CARRIED INTEREST OVERHAUL (Luxembourg)
Luxembourg has overhauled its carried interest rules via Bill n° 8590, approved by Parliament on 22 January 2026 (first vote), with finalisation expected via waiver of the second vote. The new regime applies from 1 January 2026 and is relevant from the 2026 tax year. It introduces a clearer two-track framework for Luxembourg tax-resident individuals managing AIFs:
- Contractual carried interest (no fund ownership)
If carry is purely contractual (not linked to any direct/indirect fund participation), it is treated as extraordinary miscellaneous income and benefits from preferential taxation: effectively 25% of the individual’s global income tax rate (often shown as a ~11.45% top effective rate, incl. solidarity surcharge). The benefit is no longer limited to 10 years.
- Participation-linked (equity-linked) carried interest
If carry is tied to a direct or indirect equity participation in the AIF, proceeds may be fully tax-exempt if conditions are met—typically a >6-month holding period and a ≤10% participation. For consistency, an AIF’s tax-transparent status is disregarded for carried interest.
Eligibility extends beyond employees to include directors, shareholder/partners of the manager/management company (and sometimes the fund), and certain advisory service providers. The reform also removes the requirement that investors must first fully recoup their investment, enabling deal-by-deal carry models. This new regime brings greater legal clarity for both industry professionals and the tax authorities, along with a more competitive and predictable framework. This includes a permanent preferential tax treatment—set at one quarter of the overall rate—for certain forms of contractual carried interest, designed to help Luxembourg attract and retain front-office fund-management talent and reinforce its appeal as a fund management hub
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