L-QIF attracts great interest from Family Offices

The L-QIF is a collective investment scheme under Swiss law. To meet the definition of a collective investment scheme, at least two independent investors are required. Single-investor L-QIFs are reserved for pension and insurance institutions, as with approved collective investment schemes. According to the wording of the Collective Investment Schemes Ordinance (CISO), investors are independent of each other if they contribute ‘legally and factually independently managed assets’. In the case of Single Family Offices managing money for one over-arching family, it must be examined on a case-by-case basis whether the family members who want to invest in the L-QIF meet this criterion.

By definition, a collective investment scheme is externally managed. This external management must also be ensured with the L-QIF. This means that family members whose assets are managed in the L-QIF cannot make investment decisions themselves. This does not exclude, for example, that all or individual family members are involved in the discussion of strategic topics such as asset allocation via a family investment committee or other governance mechanism. We note that it is possible – in principle - that individual family members have a role in the investment decision-making process. However, the possibility of influence must be clearly defined and legally and factually limited to ensure the rules are complied with.

For the management of an open-end L-QIF in the legal form of an investment company with variable capital (SICAV) or a contractual investment fund (FCP), a Family Office either needs a licence as a fund management company or, more commonly, it mandates an external fund management company, which delegates the asset management to the family office. As a recipient of the delegation, the Family Office needs a licence as a manager of collective assets. The custody of the investments must be carried out by a custodian bank according to the CISA.

To be able to manage a closed-end L-QIF in the legal form of a limited partnership for collective investments (LPCI), a Family Office needs a FINMA licence as a manager of collective assets. In this constellation, it is interesting for a Family Office that, according to the law, it does not have to appoint a fund management company or an administrator. This saves costs and can also be interesting for reasons of discretion. The investments must be held in custody by a depositary. The depositary does not need a custodian bank licence according to CISA. For non-bankable assets, the depositary does not necessarily have to be a bank.

The open-end L-QIF can be structured as an umbrella fund and thus include various sub-funds. In contrast, the closed-end L-QIF does not allow for an umbrella structure. However, a Family Office (with the corresponding licence as a manager of collective assets) can be the general partner of various LPCIs. Therefore, there is no need to incorporate a separate corporation as a general partner for each LPCI.

From a tax perspective, the L-QIF is treated the same as other collective investment schemes and is transparent for income and wealth tax purposes. The L-QIF itself is not taxed but the taxable income and net asset value of the L-QIF are allocated to investors and are taxable in their hands. For individuals who hold their interests in the L-QIF in a private capacity and not as part of a business operation, capital gains realised by the fund remain tax exempt. 

Net investment income (excluding capital gains, capital repayments and income from direct real estate ownership) from an L-QIF is subject to 35% withholding tax applying in Switzerland, irrespective whether distributed or accumulated. 

Based on Swiss domestic law, investors domiciled outside Switzerland are entitled to a refund of the withholding tax deducted on the income from the L-QIF, provided that at least 80% of the income stems from foreign sources. If the L-QIF can credibly demonstrate that at least 80% of the taxable income from shares is expected to be derived from foreign sources on a permanent basis, the withholding tax is not payable to the extent that the income is paid out, transferred or credited to a non-Swiss investor against a declaration of domicile (so-called affidavit).

Based on double tax treaties that have been concluded between Switzerland and the country of residence of foreign investors, these investors may be in the position to (partially) reclaim the withholding tax suffered.

Please note that specific rules apply to L-QIFs holding real estate investments, which will be covered in the next article. 

As our brief overview of specific relevant topics shows, the L-QIF can represent an interesting structuring option for Multi- and Single-Family Offices looking for a flexible investment vehicle. We are happy to support you in evaluating the various options up to the legal structuring and launch of your L-QIF.