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Luxembourg Approves New Tax-Advantaged Fund Vehicle

by Ulrika Lomas,, Brussels

20 July 2016

Luxembourg's Parliament has approved a new tax-advantaged alternative fund structure, adding to the jurisdiction's already impressive array of such vehicles.

The Reserved Alternative Investment Fund (RAIF) law was approved by Parliament on July 14 and was due to come into force three days after publication in Luxembourg's Official Gazette.

The RAIF is said to be similar to the Luxembourg Specialized Investment Fund (SIF) regime, which are permitted more flexibility over investment policy than standard funds, and are subject to a looser regulatory regime, but can only be marketed to experienced investors. However, a RAIF differs from a SIF in that it does not require approval of the Luxembourg regulator, the CSSF. Instead, a RAIF is supervised as an alternative investment fund under the European Union alternative investment fund manager directive (AIFMD) and must submit regular reports to the regulator.

A RAIF is also similarly tax efficient, and like a SIF is exempt from income tax, net wealth tax, and withholding tax on distributions. In addition, management services provided by a RAIF are exempt from value-added tax in Luxembourg. Both types of fund pay an annual subscription tax of 0.01 percent based on the net asset value of the fund.

Alternatively, a RAIF can adopt a similar structure to a Luxembourg SICAR (Société d'investissement en capital à risque), in which case it will be exempt from the annual subscription tax and tax on income from transferable securities (with remaining income subject to Luxembourg corporate tax). However, as a form of investment company, SICARs can take advantage of Luxembourg's network of double tax avoidance treaties.

Freddy Brausch, Vice-Chairman of the Association of the Luxembourg Fund Industry (ALFI) with responsibility for national affairs, explained: "In order to ensure sufficient protection and regulation via its manager, a RAIF must be managed by an authorized external AIFM. The latter can be domiciled in Luxembourg or in any other member state of the EU. If it is authorized and fully in line with the requirements of the AIFMD, the AIFM can make use of the marketing passport to market shares or units of RAIFs on a cross-border basis."

Denise Voss, Chairman of ALFI, added: "The new structure complements Luxembourg's attractive range of investment fund products and we believe this demonstrates the understanding the Luxembourg legislator has of the needs of the fund industry in order to best serve the interests of investors."

With its attractive tax and regulatory regimes, Luxembourg remains the most popular domicile for funds in Europe. According to ALFI, 45.75 percent of all net fund sales in Europe could be attributed to Luxembourg-domiciled funds in 2015. Net assets under management in Luxembourg fund structures have doubled over the last 10 years, peaking at EUR3.6 trillion (USD4 trillion) in May 2015.

TAGS: tax | investment | interest | law | Luxembourg | withholding tax | regulation | alternative investment | services | Investment | Europe | Invest | Investment

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