Was Your SIF Set Up Before 2016? Consider a RAIF Conversion While Evaluating the Benefits of Maintaining a SIF

The Specialised Investment Fund (SIF) regime was established in Luxembourg by the Law of 13 February 2007 (the “SIF Law”). The SIF regime’s purpose was to offer great flexibility on investment scope while structuring and providing for an advantageous tax regime. It’s regulated at the fund level by the Commission de Surveillance du Secteur Financier (CSSF).

The entry into force of the Alternative Investment Funds Managers Directive (AIFMD), particularly Recital 10, “This Directive does not regulate AIFs,” took the discussion of the regulation at the fund level a bit further. Indeed, there’s a double layer of supervision in Luxembourg’s regulatory framework: direct supervision from the CSSF and indirect supervision from the alternative investment fund manager (AIFM), which is also regulated by the CSSF.

The Law of 23 July 2016 on reserved alternative investment funds (the “RAIF Law”) introduced a new regime into the Luxembourg toolbox: RAIFs, a fund structure that combines features of the investment company in risk capital (société d’investissement en capital à risque, SICAR), along with SIFs, to be regulated at the level of the AIFM only.

Introducing RAIFs Was a Great Success

Despite RAIFs being available only since 2016, there are already more than twice as many RAIFs than SIF structures: There are more than 2,880 RAIFs registered with the Luxembourg Trade and Companies Register (RCS), and 1,138 SIF vehicles. These RAIF structures numbers evince their popularity with fund managers and trust from investors.

When the asset manager or the fund’s sponsor contemplates the creation of a new investment strategy, alongside the current SIF structure established prior to 2016, it should also consider converting the SIF, including the existing compartments, into RAIF for the following reasons.

RAIF Conversion is Suitable for Open-ended Funds (e.g., Evergreen Funds) and Applicable for Closed-end Funds 

Conversion from a SIF to a RAIF is relevant for open-ended funds as a solution for reducing regulatory costs and improving efficiency. This conversion is also applicable for closed-end funds, but its relevance diminishes if the fund’s term is nearing completion. In such cases, particular attention must be paid to the fund’s remaining life cycle to assess whether the conversion is worthwhile.

Maintaining a SIF: Continued Regulatory Oversight, Investor Confidence, and Tax Benefits

In such cases, maintaining a SIF might be a better option due to the following reasons:

• Regulatory oversight: SIFs remain directly supervised by the CSSF, ensuring additional investor confidence.
• Investor preference: For some investors, such as institutional investors, direct CSSF supervision remains a key criterion for investment.

Key Advantages of Launching a New Subfund in the Existing SIF:

• Lower setup costs: The incremental costs are typically lower because the SIF’s operational processes, service providers, and regulatory framework are already in place.
• Operational efficiency: Leveraging existing relationships and processes, leading to quicker setup and potential economies of scale, can reduce operational costs.
• Regulatory continuity: The SIF remains subject to oversight by the CSSF, which may be preferred by investors seeking double regulatory supervision.

Converting to a RAIF: Long-term Strategic Flexibility, Savings, and Faster Market Access

Alternatively, converting to a RAIF could offer significant benefits in the long run, especially in terms of cost and operational efficiency. While the SIF regime requires direct CSSF supervision, the RAIF relies on supervision at only the AIFM level. This allows for more flexibility and fast implementation of investment decisions.

Key Advantages of Converting to a RAIF:

• Greater flexibility: A RAIF is not subject to direct CSSF approval for the launch of new compartments or adjustments to investment strategies. This allows for shorter setup times and faster decision-making, allowing timely responses to market opportunities and investor needs. Such agility can be critical in a rapidly evolving regulatory environment or when deploying complex investment strategies.
• Faster time to market: A RAIF benefits from a streamlined regulatory process, because the absence of CSSF approval reduces the time required to establish new funds or subfunds. This is particularly advantageous for asset managers wanting to quickly capitalize on market trends or introduce new products in a competitive investment landscape.
• Branding and positioning: Establishing a new RAIF allows for distinct branding, which could appeal to investors looking for a separate investment vehicle.
• Investor protection: Despite the absence of direct CSSF oversight, the RAIF remains fully compliant with the AIFMD framework, ensuring investor protections such as risk management, transparency, and reporting are upheld.
• Cost efficiency: Without the need to incur CSSF fees at the level of the RAIF, and with compliance requirements consolidated at the AIFM level, fund managers can achieve a more cost-effective operational model. These savings can be reinvested in other areas of fund management or passed on to investors, thereby enhancing overall fund performance.
• French taxation: Until 2024, using a SIF rather than a RAIF provided a safer tax environment for French real estate investments. Now, RAIFs may be eligible for the same dividend-withholding tax exemption and reductions in France as a SIF, subject to obtaining an advance ruling. This change enhances the RAIF’s attractiveness for real estate in France.

Practical Checklist for SIF Conversion to RAIF

For fund managers considering a conversion to a RAIF structure, a thorough legal and operational review is essential to ensuring a smooth transition. Please consider the following steps:

1. Review fund documentation: Ensure that all existing fund documentation is aligned with the requirements of the RAIF regime, with particular attention to investor disclosures and risk management policies in line with AIFMD standards.
2. Secure all existing investors’ consent or voluntary early redemption: Engage with existing investors to secure the necessary consent — or voluntary early redemption (in the case of an open-ended fund) for investors who will not consent — for conversion from a SIF to a RAIF, ensuring transparency in the changes in regulatory oversight and any resulting operational benefits.
3. Secure CSSF’s approval of the conversion: Ensure approval from the CSSF for conversion from a SIF to a RAIF.

Conclusion: Balancing SIF and RAIF Considerations

Whether maintaining a SIF or converting it into a RAIF depends on a fund's investment strategy, investor base, and regulatory preferences. While RAIFs offer speed, flexibility, and cost savings, SIFs provide a structured and regulated environment that some investors prefer. Before deciding, it is crucial to evaluate long-term strategic objectives, cost implications, and investor expectations.

For fund managers, aligning regulatory structures with investment goals remains a key success factor in navigating Luxembourg’s evolving investment fund landscape.

RAIF vs. SIF: A Comparative Table

The following table highlights the core differences between the different fund types and their main criteria:

Topic	RAIF	SIF
Regulatory supervision	No direct CSSF supervision Oversight and monitoring via the AIFM	CSSF to approve all constitutive documents and any proposed changes, including: Change of management regulations or articles of incorporation Change of registered address Corporate actions (e.g., merger, liquidation, spin-off, etc.) Change in governance of an investment company (board members, conducting persons, others) Liquidation of subfunds Change of denomination of a fund and/or subfunds Change of investment policy/investment restrictions of a fund and/or subfunds Change in the characteristics of the fund and/or subfunds (consolidation currency, subfund currency, type of share classes, etc.) Change of rules in respect of subscriptions or redemptions Change of the management company or of the AIFM of a fund Change of service provider or agent (domiciliation agent, depositary bank, UCI administrator, asset manager, independent valuer, paying agent, distributors, external auditor, etc.) Ongoing supervision of AIF by the CSSF and subject to fees including: Annual charge: €9,250 (SIF umbrella with up to five compartments) Authorization fee for new compartment: €1,100
Reporting to the CSSF	Not at the level of the RAIF An annual report assessing the assets, liabilities, income, and operations of the RAIF is required at AIFM level	Annual Report to assess the assets, liabilities, income, and operations of the SIF. Annual Report at the level of the AIFM
AIF status/AIFM	Is always an AIF and requires an authorized AIFM, subject to AIFMD	If the SIF is subject to Part I of the SIF Law: Either the SIF does not qualify as an AIF and complies only with SIF Law, or the SIF qualifies as an AIF and falls within the AIFMD exemption managed by a registered AIFM. If the SIF is subject to Part II of the SIF Law: The SIF qualifies as an AIF managed by an authorized AIFM and must comply with AIFMD.
Establishment	No CSSF approval required Establishment must be notified by the AIFM to the CSSF Registration on RCS RAIF list 20 business days after establishment	Establishment subject to CSSF prior approval (which can take up to six months) followed by registration on CSSF’s official list.
	Minimum subscribed capital of €1,250,000 must be reached within 24 months of the setup, with a minimum 5% of subscribed capital to be paid for shares (i.e., not partnership interest) if applicable
Investment restrictions	None: Allows all assets and any strategy or investment policy (exceptions apply when using SICAR tax regime)	None: Allows all assets and any strategy or investment policy. Prior approval of any changes to the investment objective and strategy is required by the CSSF.
EU marketing passport	Available	Passport for the SIF is not subject to Part I of the SIF Law. Passport for SIF is subject to Part II of the SIF Law.
	Subject to payment of a fee for the application in certain jurisdictions where the fund will be marketed
Marketing documentation	Offering document to comply with disclosure requirements under Article 23 of AIFMD	Offering document to comply with disclosure requirements under Article 23 of AIFMD and Chapter 7 of the SIF Law; must include all necessary information for prospective investors. Any change to the offering document elements is subject to CSSF prior approval.
Board of managers of general partners	No specific requirements	Proof of qualifications, experience, and good standing must be submitted to CSSF. CSSF to approve board of managers. No residency requirements (but consider substance requirements).
Delegation	Requirements per AIFMD. Delegation must be disclosed in the issuing document. Delegation to third parties must be notified by the AIFM to the CSSF prior to becoming effective.	Requirements per AIFMD. Delegation must be disclosed in the issuing document. Delegation to third parties must be notified by the AIFM to the CSSF prior to becoming effective. CSSF typically conducts a closer review of delegation arrangements for SIFs and can impose higher requirements before approval
Tax treatment	Not subject to net wealth tax Not subject to corporate income tax No withholding tax on distributions Annual subscription tax of 1bp on NAV (certain exemptions exist)
Value-added tax (VAT)	VAT exemption on management services
Disclosures to investors	Article 23 disclosures and Annual Report
Marketing	AIFMD passporting and NPPR
Umbrella structure	Multiple subfunds available
Eligible assets	No restriction
Depositary	Required
Legal form	Can be set up as Fonds commun de placement (FCP), société d’investissement en capital à variable (SICAV), or société d’investissement en capital à fixe (SICAF)
Risk diversification	Subject to mandatory risk spreading
Investors	Well-informed investors: Institutional, professional, and other investors who invest more than €100,000 or obtain assessment certifying expertise, experience, and knowledge
Annual report	Annual audited report in compliance with AIFMD and Annex to (RAIF/SIF) Law

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.