The new Limited Qualified Investor Fund (L-QIF) – What is it and who is it for?

1. Context

Switzerland’s asset management and funds market is an essential contributor to the Swiss financial industry. However, Switzerland and funds under Swiss law have faced challenges in competing with major fund hubs, with the lion’s share of funds distributed and administered in Switzerland being foreign-based funds primarily domiciled in Luxembourg. This trend stems primarily from Switzerland’s non-EU membership status, hindering its access to the EU market, and the imposition of a 35% withholding tax on income distribution from funds, particularly impacting non-Swiss investors.

Furthermore, other jurisdictions have in recent years enacted lighter regulatory regimes for non-retail funds. For instance, Luxembourg’s Reserved Alternative Investment Fund (RAIF), implemented in 2016, does not require approval from the competent supervisory authority (for the fund) allowing swift and cost-effective market entry.

2. Understanding the L-QIF

In an effort to enhance Switzerland’s competitiveness, a new unregulated fund category reserved to qualified investors (as defined in CISA) has been introduced through an amendment of the Collective Investment Schemes Act (CISA): the “Limited Qualified Investor Fund” or “L-QIF”. The Federal Council adopted the dispatch for the revision in August 2020 and the new regulatory regime has come into force on 1 March 2024.

Similar to the RAIF, the L-QIF is an unregulated investment product, exempt from approval by the Swiss Financial Market Supervisory Authority (FINMA), and largely flexible in the design of its investment policy and structuring. As a corrective measure, the L-QIF must be managed by a FINMA supervised fund management company which serves to ensure investor protection and service quality. Portfolio management of an L-QIF may be delegated to asset managers (under certain circumstances).

The L-QIF is accessible exclusively to qualified investors (as defined in CISA), which definition encompasses institutional and professional investors and includes high-net-worth individuals and their investments vehicles (subject to specific criteria being met). Additionally, investors with long-term advisory or discretionary mandates with financial institutions may, under certain conditions (i.e., no opt-out), automatically qualify for L-QIF investments.

3. Advantages of the L-QIF

The absence of product approval requirements for L-QIFs facilitates quick and easy implementation of new investment products and changes to existing ones. Time-to-market is expected to be significantly increased when compared to fully licensed funds.

The L-QIF should be particularly advantageous for vehicles focusing on alternative investments like real estate, private equity, private debt or for smaller innovative funds and their sponsors as limited investment restrictions apply and redemption cycles can be extended for up to five years from launch.¹ For these asset classes, structuring the L-QIF as a SICAV – a corporate entity independent from the fund management company or asset manager – may be a prudent choice for legal and operational efficiency.

The tax treatment of L-QIFs’ income distribution could nevertheless remain a potential obstacle as, unlike RAIFs that typically incur only a nominal annual tax (approximately 0.01% of the NAV) and no withholding tax, L-QIFs may be subject to a 35% withholding tax on profits, posing challenges for foreign-based investors seeking full tax recovery. From a Swiss income tax perspective, L-QIFs are treated equally to FINMA-approved funds and in principle taxed transparently.

Consequently, L-QIFs are of particular interest to Swiss-based entities, such as:

• Banks, for offering flexible fund options to their high-net-worth clients both in terms of content and asset management in lieu of managed accounts;
• Third-party or independent asset managers for existing or new investors seeking a flexible and readily setup fund structure;
• Pension funds and insurance companies, e.g., in the form of single investor L-QIFs;
• Family offices, e.g. by creating an umbrella with compartments for each family member according to their needs, thus simplifying matters in the event of succession or dispute while pooling costs;²
• Property developers and institutional investors, providing additional avenues for project development as well as boosting and diversifying their investments.³

4. Key takeaways

• Introduction of the L-QIF aims at strengthening Switzerland’s competitiveness by introducing a Swiss alternative to comparable foreign products such as the Luxembourg RAIF, thereby fostering increased domestic launch of collective investment schemes;
• Easier, expedited and cost-effective market entry, combined with heightened flexibility of the L-QIF, will enhance Switzerland’s attractiveness as a collective investment scheme home jurisdiction;
• Use of L-QIFs has the potential to result in significant benefits for professional asset managers, sophisticated investors, and property developers alike.
• Lastly, reliable and stable political institutions, currency, and legal system remain cornerstones of Switzerland’s positioning as major global financial centre, certain to provide a strong background for the L-QIF to thrive.

We welcome any queries on this matter and will be pleased to advise on structuring options.

¹ L-QIFs may also be structured as closed-ended vehicles, such as a partnership for collective capital investments under Swiss law.

² It is noteworthy that L-QIFs must comply with general principles applicable of funds, including plurality of investors, and that fact patterns including of related parties must be assessed carefully to ensure compliance.

³ Specific provisions and restrictions apply to L-QIFs investing in real estate which must be considered carefully. In particular, the legislator clarifies in CISA that L-QIFs investing in direct real estate are restricted to certain institutional and professional clients, notably excluding private clients (and private investment structures set up for such private clients). Please consider MLL’s previous publication on this topic (article in German): https://www.mll-news.com/l-qif-neue-moeglichkeiten-fuer-institutionelle-immobilieninvestoren/.