www.arendt.com

© Copyright Arendt & Medernach 09/2016

Arendt & Medernach SA | 41A, avenue J.F. Kennedy L-2082 LuxembourgRegistered with the Luxembourg Bar | RCS Luxembourg B 186371 | VAT LU26853724

LUXEMBOURG DUBAI HONG KONG LONDON MOSCOW NEW YORK

reserved alternative investment funds (RAIF) for EU and third-country AIFMs

A broad range of practice areas

Administrative Law, Property, Construction

& Environment

Bank Lending& Structured

Finance

Banking & Financial Services Capital Markets Commercial &

Insolvency

Corporate Law, Mergers &

Acquisitions

DisputeResolution

Employment Law, Pensions & Benefits

EU & Competition Law

Insurance & Reinsurance Law

InvestmentManagement Tax LawPrivate Equity

& Real Estate Private WealthIP,

Communication& Technology

reserved alternative investment funds (RAIF) for EU and third-country AIFMs

3

Table of contents

I. Setting the scene 4

A. From a double tier to a single tier supervisory model 4

B. Looking ahead: the three ingredients for success 5

II. Innovation & Continuity 6

A. The structure of the RAIF Law 6

B The Luxembourg fund structuring toolbox: a new building block 6

C. The key features of a RAIF 7

D. Conversion, a relevant option? 9

Annex 10

Comparison table of the RAIF with other regimes 10

Taxation 12

Contacts 15

About Arendt & Medernach 16

Disclaimer: the following brochure does not constitute legal advice and is merely intended to raise awareness of issues relating to reserved alternative investment funds. Arendt & Medernach shall not incur liability of any kind should this document be used as a basis for responding to legal questions.

4

I. Setting the scene

A. From a double tier to a single tier supervisory model

The law of 23 July 2016 introduces a new Luxembourg investment fund regime, the Reserved Alternative Investment Funds (the RAIF1 Law).

The RAIF offers Luxembourg based AIFMs and, more widely, all EU based AIFMs a very attractive fund product structuring solution for the implementation of all types of alternative (non-UCITS) investment strategies. The RAIF can invest in any asset class (i.e., private equity, real estate, hedge, infrastructure, debt acquisition and loan origination, as well as listed securities of any type) and can be closed-ended or open-ended, leveraged or unleveraged.

Prior to the RAIF Law, Luxembourg and EU based AIFMs making Luxembourg their alternative investment fund structuring hub could choose between three main structuring solutions:

the investment company in risk capital (SICAR; since 2004);

the specialised investment fund (SIF; since 2007); and

the common or special limited partnership (CLP and SLP; since 2013).

While the SICAR and SIF structuring solutions enjoy and will continue to enjoy a widespread use amongst international investors and managers alike, it is the unparalleled success of the Luxembourg limited partnership regimes since 2013 which actually triggered the design and swift enactment of the RAIF Law.

AIFM Directive conformity

The Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers, as amended, (the AIFM Directive) introduced a harmonised manager regulation across Europe, de facto creating a new European investment funds order whereby AIFs could be subject to regulation both at product level and via the manager, or only through the regulation of the manager (i.e., the AIFM Directive). Seizing this opportunity in July 2013, Luxembourg shifted from its traditional double tier investment fund supervisory model to an optional single tier AIFM regulation model.

1 Fonds d’investissement alternatif réservé - FIAR.

5

B. Looking ahead: the three ingredients for success

With 40% of AIFs marketed cross-border according to the European Commission2, the selection of the appropriate investment funds domicile is a crucial step. Luxembourg, as Europe’s most important cross-border investment funds domicile, not only offers European connectivity but a truly global reach combined with a fit-for purpose environment characterised by a proven ability to connect managers and investors, stability and predictability, as well as a solid, yet flexible, legal, regulatory and fiscal framework which are the fundamentals for any long term project. Providing the international investment funds industry with a recognised and solid structuring framework while keeping innovation at a steady pace are the challenges Luxembourg is proactively and constantly taking up.

Luxembourg AIF structuring solutions have regularly been criticised by fund promoters due to time-to-market issues. The RAIF is the most direct answer to these issues. Indeed, simply eliminating the risk of a supervisory deadlock, the RAIF maintains the regulatory standards developed over the past 25 years at the highest level, thus protecting and safeguarding investors’ interests. As a result, Luxembourg RAIFs are positioning themselves to be true alternatives to AIFs established in the Cayman Islands, the British Virgin Islands or Delaware. Full compatibility with EU regulations, a truly global marketing reach and time-to-market are the three ingredients for success.

2 Consultation document – CMU action on cross-border distribution of funds, June 2016.

6

II. Innovation & ContinuityA. The structure of the RAIF LawThe RAIF Law should be viewed as continuity in innovation. Based on the success of the SICAR regime and the SIF regime since 2004 and 2007 respectively, the RAIF Law combines both regimes and wraps them into one single legislative text, merely creating a new scope of application reserved for fully authorised alternative investment fund managers based in Luxembourg, any other EU Member State or upon availability of the third country management passport, to third country based managers. Therefore, the RAIF Law offers a new legal, fiscal and regulatory funds approach in Luxembourg which enhances the existing Luxembourg fund structuring toolbox.

B. The Luxembourg fund structuring toolbox: a new building block

Navigating the Luxembourg fund structuring toolbox may present its challenges when one is not given the whole picture. The below chart illustrates how the different structuring building blocks may be assembled by choosing amongst the different regimes. This chart also shows how the new RAIF building block is structured by combining the most salient features of its two related fund regimes: the SICAR and the SIF.

The Luxembourg fund structuring toolbox

Choose: SICAV or SICAF

Co

rpo

rate

pro

du

ct le

vel

Man

ager

leve

l

Co

mm

on

fun

dp

rod

uct

le

vel

Choose: Single AIF or multi-compartment (umbrella) structure

Choose your corporate form: Fundamental 1915 Company Law - S.A., S.à r.l.*, SCA, CLP*, SLP*, SCOSA*, etc.

(* N/A to Part I UCITS)

2010UCI(TS) Law

2016 RAIF Law

2007 SIF Law

2004 SICAR Law

Other(unregulated)AIF (i.e., CLP,

SLP, etc.)

UCITSManCo

Registered orAuthorised

Luxembourgor EU AIFM**

AuthorisedLuxembourgor EU AIFM**

Registered or Authorised Luxembourg or EU AIFM**

Part I Part II

FCP (fonds commun de placement) - common fund (UCITS/ UCI/ RAIF/SIF)

** Third-country when passport available

7

C. The key features of a RAIFBy granting alternative investment fund managers the possibility of setting up a new type of AIF, the RAIF represents a significant advance in the Luxembourg fund structuring toolbox. The diagram below provides a summary of the key features of a RAIF ecosystem.

The RAIF ecosystem

All assetclasses

Luxembourgdepositary

Investorinformation

AIFM

Investmentadvisor

PortfoliomanagerRAIFins

titut

iona

l

profe

ssio

nal

well-in

form

ed

PASSPORT

EUROPEAN UNION

1

6a

2

3

9

4

5

7

8 6b

1 Legal structuring flexibility: Similar to the SIF and to the SICAR, all Luxembourg corporate, partnership and contractual legal forms are available to set up a RAIF: 

partnership forms: corporate (SCA), common (CLP) or special (SLP); corporate forms: public limited company (société anonyme - S.A.), simplified limited company

(société par actions simplifiée - S.A.S.)*, private limited company (société à responsabilité limitée - S.à r.l.), cooperative company organised as a public limited company (société coopérative organisée comme une S.A. - SCOSA); or

contractual form: common fund (fonds commun de placement - FCP).

A RAIF may thus opt for a variable (e.g., SICAV) or fixed capital (e.g., SICAF) structure. Furthermore, the RAIF may be organised as an umbrella structure (i.e. have multiple cells or compartments).

2 No CSSF supervision: The formation of a RAIF shall be witnessed by a Luxembourg notary public within 5 days of its formation. The notary shall ensure that the RAIF is then registered with the Luxembourg Trade and Companies’ Register. Unlike RAIFs set-up as corporations, common and special limited partnerships electing for the RAIF regime may still be formed under private seal, a process which preserves the confidentiality of the limited partnership agreement.

The absence of CSSF supervision and the fact that the launch of a RAIF (or any changes thereto) will not be conditioned upon CSSF authorisation is a welcome and very attractive feature of the new regime. Investment fund managers and promoters have long been requesting certainty as to timing when applying for new product launches in Luxembourg.

* only available for Chapter IV under the RAIF Law.

8

3 Eligible investors: RAIFs are available to “well-informed” investors, a category which includes institutional investors, professional investors and natural persons investing a minimum amount of EUR 125,000 further accepting a self-certification. The eligible investor concept will have to be applied in the context of the AIFM Directive marketing passport, which reserves the benefit of the passport to professional EU based (i.e., established or resident) investors only.

4 Investment strategy: The RAIF can invest in all types of assets either directly or via controlled intermediate companies subject to minimum risk-spreading requirements. In accordance with the risk-spreading principle set out in the CSSF Circular 07/309, a RAIF may not invest more than 30% of its assets or commitments to subscribe securities of the same type issued by the same issuer. If the RAIF elects to invest in qualifying risk capital investments only (similar to what a SICAR does), the risk-spreading requirements will not apply.

5 Governance: Each Luxembourg AIF which elects to be treated as a RAIF must appoint an authorised AIFM, whether established in Luxembourg, in another EU Member State or, upon and subject to the implementation of the third-country AIFM management passport, a third-country authorised AIFM. This is the fundamental pre-requisite condition for the use of the new regime. Consequently, registered AIFMs as well as, currently third-country AIFMs may not manage a RAIF.

However, the RAIF Law provides for one noticeable exemption in line with the AIFM Directive for managers which are part of a supranational organisation (e.g. the European Investment Bank (EIB) or the European Investment Fund (EIF)) provided the AIFs they manage pursue investment policies that are of public interest.

6 Portfolio manager: The AIFM can delegate portfolio management or risk management functions to delegates and/or rely on investment advisors based in the EU or outside the EU, in compliance with the requirements of the AIFM Directive.

7 Depositary: A Luxembourg based depositary bank or professional of the financial services sector providing depositary services needs to be appointed as per the AIFM Directive.

8 Investors’ information and transparency: Being managed by authorised AIFMs, RAIFs will be required to comply with AIFMD transparency requirements, notably in relation to disclosures to investors (initial and ongoing) and annual reports.

9 Passport: As an EU based fund managed by an authorised AIFM, the Luxembourg RAIF avails of the AIFMD passport for cross-border marketing to professional investors across the EU.

Tax efficient features: The RAIF is either subject to an annual subscription tax (taxe d’abonnement) at a rate of 0.01%, with various exemptions, or subject to the tax regime applicable to SICARs, in which case it would fully benefit from tax exemptions for qualifying risk capital income and gains. The VAT exemption applicable to AIF management services also applies in the RAIF context. The RAIF regime thus merely follows two tried-and-tested tax regimes with no new tax features.

II. Innovation & Continuity

9

D. Conversion, a relevant option?Existing SIFs, SICARs and unregulated AIFs may opt for the RAIF regime subject to securing the relevant approvals from investors and, where applicable, from the CSSF.

RAIFs may also elect to convert into SIFs (or, where applicable, SICARs). This conversion option could be attractive in order to benefit from the speed to market of the RAIF where investors from a long term perspective have a preference for a SIF or a SICAR.

The product regulation has been replaced by the AIFM authorisation as a prerequisite for certain institutional investors (e.g., in Germany). However, it remains to be seen, for instance, whether managers managing a regulated SIF or SICAR, when the AIF is running smoothly, will decide to ask existing investors if the fund should remain subject to product regulation or if the regulatory status of said fund should be changed.

In particular, there may be limited appetite for managers of regulated closed-ended AIFs (which are also closed for further investors) to seek a regime change. The question is more likely to be raised by umbrella structures, which continue to launch new compartments or sub-funds, although investors in the existing compartments or sub-funds will have to consent to such a regime change.

For further details and a comparison of the RAIF with other regimes, please refer to the comparative table on the next pages.

II. Innovation & Continuity

10

AnnexComparison table of the RAIF with other regimes

RAIF SIF SICARPartnership not qualifying as SIF/SICAR/RAIF

Legal forms

Corporate form (SCA, SA, SAS*, SARL)

Partnership (CLP or SLP)

Or contractual form (FCP)

Idem RAIF

Corporate form (SCA, SA, SARL)

Or partnership (CLP or SLP)

May have legal personality (CLP) or not (SLP)

Formed between at least one unlimited partner (general partner) and one limited partner that should be different entities

Authorisation

No CSSF authorisation required

However, notarial acknowledgment within 5 days of the formation. Registration with the RCS. The RCS keeps an official list of RAIFs

No start of activities until authorised by the CSSF

Once authorised, registered on the official list maintained by the CSSF

Idem SIFNot subject to authorisation from the CSSF; may therefore be set up quickly

Supervision by the CSSF

Not subject to the supervision of the CSSF

However RAIFs have to be managed by an authorised external AIFM

Subject to the permanent supervision of the CSSF until the close of liquidation

Any amendment to the constitutive documents and any changes in the various appointments (i.e., management, delegates and services providers) require prior CSSF approval

Idem SIF

Not subject to the supervision of the CSSF

However if the Partnership qualifies as an AIF and is managed by an authorised AIFM, the AIFM will be supervised by the CSSF

DepositaryDepositary bank or professional of the financial services sector providing depositary services, subject to conditions

If the Partnership qualifies as an AIF and is managed by an authorised AIFM, same as for SIF, RAIFs or SICARs

Auditor

Luxembourg independent auditor (réviseur d’entreprises agréé) mandatory

The auditor’s report and qualifications, if any, to be included in full in the annual report

Luxembourg independent auditor (réviseur d’entreprises agréé) mandatory

The auditor’s report and qualifications, if any, to be included in full in the annual report

Some additional duties of notification to and of extensive supervision at the request of the CSSF under certain circumstances

Idem SIF

No auditor required in SLPs

In CLPs, Luxembourg independent auditor (réviseur d’entreprises agréé) to be appointed if certain quantitative thresholds are exceeded

Risk management

N/A

The AIFM will however be required to have a risk management process in place taking into account the risks inherent to the RAIF

Appropriate risk management systems to detect measure, manage and monitor the risk of positions and their contribution to the overall risk profile of the portfolio

Idem SIF

If the Partnership qualifies as an AIF and is managed by an authorised AIFM, same as RAIF

* only available for Chapter IV under the RAIF Law.

11

  RAIF SIF SICARPartnership not qualifying as SIF/SICAR/RAIF

Eligible investments

Any asset class and any investment policy or strategy

Risk spreading requirements unless RAIF invests exclusively in risk capital as per constitutive documents

Any asset class and any investment policy or strategy subject to prior approval by the CSSF

Risk spreading requirements (max 30% per asset)

Investments exclusively in assets representing risk capital as per the SICAR Law

No legal risk-spreading requirement (investment in a single target company therefore possible)

Not limited in their purpose

Umbrella structure available

Yes No

Eligible investors

Well-informed (Institutional, professional, minimum amounts investors with special certification)

Eligible investor requirements do not apply to persons taking part in the management of a SIF, RAIF or SICAR

No restrictions

However AIFs with an authorised AIFM may only be marketed to professional investors

Capital

Variable capital available across the board

Significant flexibility in relation to new share issuance, issue price and redemptions

Mechanisms to admit new partners and increase/reduce the partners’ contributions freely set out in the LPA

Financing

Variety of equity, debt and hybrid instruments (including (convertible) preferred equity certificates, i.e. CPECs and PECs) available depending on legal form

Minimum capital of EUR 1 million for a SICAR, EUR 1.25 million for a SIF and RAIF to be reached no later than 12 months following the authorisation by the CSSF. No minimum capital requirements apply to partnerships

Distributions to investors

Distributions by way of annual or interim dividends available

However distribution may only be made to the extent that the minimum share capital is maintained (EUR 1.25 million for a SIF or a RAIF, EUR 1 million for a SICAR)

Distributions by way of annual or interim dividends not subject to any restrictions other than those set forth in the LPA

ValuationAssets to be valued at fair value, in accordance with constitutive documents

Valuation governed by the provisions set forth in the LPA

Transparency

Issuing document (for SIFs and RAIFs) or prospectus (for SICARs) required unless a Prospectus Directive-compliant prospectus under the amended Law of 10 July 2005 has been published (for SIFs and RAIFs)

For RAIF cover page of the issuing document must clearly indicate that the RAIF is not under the supervision of the CSSF; no other requirement in terms of minimum content or specific layout. However, investors must be able to make an informed assessment of the investment proposed and of the risks associated therewith

Audited annual report for each financial year within 6 months from the end of the financial year to which it relates. No requirement to prepare consolidated financial statements

Additional AIFM Directive transparency requirements may need to be complied with upon appointment of an authorised or registered AIFM (always required for a RAIF)

No specific legal obligation to establish a prospectus or issuing document

SLPs: no legal obligation to file their annual accounts with the RCS

LPs shall file their annual accounts on a yearly basis in case their turnover exceeds EUR 100,000

12

AnnexTaxation

 SIF & RAIF not qualifying for

SICAR-like taxation

SICAR & RAIF investing in Risk Capital

SA, SARL, SCA CLP, SLP

Corporate income tax (CIT)

N/A: tax exempt

Maximum 21%, plus a solidarity surcharge of 7% which leads to an effective CIT of 22.47%

However 100% exemption for profits derived from (i) risk capital securities and (ii) funds to be invested within 12 months in risk capital securities

N/A: tax transparent

Municipal business tax (MBT)

N/A: tax exempt

6.75% (in Luxembourg-city)

However 100% exemption for profits derived from (i) risk capital securities and (ii) funds to be invested within 12 months in risk capital securities

N/A: tax transparent

Withholding Tax

> On dividends: N/A3 > On interests: N/A4

Net worth tax

1bp per annum on net assets Only subject to minimum tax of EUR 3,210

1324

3 For the purposes of this summary table, it is assumed that income is paid to companies.4 Assuming the beneficiary of the payments is not a Luxembourg resident individual.

13

Notes

14

15

Camille Bourke, Partner

Tel: +44 207 456 9800camille.bourke@arendt.com

Michèle Eisenhuth, Partner

Tel: +352 40 78 78 519michele.eisenhuth@arendt.com

Francis Kass, Partner

Tel: +352 40 78 78 277francis.kass@arendt.com

Yves Lacroix, Partner

Tel: +352 40 78 78 745yves.lacroix@arendt.com

Claude Niedner, Partner

Tel: +352 40 78 78 515claude.niedner@arendt.com

Florence Stainier, Partner

Tel: +352 40 78 78 657florence.stainier@arendt.com

Pierre Beissel, Partner

Tel: +352 40 78 78 792pierre.beissel@arendt.com

Gilles Dusemon, Partner

Tel: +352 40 78 78 986gilles.dusemon@arendt.com

Stéphane Karolczuk, Partner

Tel: +852 2801 5808stephane.karolczuk@arendt.com

Claude Kremer, Partner

Tel: +352 40 78 78 561claude.kremer@arendt.com

Isabelle Lebbe, Partner

Tel: +352 40 78 78 510isabelle.lebbe@arendt.com

Henning Schwabe, Partner

Tel: +352 40 78 78 919henning.schwabe@arendt.com

Contacts

16

www.arendt.com © Arendt & Medernach 2017

About Arendt & Medernach

Arendt & Medernach is the leading independent business law firm in Luxembourg. The firm’s international team of more than 300 legal professionals represents Luxembourg and foreign clients in all areas of Luxembourg business law from our head office in Luxembourg and our other offices in Dubai, Hong Kong, London, Moscow, New York and Paris.

Our philosophy is expressed through our five values: vision – commitment – people – independence – energy. We strive for excellence in order to achieve the best results for our clients and we always look for creative solutions.

Our specialised practice areas allow us to offer a complete range of Luxembourg legal services tailored to the client’s individual needs across all areas of business law.

A broad range of practice areas

Administrative Law, Property, Construction

& Environment

Bank Lending& Structured

Finance

Banking & Financial Services Capital Markets Commercial &

Insolvency

Corporate Law, Mergers &

Acquisitions

DisputeResolution

Employment Law, Pensions & Benefits

EU & Competition Law

Insurance & Reinsurance Law

InvestmentManagement Tax LawPrivate Equity

& Real Estate Private WealthIP,

Communication& Technology

www.arendt.com

© Copyright Arendt & Medernach 03/2017

Arendt & Medernach SA | 41A, avenue J.F. Kennedy L-2082 LuxembourgRegistered with the Luxembourg Bar | RCS Luxembourg B 186371 | VAT LU26853724

LUXEMBOURG DUBAI HONG KONG LONDON MOSCOW NEW YORK

reserved alternative investment funds (RAIF) for EU and third-country AIFMs