The Reserved Alternative Investment Fund (RAIF) – A new and innovative vehicle to host alternative investment funds in Luxembourg and other legislative modernizations

Today, the Luxembourg parliament voted on a law regarding the Reserved Alternative Investment Fund (Fonds d’Investissements Alternatifs Réservés - RAIF). This law, along with the law voted yesterday on the modernization of the law of 10 August 1915 on commercial companies as amended (the “Company Law”), both offer an attractive legal framework for different investors looking to structure their investments through Luxembourg.

The Reserved Alternative Investment Fund (RAIF): the perfect tool for alternative investments players

The Reserved Alternative Investment Fund (RAIF) regime will significantly widen the options for Private Equity, Real Estate or Hedge Funds managers in Luxembourg.

The new Reserved Alternative Investment Fund (RAIF) regime proposes to provide all the existing benefits associated to the specialized investment fund (SIF) or Société d’investissement à capital variable (SICAR) regimes in a pragmatic legal environment. One of the key benefits of the Reserved Alternative Investment Fund (RAIF) regime for fund managers will be the absence of overlapping of regulations at the product and manager levels offering unique go-to-market capabilities compared to offshore fund regimes or other existing onshore fund regimes.

We are confident that such a fund regime will provide an efficient and consolidated answer to many of the challenges fund managers are facing in the current environment.
 

A flexible and dynamic legal framework

The Reserved Alternative Investment Fund (RAIF) can be set-up within a very short timeframe and will be largely modelled on the popular SIF regime. It will not be subject to the approval and/or supervision of the Luxembourg regulatory authority and will benefit from the structuring flexibility also applied to the other types of Luxembourg investment funds and SICAR.

The Reserved Alternative Investment Fund (RAIF) will be managed by an authorized AIFM and as such will be indirectly subject to the AIFMD regime. The AIFM regulation will be fully applicable with the related investor protection and this new fund will benefit from the marketing passport granted to the AIFM allowing to strengthen the position of Luxembourg as a primary platform to distribute fund products.

The Reserved Alternative Investment Fund (RAIF) should be able to adopt any fund strategy, invest in any asset class and, under certain conditions, not be required to diversify its portfolio of assets.

A tax neutral vehicle benefiting from the tax regime applicable to other funds with some particularities

The main objective of this new regime is to propose a tax neutral vehicle to investors allowing fund managers to accommodate various investments and/or investors’ tax needs or constraints.

The applicable tax regime will solely depend on how the fund is set up.

A Reserved Alternative Investment Fund (RAIF) vehicle relying on the SIF tax regime will be exempt from corporate income tax, municipal business tax and net worth tax. There will not be withholding taxes on distributions or any tax on speculative capital gains for investors. A 1 bps subscription tax, with exemptions available similarly to a SIF, will be applied.

If the RAIF invests in risk capital benefits, then it may be subject, like a SICAR, to corporate income tax and municipal business tax, although not to net wealth tax (except for the minimum net wealth tax). However, any income from transferable securities and income from temporary investments (investments made for less than 12 months) will be exempt. Again, there will be no withholding taxes on distributions or any tax on speculative capital gains for investors.

In both cases, it will be possible to set-up the fund as a tax transparent vehicle, whether this is as a mutual fund in the case of a RAIF-SIF or as a partnership for RAIF-SIF and RAIF-SICAR.

VAT is generally also a key factor when deciding upon the location of the fund, especially in comparison to offshore funds. The fees paid in consideration for the management of the fund vehicle should in principle be eligible to the Luxembourg VAT exemption whether the RAIF opts for the SIF or the SICAR tax regime.