The Luxembourg RAIF from a German tax perspective

Luxembourg as a fund centre is known for its innovative strength. The launch of a new fund vehicle for alternative investments, the Reserved Alternative Investment Fund ("RAIF"), is imminent. This will significantly expand the Luxembourg product range for international investors in the field of alternative investments. The RAIF itself is unregulated, its documentation does not require approval from the Luxembourg supervisory authority (CSSF), only the fund manager must have an AIFM licence. The associated speed of launching a RAIF represents a significant advantage over the widely used Luxembourg special funds ("SIF"), the approval of which can now take several months. Furthermore, unlike the SIF, the RAIF does not have to comply with any diversification requirements. It can take the legal form of a special fund (FCP) or a company (SICAV) and therefore has all the advantages (flexible capital injection and repatriation, liability-shielded sub-funds, issue of unit classes) that were previously reserved for funds regulated in Luxembourg. Within the framework of the SICAV structure, corporations (S.A., Sàrl), partnerships (SCS, SCSp) or the partnership limited by shares (SCA) can be used.

In Luxembourg, the RAIF is either treated as a SIF for tax purposes, i.e. an annual taxe d'abonnement of 0.01% of the NAV is payable. Alternatively (without the obligation to pay a taxe d'abonnement), the RAIF can also opt for the SICAR taxation regime (if a corporation is used as the underlying legal form) or for the transparent SCS taxation regime (if a partnership is used), provided that the RAIF invests exclusively in so-called venture capital.

From German tax perspective the RAIF falls within the scope of the German Investment Tax Act (InvStG) as an investment fund. RAIFs are typically classified as investment companies and not as privileged investment funds (e.g. due to the lack of a redemption right or other non-compliance with the investment conditions of section 1 (1b) sentence 2 InvStG). Sections 18 and 19 InvStG differentiate between partnerships and capital investment companies. The use of the underlying legal form (SCS or SA/Sarl/SCA) for the RAIF is therefore decisive for the tax treatment of the RAIF from a German perspective (cf. Elser, Die Investitionsgesellschaften, in: Beckmann/Scholtz/Vollmer: Investment-Handbuch, Erich Schmidt Verlag Kz 420 vor §§ 18, 19 InvStG (2015).

• RAIF-SCS is treated transparently for tax purposes as a personal investment company (Section 18 InvStG); depending on the income received by the RAIF on the input side, the German investors are treated as if they were receiving the income directly themselves. In particular, this means that the investment income exemptions under Sections 3 No. 40 EStG and 8b KStG can generally be applied at investor level. For example, gains from the sale of shares in corporations realised by the RAIF-SCS are tax-exempt at the level of German investors subject to corporation tax at 95%. The RAIF-SCS also has the advantage that it is transparent for double taxation treaty purposes and therefore allows German investors to claim withholding tax reductions in the target countries. However, it should be noted that the RAIF-SCS may qualify as a commercial partnership from a German tax perspective, which may deter tax-exempt investors from investing in such a RAIF (cf. TAXGATE Blog v. February 2016).
• The RAIF-SA and the RAIF-FCP, on the other hand, qualify as capital investment companies (section 19 InvStG). At investor level, this means that the investment income exemptions do not apply to distributions from the RAIF. Investment income included in the distribution is therefore reclassified as fully taxable distributions. In addition, the participation in the RAIF falls within the scope of the add-back taxation pursuant to the Foreign Tax Act (AStG), with the result that certain passive income from the RAIF is attributed to the German investor as fully taxable income even without a distribution.

As a result, under the current legal situation, taxable investors will tend to favour the transparent RAIF-SCS and tax-exempt investors will often prefer the RAIF-SA. If all target groups are to be addressed, a parallel fund structure with both fund vehicles may also be an option. The more cost-effective establishment of a RAIF (compared to a SIF) will certainly lead to increased use of such parallel structures, where each investor can choose the vehicle that suits them best.

From 2018 the InvStG is to be completely reformed. According to the current draft bill for a Investment Tax Reform Act the differentiation between investment funds and investment companies is to be abandoned. In contrast to the current legal situation RAIF-SCS are no longer covered by the scope of the InvStG, but continue to be treated transparently for tax purposes as described above.

The RAIF-SA or the RAIF-FCP will then be taxed as a mutual investment fund in accordance with new investment tax rules, which can be summarised as follows (see in detail Elser, Corporate Asset Management nach Reform der Investmentbesteuerung, CORPORATE FINANCE 2016, p. 141 mwN).

• Distributions from the RAIF are taxable; the investment income exemptions pursuant to sections 3 no. 40 EStG and section 8b KStG do not apply. The same applies to gains from the sale of units in RAIFs. If the RAIF fulfils the requirements for qualification as an "equity fund", "mixed fund" or "real estate fund", so-called partial exemptions (e.g. 30% exemption for equity funds) apply at the level of certain investors.
• In addition, a so-called advance lump sum is taxed annually at investor level for accumulating RAIFs in order to counteract deferral advantages. However, additional taxation in accordance with the AStG is no longer envisaged.

To summarise, the introduction of the RAIF is also very welcome from the perspective of German (institutional) investors. It represents a further flexible instrument in the already extensive Luxembourg "toolbox", which makes it considerably easier for institutional investors to structure their investments in the field of alternative investments. From a German tax perspective, however, the use of the legal form for the RAIF is crucial under the current legal situation and also after the introduction of the new InvStG. While the SCS (partnership) was often preferable under the current legal situation (exception: tax-exempt investors), the structure as a corporation (RAIF-SA) will become more attractive again for many (also taxable) investors from 2018. Your TAXGATE team has analysed the effects of the investment tax reform for corporate and private investors in detail and will be happy to answer any questions you may have in this regard.

Dr Thomas Elser is a tax consultant at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.