Luxembourg has firmly established itself as a global hub for investment funds, largely due to its regulatory flexibility, political stability, and favourable tax regime. While UCITS (Undertakings for Collective Investment in Transferable Securities) are often the spotlight's star, Luxembourg's Alternative Investment Fund (AIF) landscape is equally important. This post delves into the different fund structures & regimes that Luxembourg offers, highlighting their unique features and how they differ from each other.
UCI Part II Fund
UCI Part II Funds, governed by Part II of the Luxembourg Law of 17 December 2010 (as amended), are flexible investment vehicles that can be tailored to the needs of retail and institutional investors alike. Unlike UCITS, which are subject to strict investment and diversification rules to protect retail investors, UCI Part II Funds enjoy greater flexibility in terms of investment policies and asset allocation. This makes them particularly suitable for strategies that do not fit within the UCITS framework, in particular alternative strategies such as private equity, private credit, real estate and infrastructure.
Depending on requirements, UCI Part II Funds can be structured
(i) in corporate form, contractual form or (thanks to the recent Lux Fund Modernisation law) as partnerships;
(ii) as umbrella or standalone funds;
(iii) open- or closed-ended funds; and
(iv) respectively, (except for when in contractual form) in SICAV (Investment Company with Variable Capital) or SICAF (Investment Company with Fixed Capital) format.
UCI Part II Funds are regulated funds, and as such are subject to upfront authorisation and ongoing oversight by the Luxembourg regulator (==CSSF), ensuring a high level of investor protection.
This however allows for a deeper investor penetration: from a distribution perspective, they can be marketed to both Retail Investors (freely in Luxembourg and subject to local requirements on a cross-border basis) and Professional Investors; the latter of which under the AIFMD Marketing Passport if managed by an authorised AIFM. There is no requirement for a Well-Informed Investor check.
From a tax-perspective, UCI Part II Funds are quite efficient - generally exempt from net wealth tax, municipal business tax and corporate income tax. No withholding tax applies on distributions and if it is set up in investment company form (i.e. SICAV or SICAF) it can benefit from Luxembourg double taxation treaties (FCPs generally do not). What does apply is a subscription tax of 0.05% p.a. on their net assets (subject to certain exemptions allowing for reduced / zero rates). Also, UCI Part II Fund’ s benefit from an exemption of VAT on management services.
Specialised Investment Fund (SIF)
The Specialised Investment Fund (SIF), governed by the Law of 13 February 2007 (as amended), is a versatile and flexible fund regime designed for Well-Informed Investors (including Retail investors that qualify as Well-Informed Investors) and Professional Investors; the latter of which under the AIFMD Marketing Passport
While slightly more burdensome to distribute than UCI Part II Funds (due to the Well-Informed Investors requirement) SIFs can invest in a wide range of assets and have in the past been particularly popular in the Alternatives space. One of the SIF regime's standout features is its flexibility in respect of investment policies and diversification rules. It is still a regulated structure, but thanks to its more restricted investor universe (compared to UCI Part II Funds), SIFs are subject to a lighter regulatory regime compared to UCITS, with a focus primarily on risk spreading.
The SIF structure is attractive due to its tax efficiency - on par with UCI Part II Funds and, additionally, with a generally flat annual subscription tax (taxe d'abonnement) of 0.01% on its net assets.
Reserved Alternative Investment Fund (RAIF)
Introduced in 2016, the Reserved Alternative Investment Fund (RAIF) combines the investment regulatory advantages of the SIF and SICAR regimes with an innovative twist: it is not directly subject to the supervision of the Luxembourg regulator (==CSSF). Instead, RAIFs are indirectly regulated via their AIFMs (Alternative Investment Fund Managers), which must be fully authorised and supervised. This feature significantly shortens the time-to-market for launching a RAIF.
Like SIFs, RAIFs offer great flexibility in terms of investment policy and can also opt for a tax regime similar to SIFs or SICARs, depending on their investment focus (following either one of the two).
As with SIFs, RAIFs can only be marketed to Well-Informed Investors (including Retail investors that qualify as Well-Informed Investors) and Professional Investors; the latter of which under the AIFMD Marketing Passport. They must however be managed by an authorised AIFM, making them unsuitable for self-managed investment schemes.
Investment Company in Risk Capital (SICAR)
The SICAR is specifically designed for private equity and venture capital investments. It is a highly targeted structure for investors looking to invest in risk capital. SICARs are subject to a regulatory framework that is attuned to the needs of risk capital investment, with a focus on providing transparency and investor protection. Unlike SIFs, SICARs are not obliged to follow risk-spreading principles, allowing them to concentrate investments even in a single venture if desired. The determining restriction for SICARs is an asset restriction - they are only allowed to invest into risk capital, characterised by an early stage asset that is intended to be developed and ultimately IPO’d.
Same as with RAIFs and SIFs, only Professional Investors and Well-Informed Investors (including Retail investors that qualify as Well-Informed Investors) are eligible to invest.
Tax-wise, SICARs are fully taxable entities if set up as corporations but tax transparent if set up as partnerships. However, they are (broadly) exempt from income tax on their earnings and gains of their risk capital holdings as well as from subscription tax and withholding tax on distributions.
Securitisation Vehicles
While strictly speaking (and actually quite by design) not a fund regime, Luxembourg's securitisation vehicles offer a flexible structure for the securitisation of a wide range of assets, enabling the transformation of illiquid assets into potentially tradable securities issued, cleared and settled on the international clearing infrastructure. They are purposely set up to fall outside of the scope of European fund regulation (most significantly AIFMD).
These vehicles can be established as securitisation funds, partnership structures or, most commonly, capital companies, and while they are not exclusive to Well-Informed Investors or Professional Investors, they are particularly attractive for sophisticated investment strategies involving the securitization of risks and cash flows (including private market content). As such, in their private market context they are most commonly regarded as complex instrument reserved for sophisticated investors.
The tax regime for securitisation vehicles is designed to be neutral, with taxation based only on the vehicle's actual profits, and no subscription tax is levied. This makes securitisation vehicles distinct in terms of their operational flexibility and tax treatment compared to UCI Part II Funds, SIFs, RAIFs, and SICARs.
Master-Feeder Structures
While not a standalone fund regime, the master-feeder setup is worth mentioning due to its popularity in Luxembourg's and the wider European fund landscape. It allows investors (through feeder funds) to pool their investments into a master fund, which then makes collective investments. This structure is often used to consolidate assets from different jurisdictions, enhancing operational efficiency, enabling access to broader investment opportunities, accessing an otherwise inaccessible fund (due to e.g. minimum investment amounts, investment type, tax or regulatory drivers. The master-feeder structure can be applied across the UCI Part II, SIF, RAIF and SICAR regimes providing a layer of flexibility in terms of investment consolidation, diversification and a whole host of other reasons.
The Long and Short of It
Luxembourg's fund structures offer a diverse palette for investors and fund managers, each with its regulatory nuances, tax implications, distribution considerations, investor targeting and operational aspects.
From the broad appeal of UCI Part II Funds, over the flexibility of SIFs and RAIFs to the targeted investment focus of SICARs and the unique opportunities offered by securitisation vehicles, Luxembourg continues to be a leading destination for alternative investment funds. Understanding the differences between these structures is crucial for leveraging Europe’s private market landscape to its fullest.