The RAIF Law of 23 July 2016 has seen the creation of a new unregulated investment vehicle in Luxembourg, the reserved alternative investment fund (“RAIF”). The RAIF regime enables the creation of umbrella structures with ring-fenced sub-funds (compartments) in the unregulated arena. The aim is to further boost Luxembourg’s appeal as an international fund location while utilising the European regulatory framework.
As an alternative investment fund (“AIF”), a RAIF does not require prior approval from the Luxembourg financial regulator (Commission de Surveillance du Secteur Financier – hereafter the “CSSF”). This makes it possible to launch new investment funds faster, in line with market demands. Only the fund management company (“AIFM”) and the depositary are subject to control by the CSSF.
There follows an overview of the requirements related to launching a RAIF.
In product terms, a RAIF largely corresponds to the familiar Luxembourg special investment fund (“SIF”) and is likewise only open to “well-informed investors” who are able to assess the associated investment risk properly. The term “well-informed investor” as used in the RAIF Law includes in particular institutional and professional investors. Establishment of a RAIF must be registered on a list held by Luxembourg’s trade and companies register, and the RAIF must be managed by a Luxembourg-based management company. As with a SIF, the minimum capital required for a RAIF is EUR 1,250,000.00.
With regard to the choice of legal form, the legislation allows the fund to be organised in contractual form, i.e. as an FCP (fonds commun de placement), or as a company. If the RAIF is structured as an FCP, it should be noted that the RAIF has no legal personality, but is a co-proprietorship. In such a case the AIFM company will act in its own name for account of the FCP and take all the FCP’s investment decisions and other operational decisions.
If, on the other hand, the RAIF is established as a company, this can involve an investment company with variable capital (“SICAV”) or fixed capital (“SICAF”). It is important to distinguish between the choice of a SICAV or SICAF as the legal form and the chosen corporate form. Under Art. 23 of the RAIF Law, a RAIF in the form of a SICAV can be established as a public limited company, a partnership limited by shares, a common limited partnership, a special limited partnership, a limited company or a cooperative in the form of a public limited company.
Unlike a SIF, under Art. 4(1) of the RAIF Law the RAIF must be managed externally, by a licensed AIFM. In this way, the RAIF itself can remain unregulated but is at the same time subject to regulated management. The AIFM can also be domiciled in another EU Member State. This means, for example, that a German AIF investment company can manage a Luxembourg RAIF established in corporate form. By contrast, crossborder management of a RAIF set up as an FCP is not possible.
The RAIF Law contains no provisions regarding the asset classes in which a RAIF may invest. There are therefore no legal restrictions around deciding whether to invest in a particular asset. The question of how to invest is, however, restricted by the need to comply with risk regulations for risk diversification purposes, and must be in line with CSSF Circular 07 / 309 on SIFs.
In practice, this means that a RAIF cannot be structured as a single asset RAIF, since a RAIF that only invests in a single property, for example, would not comply with the risk diversification requirements of the RAIF Law. The only exception is if the RAIF is organised in such a way that it invests exclusively in risk capital.
Given the structure of a RAIF, the RAIF Law expressly provides in Art. 49(1) for the option of setting up the fund as an umbrella structure with different compartments.
It has hitherto not been possible to establish unregulated investment structures as umbrella funds with Capital Markets The RAIF – Luxembourg’s new unregulated investment vehicle 45 ring-fenced compartments in Luxembourg. With this new form, each compartment must correspond to a specific portfolio of assets which is distinct from the asset portfolios of the other compartments, particularly with regard to liability. In accordance with this fixed allocation, the assets of a given compartment may only be used to satisfy the rights and claims of investors and creditors of that compartment (ring fencing). However, it is possible for a compartment of the RAIF to invest in another compartment of the same RAIF under certain conditions (Art. 49(7) of the RAIF Law). The RAIF Law also expressly allows for transformation of a RAIF into a different fund structure.
With regard to tax, a RAIF is treated in the same way as a SIF, i.e. it is only subject to subscription tax in Luxembourg. This tax amounts to 0.01% of the net assets of the RAIF at the end of each quarter. A RAIF that is not organised as an FCP and which invests exclusively in risk capital may opt to be taxed in the same way as a risk capital company.
With regard to German tax law, however, a RAIF is subject to the German Investment Tax Act, which distinguishes between partnerships and corporations when classifying investment companies for tax purposes. The corporate structure of the RAIF is therefore crucial in determining the tax treatment.
In summary, a German special investment fund is considerably more restricted in terms of structuring options than a RAIF. The German Investment Code (KAGB) makes no provision for an unregulated AIF, or for an unregulated AIF umbrella structure. Conversely, there are no obstacles to prevent a German AIF investment company from using European passporting to manage a Luxembourg-based RAIF established as a company. A RAIF also appears to offer advantages compared to German special investment funds with regard to time to market, since the investment terms of a German fund and any material amendments to them must be submitted to BaFin before the units or shares are issued.