Introduction new flexible type of investment fund

Luxembourg, though being a small country in size, continues enhancing its strong position in the global financial sector. End of last year, the Luxembourg government launched its overall plan LUXFIN2020 in becoming the leading financial center of Europe and thereby challenging London and Frankfurt. As a further demonstration of its pro-activity, the government tabled almost simultaneously a bill of law with the Luxembourg parliament aiming at introducing a new type of investment fund: the so-called Reserved Alternative Investment Fund (RAIF – or fonds d’investissement alternatif réservé, FIAR). It is expected that this type of fund will enforce, if not enlarge, Luxembourg’s position on the global fund market.

Luxembourg is already market leader in the field of funds, for being the second largest hub for investments funds worldwide after the US, and the largest hub within the EU. Over time, Luxembourg has developed a whole range of regulated investment funds (such as UCITS, Part II UCIs, SIFs, SICARs). All these funds are subject to the ongoing supervision of the Luxembourg supervisory authority (the Commission de surveillance du secteur financier, CSSF). The range of Luxembourg funds has proven very successful. This did not alter with the introduction of the EU AIFM Directive either, although it created a shift in European regulatory focus. Also for Luxembourg, the management supervision pursuant to the EU AIFM-Directive became an additional layer of supervision on top of existing Luxembourg product supervision. This double layer may have been considered as excessive for certain types of funds and investors.

But Luxembourg would not be Luxembourg, if it would not constantly innovate and improve its legal system to accommodate the global fund industry. For that purpose, Luxembourg modernized its limited partnership regime by amending the rules applicable to the common limited partnership (société en commandite simple, SCS) and the creation of a new form of limited partnership without legal personality (société en commandite spéciale, SCSp). SCSs and SCSps are used for the structuring of regulated as well as unregulated investment vehicles. However, the fact that an SCS/SCSp may avoid regulatory supervision itself does not imply that it is not subject to any supervision at all. Any unregulated SCS/SCSp that is an AIF must, in principle, be managed by an authorized AIFM, and is therefore indirectly being supervised by the regulators. These new regimes are extremely successful. Upon their introduction, hundreds of unregulated SCSs/SCSps have been launched.

Nevertheless, SCSs/SCSps may not be suitable vehicles for all circumstances as they lack certain features of the regulated investment funds. For instance, SCSs/SCSps are tax transparent; they cannot have an umbrella structure or create compartments or sub-funds; and limited partnerships are typically used in Anglo-American jurisdictions, which might not be attractive to investors from other jurisdictions, for being used to other types of structuring.

Now, the introduced RAIF intends to meet the demand for a type of fund that is not subject to the (direct) supervision of the CSSF, whilst having the characteristics of a regulated fund.

RAIF : Legal aspects

A RAIF itself will not be subject to supervision by the CSSF. Therefore no authorization will be required from any supervisory authority in the event of changing a RAIF’s constitutional documents and other fund documents. Investors will not have the same protection as with regulated funds, but the timeframe within which a RAIF can be launched will be more attractive.

Also, there is not an entire lack of supervision. A RAIF, for being an AIF, is held to be managed by a duly authorized AIFM. This AIFM can be based either in Luxembourg or in another EU Member State. The AIFM is to ensure that the RAIF complies with all requirements of the EU AIFM Directive, and is therefore subject to indirect supervision. The RAIF regime is thus not available to internally managed AIFs (with certain exceptions).

The RAIF will have the same characteristics as a SIF. It will be possible to establish a RAIF either as a corporate entity (such as a SA, SCA, S.à.r.l.), as a partnership (such as SCS/SCSp) or as a contractual form (fonds commun de placement). In addition, RAIFs will avail of the umbrella structure, enabling them to create sub-funds or compartments. Each sub-fund can have its own investment policy and its own rules governing the terms of investment. The liquidation of one sub-fund does not trigger the liquidation of the other sub-funds. And each sub-fund can have its own investment managers or advisory board, as long as the AIFM is one and the same at the RAIF level as a whole. Furthermore, there is no limitation as to investments policies or eligible assets, for which a RAIF can operate any fund strategy. Investments in RAIFs will be limited to well-informed investors only. This category includes institutional investors, professional investors and investors investing certain minimum amounts (EUR 125,000).

RAIF : Tax aspects

The Luxembourg tax treatment of a RAIF is similar to that of a SIF (subject to an annual subscription tax (taxe d’abonnement) at a rate of 0.01%, with various exemptions), or, when it restricts its investment policy in its constitutional documents to investments in risk capital, subject to the tax regime applicable to SICARs, i.e., be fully subject to tax save for qualifying risk capital income and gains. The VAT exemption on AIF management services will also apply.

Conclusion

The RAIF is expected to become an interesting instrument for players in the field of alternative investments, who are looking for flexibility and speed to market, which the traditionally regulated fund structures are unable to provide. The AIFM not necessarily needing to be located in Luxembourg may be an additional attractive point. Also currently existing funds may consider converting into a RAIF, as the proposed bill explicitly provides for such possibility. And moreover, a RAIF may be converted into a regulated fund.

The bill introducing the RAIF has been adopted by the Luxembourg government and was submitted to parliament in December 2015. It is expected to pass in Q2 2016.