On 14 July 2016, the Luxembourg Parliament has voted a new law for the purpose of creating a new type of alternative investment fund, the Reserved Alternative Investment Fund (the “RAIF”). The RAIF law is dated 23 July 2016 and has been published in the Luxembourg official gazette on 28 July 2016. This law offers a mechanism “directly inspired” by the current available fund regimes.
The introduction of RAIF regime seeks to widen the range of investment vehicles available in Luxemburg, offering a new option to the initiators of Luxembourg AIF project.
As a RAIF is an unregulated alternative investment fund, it is not subject to the Luxembourg financial supervisory authority’s (Commission de Surveillance du Secteur Financier, the “CSSF”) prior clearance nor to its prudential supervision. In concrete terms, this means that the launch of a RAIF is not subject to the CSSF approval and that nor its issuing document, neither its articles of incorporation, nor its directors have to be approved by the CSSF. RAIFs may immediately be marketed upon incorporation. This is a significant step towards faster “time to market”.
The main idea behind the RAIF is to avoid the double layer of supervision: one at the manager side and one at the product or AIF level in order to improve time-to-market and reduce the supplemental costs that such regulation involves.
These characteristics will definitely attract the interest of many players looking for flexibility and accelerated time-to-market which the traditional regulated fund structures are unable to provide.
Raif represent a specific category of AIFs, that must be managed by an authorised AIFM, which can either established in Luxemburg or in another EU Member State or in a Third Country (where AIFMD passport is available).
Therefore, unlike a SIF, a Raif cannot be a non-AIF or be managed by an exempt AIFM.
Information disclosure to investors and annual report have to be in line with AIFM rules, hence Raif has to be included in reporting.
Legal forms and set-up.
RAIF may adopt one of the following legal structures: common investment fund (fonds commun de placement – FCP) managed by a management company, or a corporate form as an investment company with variable or with fixed capital (société d’investissement à capital variable / fixe – SICAV / SICAF).
As a corporate structure, the available corporate forms are the following: public or private limited liability company (société anonyme – SA or société à responsabilté limitée – Sàrl, partnership (société en commandite simple – SCS), ), cooperative company in the form of a public limited company (société coopérative organisée sous forme de société anonyme – SCOSA), partnership limited by shares (société en commandite par actions – SCA) or special limited partnership (société en commandite spéciale – SCSp).
The main features of a RAIF established as a Limited partnership (LP) and General Partner (GP) are: the ability to issue partnership interest is the form of securities or partner’s account( comptes d’associés), the full flexibility to organize the voting rights of partners inthe limited partnership agreement ( LPA), the entitlements of partners to the profits and losses of the LP, and distributors to partners, in the LPA andthe rules governing the transfers of partnership interests in the LPA
The RAIF is set up by private or notarial deed and registered and maintained on a list with the Registre de Commerce et des Sociétés.
Product features and investment rules.
Product and share class may be created as a stand-alone fund or as an umbrella fund with segregated liability between sub-funds. Sub-funds may invest in other sub-funds under the same umbrella. Different share classes allowed minimum capital of 1.25 million euros to be reached within 12 months.
A RAIF is not subject to limitation regarding eligible assets and diversification ratios. Just like a SIF, the RAIF must respect a 30% diversification Limit. If a RAIF restricts its investments policy in its constitutive document to investment in risk capital, it is not required to operate under the principles of risk spreading.
Eligible investors and reporting.
The RAIF will be available for well-informed investors: institutional investors, professional investors and investors investing a certain minimum amount (EUR 125 000) further accepting a self-certification.
Even though the RAIF is not regulated, supporting documentation (subscription agreement set-up documentation, depository agreement etc.) is required.
RAIFs must establish an issuing document including the information necessary for investors to be able to make an informed judgment of the investment proposed to them and, in particular, of the risks attached thereto. The issuing document must clearly make the investors aware that the RAIF is not subject to a Luxembourg prudential supervision. The preparation of the annual financial statements and investors disclosures is required to follow AIFMD standards. The financial statement will be audited by an Approved Statutory Auditor. The accounting standards to be followed are generally Luxembourg GAAP and IFRS.
In order to comply with AIFMD, the RAIF will be subject to a Luxemburg-based depositary and central administration requirement, and will need to appoint an auditor, all providing comfort to investors, as indeed envisaged by the directive.
From a practical point of view, the RAIF is set up in the form of an investment fund, but unlike the traditional unregulated product, the RAIF will be serviced in the same manner as its regulated counterparts, with regular net asset value calculations, transfer agency services and depositary
Distribution and marketing can be organized similarly to any other EU regulated investment vehicles.
Existing AIFs that are set up under company law have the option to convert to a RAIF subject to shareholder approval.
The default tax regime applicable to RAIFs mirrors the SIF regime. This means that the RAIF will only be subject, at fund level, to an annual subscription tax levied at a rate of 0.01% of its net assets. Depending on the investment assets, some exemptions from subscription tax apply, in order to avoid a duplication of this tax. Irrespective of the legal form chosen for the RAIF, it is not subject to corporate income tax, municipal business tax or net wealth tax, and distributions of profits by the RAIF do not give rise to a withholding tax.
As an alternative to the default regime, a RAIF which does not take the legal form of an FCP may choose to be taxed according to the same tax rules as those applicable to SICARs. To benefit from this optional regime, the RAIF's constitutive documents must provide that its sole object will be to invest in risk capital assets. At the end of the relevant financial year the auditor must confirm that the RAIF has complied with the risk capital investment policy. This report must be filed with the competent tax authorities.
For the time being, the choice between the default tax regime or this optional tax regime must be made at the umbrella level, meaning that within a single umbrella structure it will not be possible to have some sub-funds subject to the default tax regime and others to the optional SICAR-like tax regime.
Under these SICAR-mirroring tax rules, an RAIF which takes a corporate legal form will be a normally taxable entity for corporate income tax purposes, but with an exemption from its taxable basis for any profits and gains derived from securities invested in risk capital, or from funds reserved for investment and actually having been invested within twelve months. As a normally taxable entity, it should have access to the extensive network of double tax treaties signed by Luxembourg with other jurisdictions. Other than this liability for corporate income tax, with a wide exemption, there should be no other liability for direct taxes. The RAIF will be exempt from net wealth and municipal business tax. In line with the tax rules applying to SICARs, distributions of profits by the RAIF do not give rise to withholding tax.
A risk capital RAIF which takes the form of a partnership will be deemed to be transparent and not being engaged in an enterprise for corporate income and municipal business tax purposes. The profits and gains of such an RAIF will therefore not be liable to corporate income tax and net wealth tax at either the level of the RAIF or the level of its non-resident partners / investors, nor to municipal business tax, and its distributions of profits should not give rise to any withholding tax.
The Vat exemption applicable to AIF management services will also apply. The RAIF regime thus merely continues two tested and tried tax regimes and does not introduce any new tax features.
RAIF can be set up as tax transparent vehicles or a taxable entity that could access treaty benefits from Luxembourg’s Double Tax Treaties where available to investment structures.
Forces and weakness of RAIF.
A very attractive and quick time to market, a high flexible risk diversification rules, the possibility to create umbrella vehicles / Fund of Funds, the applicability of a fund taxation (except in case of risk capital), any restrictions on distributions and legal reserve required , the only indirect supervision by AIFM, directors, depository and auditors, the access to an EU marketing passport, the AIFMD quality seal (transparency, risk management and independent valuation) and a fund structure with many of the same characteristics and structuring flexibility as the SIF and the Sicar are undoubtedly the main qualities that attract the interest of many players.
Indeed, the RAIF, unlike the Sif and the Sicar, will not benefit from investors protection afforded by the CSSF.
Moreover, there are some costs linked to the appointment to an AIFMD and to the fund set up (mainly lawyer fees).
Certain promoters will continue to favour establishing regulated product, often to respond to investors preferences, because of CSSF supervisions and control, the SIF label and the recognition in other countries.
By Diana Cutolo, Senior Consultant Fund services @ Initio Luxembourg