Luxembourg reforms Carried Interest Tax Regime

The enacted law largely confirms the approach set out in the original draft, while incorporating an important clarification to the scope of eligible beneficiaries following comments from the Council of State. Generally speaking, the new carried interest regime provides for:

• A taxation of up to 11,45% for carried interested implemented on a contractual basis;
• A taxation of 0%, under conditions, for participation based carried interest.

Background

With the new law, Luxembourg has modernised its special tax regime for carried interest introduced upon implementation of the European Union’s Alternative Investment Fund Managers Directive (AIFMD) in 2013. Although the regime offered preferential tax treatment to carried interest holders, this was subject to specific conditions and a limited timeframe. The stringent conditions for the application of the preferential tax treatment were deterrent for the fund industry.

The new carried interest tax regime:

• Addresses the shortfalls of the current regime; and
• Aligns the carried interest rules more closely with the current market standards;
• Aims at Attracting talent for the Luxembourg alternative investment fund industry.

Description of the new regime

Personal Scope: Eligible Beneficiaries

Under the enacted law, the new carried interest regime applies to individuals who:

• perform investment management functions such as portfolio management or risk management, in the capacity of employees, partners, managers or directors of an AIF, an AIFM or a management company
• provide services directly linked to the management of an AIF under a services agreement, whether entered into directly or through intermediary entities.

Conversely, individuals performing purely administrative tasks are excluded from the scope of the new rules.

The final text of the new carried interest regime law deviates from the initial bill proposed, which was extending the application of the new regime to a broad scope of eligible beneficiaries that are directly or indirectly involved in the management of the AIF.  This deviation is in response to the concerns raised by the State Council that requested that the scope of the eligible beneficiaries is more precisely defined.

Material Scope: Carried Interest

The core technical features of the draft law have been retained. Accordingly, the new carried interest regime distinguishes between (i) contractual carried interest and (ii) participation based carried interest. In this respect:

• Contractual carried interest refers to performance‑based remuneration granted on a contractual basis and not linked to an investment in the fund i.e. the beneficiary is not required to acquire a direct or indirect stake in the AIF. Such remuneration is awarded free of charge and paid out once the AIF achieves a pre-agreed performance rate. Contractual carried interest will be classified as extraordinary income and will be taxed at an effective rate of up to  45%.

The preferential regime may only apply where the remuneration genuinely qualifies as carried interest and cannot be used to reclassify fixed remuneration.

• Participation-based carried interest: refers to performance based remuneration linked to a direct or indirect participation in the AIF, or represented by such participation (e.g. in case of carried shares or units subscribed either directly at fund level or through a dedicated carry vehicle). Such remuneration should be tax exempt if the participation (i) is held for more than 6 months and (ii) does not exceed 10% of the AIF’s capital.

This treatment applies irrespective of the legal form of the fund, ensuring consistent treatment across both tax-opaque and tax transparent vehicles.

Next steps

On 22 January 2026, the bill passed its first constitutional vote. A waiver of the second vote has been requested. Our expectation is that such waiver will be granted. The new carried interest regime will be applicable with retroactive effect as of 2026 fiscal year.

Our comment

The adoption of the revised carried interest regime represents a significant enhancement to Luxembourg’s overall competitiveness in the alternative investment sector. The legislative clarification of the eligible beneficiary scope responds directly to concerns raised during the legislative process and increases legal certainty for market participants. In combination with the codification of the tax treatment of alphabet shares and the 50% inpatriate exemption, this reform offers new opportunities to the Luxembourg alternative investment fund industry seeking to attract and retain talent.