The tax and legal framework for investors seeking to structure their investments through the country has been boosted by the implementation of a new alternative investment fund vehicle.
The law, introducing the Reserved Alternative Investment Fund (RAIF), was published in the Official Gazette on July 28 2016 and is now in force.
The new RAIF regime significantly expands the options for private equity, real estate and hedge fund managers in Luxembourg.
The regime aims to provide all of the existing benefits associated with the specialised investment fund (SIF) or Société d'Investissement à Capital Variable (Sicar) regimes, with an efficient regulatory structure. It also aims to increase the go-to-market capabilities, compared to offshore fund regimes or other existing onshore fund regimes.
One of the key benefits of the RAIF regime for fund managers is the absence of overlapping regulations at the product and manager levels. The RAIF will be managed by an authorised AIFM and, as such, will be indirectly subject to the AIFMD regime.
The 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. This new fund also will benefit from the "marketing passport" granted to the AIFM, thus enhancing Luxembourg's position as a primary platform to distribute fund products.
Although there is no specific real estate investment trust (REIT) regime in Luxembourg, it should be possible to use the RAIF as a REIT, given its tax neutrality (as explained below), but without the related constraints such as the exposure to a single investment location, the obligation to distribute rental income annually, meet certain thresholds, etc.
From a tax perspective, the main objective of the RAIF regime is to offer a tax-neutral vehicle to investors, allowing fund managers to accommodate various investments and/or investors' tax needs or constraints.
The applicable tax regime depends on how the fund is set up, i.e. whether it is similar to a SIF or a Sicar:
- A RAIF vehicle relying on the SIF tax regime will be exempt from corporate income tax, municipal business tax and net worth tax. There will be no withholding taxes on distributions, and no non-resident tax on speculative capital gains for investors. A one basis point subscription tax, with exemptions available that are similar to those for a SIF, will be applied.
As an exempt entity, a RAIF's access to tax treaties should be confirmed on a case-by-case basis, since the treatment of such types of investment funds has been subject to discussions at an international level within the context of the OECD BEPS Project.
- If a RAIF invests in risk capital benefits, then, like a Sicar, it may be subject to corporate income tax and municipal business tax, although not to net worth tax (except for the minimum net worth tax). However, any income from transferable securities or income from temporary investments (investments made for less than 12 months) will be exempt. There will be no withholding taxes on distributions, and no non-resident tax on speculative capital gains for investors.
As an entity subject to tax, in principle, the RAIF should have access to tax treaties, although as mentioned above, this is subject to confirmation on a case-by-case basis. The RAIF law should combine the flexibility of a fund vehicle (e.g. compartments) with tax neutrality of an investment (i.e. access to tax treaties) and investors (i.e. tax exemption on income from transferable securities and no withholding tax) perspectives. This could be seen as an interesting improvement compared to the Soparfi (Societe de Participations Financieres) tax and legal regime, which in Luxembourg is a typical trading company that is subject to the general legal and tax-related company law provisions.
In both cases, it is possible to set up the fund as a tax-transparent vehicle, whether as a mutual fund in the case of a RAIF-SIF or as a partnership for a RAIF-SIF or a RAIF-Sicar. This is an important feature in a case where a tax treaty is not applicable and/or where it is necessary to rely on the tax profile of the investors from a source country perspective.
VAT is also generally a factor when deciding on the location of a fund, especially in comparison to offshore funds. The fees paid in consideration for the management of the fund vehicle, in principle, are eligible for VAT-exempt treatment under Luxembourg law, regardless of whether the RAIF opts for the SIF or the Sicar tax regime.
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