At its meeting on November 27 the Luxembourg government formally approved draft legislation creating a new type of fund vehicle, the reserved alternative investment fund (fonds d’investissement alternatif reservé). The most important characteristic of the RAIF (or FIAR, its French acronym) is that it is not subject to regulation by the Financial Sector Supervisory Authority (CSSF), although it must have an authorised manager. Further details of the fund and its requirements will become clear once the parliamentary bill has been published.

In a statement, the government says it is designed to benefit from the structuring flexibility of non-UCITS collective investment vehicles, specialised investment funds (SIFs) and risk capital investment companies (SICARs). However, the system of dual supervision of managers and funds applicable to these vehicles, which adds costs and places restrictions on the management of the funds, may not be necessary or desired by institutional and professional investors.

What kind of investors may place money in RAIFs?

The RAIF is restricted to sophisticated, institutional and professional investors, and are subject to a minimum investment of €125,000.

What advantages does the RAIF offer?

The RAIF is based on the alternative investment fund regime established by the European Union’s Alternative Investment Fund Managers Directive and its application in Luxembourg to specialised investment funds. However, it is designed to speed up time to market through the absence of a requirement for authorisation or ongoing supervision by the CSSF. This means that future changes to the fund’s constitutional, information or other documents, will not require regulatory approval.

Must a RAIF have a manager established and regulated in Luxembourg?

No. There is no requirement for a Luxembourg-based manager, but it must have an alternative investment fund manager authorised under the AIFMD and domiciled in a European Economic Area member state in order to benefit from the AIFM’s marketing passport.

Are there restrictions on the kind of strategy a RAIF may follow?

With the reservation that the terms of the legislation have not yet been published, it appears that the manager of the RAIF may follow any kind of investment strategy, with no restrictions regarding eligible assets. RAIFs whose investment policy is restricted to risk capital investments will not be required to follow risk-spreading rules.

What kind of tax treatment will RAIFs receive in Luxembourg?

RAIFs will enjoy the same tax treatment as SIFs, paying an annual subscription tax amounting to 0.01% of its net assets but enjoying complete exemption from corporate income tax or withholding tax on the distribution of returns, whether in the form of dividends or interest income. RAIFs limited to risk capital investments will be subject to the same tax regime applicable to SICARs.

What kind of structure can a RAIF take?

Like SIFs and SICARs, RAIFS can take any corporate or contractual legal form, including a public limited company, partnership limited by shares, or common or special limited partnership.

Is the RAIF more attractive than Ireland’s new ICAV for targeting US investors?

The ICAV is a regulated fund vehicle, unlike the RAIF, with the attendant costs and time requirements. When structured as a partnership limited by shares (SCA), the RAIF may, like the ICAV, elect treatment as a partnership for US tax purposes. This is important for hedge funds marketed to US taxpayers, since it allows the use of master-feeder structures.

Can a RAIF have multiple compartments?

Yes, it appears that a RAIF can be created as an umbrella structure with multiple sub-funds, as well as multiple share classes.

When is the draft legislation likely to become law?

Now that the law has been approved by the government, it will be introduced to the lower house of Luxembourg’s parliament, the Chamber of Deputies, for debate and approval. Although the bill has not yet been published, current estimates suggest enactment of the legislation could take place by the second quarter of next year.