternative Investment Fund (the “fonds d’investissement alternatifs réservés”, “RAIF”), offering a new option and flexibility to sponsors, managers and initiators of alternative investment funds.

This is a major reform as it tackles the over-layering of supervision that came to existence with the implementation of Directive 2011/61/EU on Alternative Investment Fund Managers (the “AIFMD”) in Luxembourg whilst streamlining the process to establish regulated funds in Luxembourg.

RAIFs combine the legal and tax features of regulated Alternative Investment Funds (the “AIFs”) like Specialised Investment Funds (the “fonds d’investissement spécialisés", “SIFs”) or Investment Companies in Risk Capital (the "société d'investissement en capital à risque", "SICAR”) without the regulatory licensing or oversight of the Commission de Surveillance du Secteur Financier (the “CSSF”) together with favourable tax and legal regimes. The RAIF Law is a shift from a product approach to indirect regulation through the external authorised Alternative Investment Fund Manager (the “AIFM”), whilst having the benefit of the EU passport in relation to the marketing of its interests, units or shares throughout the EU.

The RAIF should be a preferred option for those sponsors, managers and initiators seeking contractual flexibility and protection, swift time-to-market, tax optimisation and marketability in the same structure.

What is a RAIF?

The RAIF is an AIF that:

  1. appoints an external authorised alternative investment fund manager ("AIFM");
  2. invests in accordance with the risk spreading principle (excepted in case of RAIFs investing solely in risk capital);
  3. is opened to well-informed investors only[1] ;
  4. whose constitutive documents provide that they are subject to the provisions of the RAIF Law.

A RAIF may take one of the legal forms below:

  • a common limited partnership with legal personality (“société en commandite simple”, “SCS”);
  • a special limited partnership without legal personality (“société en commandite spéciale”, “SCSp”);
  • a private limited liability company (“société à responsabilité limitée”, “SARL”);
  • a public limited liability company (“société anonyme”, “SA”);
  • a partnership limited by shares ("société en commandite par actions", "SCA")
  • cooperative organised as a public limited company (“société coopérative organisée comme une SA”, “SCOSA”)
  • an investment company with variable capital (“société d'investissement à capital variable”, "SICAV");
  • an investment company with fix capital (“société d'investissement à capital fixe”, "SICAF"); or
  • a common placement fund (“fonds commun de placement”, “FCP”).
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Key features of investment vehicles available in the Luxembourg toolbox

Topic

SIF / SICAR

RAIF

Unregulated passported AIF

Distribution – type of investors

Must be professional investors under AIFMD (unless local transposition allows non-professional investors) and well-informed investors

Must be professional investors under AIFMD (unless local transposition allows non-professional investors) and well-informed investors

Must be professional investors under AIFMD (unless local transposition allows non-professional investors)

Distribution – Number of investors

Raising capital from the public is allowed

Raising capital from the public is allowed

A limited number of potential investors must be targeted

Setting-up

- Establishment subject to CSSF prior approval

- Registration in CSSF official list

- No CSSF approval

- AIFM to confirm the establishment of the RAIF before public notary

- Registration in RCS list 10 days after establishment

- No formality or registration required

Fund denomination

Can include "Fund” in the name of the vehicle

Can include "Fund” in the name of the vehicle

“Fund” denomination to be avoided

Annual Report

Annual report in compliance with AIFMD and Annex to SIF Law

Annual report in compliance with AIFMD and Annex to RAIF Law

Annual report in compliance with AIFMD

Consolidation

No compulsory consolidation with intermediary holding entities

No compulsory consolidation with intermediary holding entities

Compulsory consolidation with intermediary holding entities

Reporting to CSSF

Monthly

None

None

Umbrella structure

Multiple sub-funds available

Multiple sub-funds available

Multiple sub-funds not available

Tax treatment

- SIF: Annual subscription tax of 1bp on NAV

+ No WHT

+Not subject to NWT

- SICAR:

+ CIT and MBT but exempted from tax on income and gains derived from securities (excepted SCS and SCSp which are tax transparent)

+ No WHT on distributions

+ Subject to minimum NWT

- Annual subscription tax of 1bp on NAV (excepted for risk capital funds)

- Not Subject to NWT

- Risk capital:

+ CIT and MBT but exempted from tax on income and gains derived from securities (excepted SCS and SCSp which are tax transparent)

+ No WHT on distributions

+ Subject to minimum NWT

- Fully taxable CIT and MBT (excepted SCS and SCSp which are tax transparent)

- NWT: 0,5% of NAV

- WHT: 15% on dividends (excepted SCS and SCSp which are tax transparent)

- No subscription tax

VAT

VAT exemption on management services

VAT exemption on management services

VAT exemption on management services

Eligible assets

No restriction

No restriction

No restriction

Diversification requirements

SIF: Principe of risk spreading (i.e. 30% in any single asset subject to CSSF derogation)

SICAR: None

Principe of risk spreading (similar to SIF)

Risk capital: None

None

Marketing documentation

Offering document to comply with disclosure requirements under AIFMD (art. 23 AIFMD)

Offering document to comply with disclosure requirements under AIFMD (art. 23 AIFMD)

Offering document to comply with disclosure requirements under AIFMD (art. 23 AIFMD)

A great addition to the very successful Luxembourg limited partnerships

The RAIF provides additional structuring solutions for AIFs in Luxembourg, with a supervision that will be done through the AIFM.

We witnessed a strong appetite for Luxembourg limited partnerships, due to their key features set-out below:

(a) Confidentiality is guaranteed

No publication: Registration of the SCS/SCSp at the Luxembourg trade and companies register (the “RCS”) is minimal and includes their name, the name of their GP(s), their object, their address and their duration.

No publication on the performance of the SCSp: the SCSp’s accounts are not filed at the RCS.

(b) Safe harbour for actions by LPs

In Delaware and the Cayman Islands, the scope of decisions made by limited partners without compromising their limited liability is uncertain. In Luxembourg, the Luxembourg act dated 10 August 1915 on commercial companies, as amended (the “Companies Act”) introduced a non-exhaustive list of actions that may be taken by LPs, which do not, as such, put their limited liability at risk.

(c) Wide choices for contributions

Contributions to a SCS and SCSp may be made in kind, cash or industry and may include loans granted to the partnership, with no debt-to-equity ratio to be complied with. A mere statement in the limited partnership agreement (the “LPA”) by the partners suffices for non-cash contributions. Contributions, withdrawals, loans, allocations to profits, losses and expenses may be booked for each limited partner in a capital (and loan) account.

(d) GP and LP’s creditors cannot seize the SCSp’s assets

The assets contributed to the SCSp are registered in the name of the partnership and may only satisfy the rights of creditors that have been created in relation to the SCSp’s business and the SCSp’s assets are not available to the GPs or the LPs’ creditors.

(e) High flexibility on power and economic distributions

Limited or multiple as well as non-voting partnership interests (which may be represented by securities issued by the SCS/SCSp) are permitted thus enabling investors to distribute powers as they deem fit in the LPA. In addition, there is no claw back on distributions in case of insolvency, except for fraud as opposed to the British Virgin Islands, where a six-month claw-back period applies.

(f) Freedom to organise transfers of partnership interests

The LPA organises all conditions relating to the redemption, transfer, splitting or pledge of their interests by the LPs. The Companies Act provides conditions to transfers if such transfers are not dealt with in the LPA. The Companies Act also provides that partnership interests may be listed on a stock exchange or a regulated market.

The attraction for the Luxembourg limited partnerships is expected to increase with the RAIF Law as the technical features for unregulated structures are introduced by the RAIF Law. A RAIF may:

  • opt for a variable capital structure;
  • be organised as an umbrella structure, i.e., have multiple compartments or sub-funds with:
  • a separation of liabilities and risks (where, in particular, the liquidation of a sub-fund will not (subject to other sub-fund being active) trigger the liquidation of the fund);
  • an investment policy for each sub-fund,
  • investment adviser for each sub-fund,
  • securities/units/partnership accounts different for each sub-fund;
  • governing rules for each sub-fund;
  • carry arrangements for each sub-fund;
  • distribution rules for each sub-fund; and/or
  • categories of investors for each sub-fund, etc.
  • draft its constitutive documents in English language only (without being obliged to translate them for filing into either French or German); and
  • benefit from the same exemptions applicable to SCS and SCSps with respect to general meetings.

Furthermore, if set-up as a SICAV, the rules applicable to limited partnerships will benefit the SICAV with respect to voting arrangements, distributions, transfers and the issue of interests, securities and partnership accounts, thus extending the flexibility of the regime of the SCS and SCSp to the regulated SICAV.

However, if the RAIF is established under the form of a SCS or SCSp, its incorporation documents need (at least) a statement before a notary and publication in the official gazette (contrary to SCS and SCSp that are not RAIFs).

A great addition to Luxembourg funds set-up as corporates

As an exception to the rules in the Companies Act, no legal constraints apply to the statutory reserve, dividend distributions and redemption of shares.

A pragmatic approach to regulated funds

In addition to the greater flexibility permitted for SICAVs established as limited partnerships described above, no legal constraints apply to dividend distributions and redemption of shares for FCPs set-up as RAIFs.

Risk spreading rules should be close to rules applicable to SIFs

Risk spreading rules apply to RAIFs that (i) do not invest in risk capital and (ii) are subject to the application of the special tax regime described below. Whilst no specific rules are included in the RAIF Law, the position taken is to apply the diversification rules applicable to SIFs.

Investor information

A RAIF needs to publish an offering document. The offering document needs to state that the RAIF is not subject to supervision and the share register of the RAIF must be kept up-to-date if shares are issued to investors. Within 6 months following the reference period, the RAIF will provide investors with an annual report in line with the requirements of the AIFM Law.

Reporting to investors has to be aligned to the requirements of the AIFM Law.

A favourable tax regime

A RAIF will be subject to two different tax regimes depending on whether it has, or not, opted for the special tax regime described below:

  • under the general tax regime, a RAIF, irrespective of its corporate form, will only be subject to a tax regime similar to the one applicable to SIF i.e.:
  • it will subject to subscription tax at a rate of 0.01% p.a. (with certain exemptions available);
  • it will be exempt from corporate income tax, municipal business tax and net wealth tax; and
  • its distributions will generally not be subject to any withholding tax and should not be subject to Luxembourg taxation in the hands of non-resident investors;
  • under the special tax regime, a RAIF that invest in risk capital and that is not a mutual fund (FCP) will be subject to a tax regime similar to the one applicable to SICARs i.e.:
  • it will be fully subject to corporate income tax and municipal business (unless it is established as a SCS or SCSp in which case, as a transparent entity, it will be as a rule exempt from corporate income tax and municipal business tax) but income and gains derived from securities (valeurs mobilières) will be exempt thereof;
  • it will be exempt from net wealth tax, except for the minimum net wealth tax (unless it is established as a SCS or SCSp in which case it will also be exempt from this minimum net wealth tax);
  • its distributions will generally not be subject to any withholding tax and should not be subject to Luxembourg taxation in the hands of non-resident investors.

VAT exemption

No VAT provisions are included in the RAIF Law. As per current Luxembourg VAT legislation, the management of AIFs benefits from a VAT exemption. Indeed, the Luxembourg VAT legislation was amended by the AIFM Law to specifically cover AIFs in the VAT exemption regime. Such VAT exemption applies, in principle, to administration, portfolio and risk management services rendered to a fund. Services delegated to a third party may also benefit from a VAT exemption. VAT exemptions are, however, to be interpreted strictly and in the light of Luxembourg and European case law. A case-by-case analysis is advisable.

What about existing funds?

Existing FCPs, SICAVs, SICAFs and unregulated AIFs may elect for the RAIF regime subject to securing the relevant approvals from investors and where applicable from the CSSF.

The transformation of a regulated fund is subject to:

  • the prior approval of the CSSF; and
  • the amendments of the constitutive documents including the articles of association of the fund and the issue document/prospectus.

Existing unregulated SCSs and SCSps may adopt the RAIF regime by amending their LPA.

Whether or not existing funds should become a RAIF requires a case-by-case analysis from a tax, legal and regulatory perspective. For instance, (i) unregulated sub-threshold funds that cannot market in some jurisdictions and have to appoint anyhow an authorised AIFM may consider closely the tax regime applicable to RAIFs for their conversion, (ii) unregulated SCSs and SCSps may wish to benefit from an umbrella structure and benefit from a marketing passport, SICARs, SIFs and FCPs may wish to benefit from the lighter requirements on redemptions, etc.

Key take aways

Now that the RAIF Law has been adopted, initiators will have much greater choices to structure their fund. They may not need a regulated investment product or, on the contrary, consider a FCP, SICAV or SICAF, in each case with the RAIF regime. RAIFs will combine the legal and tax features of regulated AIFs like a SIF or a SICAR without the supervision of the CSSF together with favourable tax and legal regimes. The implementation of the RAIF Law is a shift from a product approach to indirect regulation through the external authorised AIFM – in Luxembourg or in a EU Member State, aligning Luxembourg to the focus under the AIFMD on the regulation of the AIFM, rather than on regulation of the AIF itself.

In addition, the absence of regulatory approval requirement will allow managers to reduce the time to market their fund and will reduce costs compared to other types of regulated fund vehicles. The possible creation of sub-funds through the umbrella structure, ring-fencing investments and relating risks and return, higher investor protection (via a fully authorised AIFM), access the pan-European AIFMD marketing passport, advantageous tax treatment while benefiting from a VAT exemption on fund management services, offer a unique product in Europe and strengthen Luxembourg’s strategic position in the AIF landscape.