Carried interest tax reform in Luxembourg: A new era for AIF managers
On July 24, 2025, the Luxembourg government submitted a significant draft law proposal aimed at reforming the carried interest tax framework in Luxembourg. The draft law is designed to attract more “front-office” activities to Luxembourg and provide greater legal certainty for alternative investment fund (AIF) managers and their staff.
Expanded Beneficiary Scope
The draft law expands eligibility for favorable tax treatment beyond traditional AIF manager employees (e.g. it includes employees of investment advisory companies, independent AIF board members, management company partners).
New Dual-Category Framework
The draft law establishes two distinct categories for carried interest:
- Contractual Carried Interest: Income from arrangements not linked to an ownership stake in the AIF will be taxed at one-quarter of the standard rate (approximately 11.45%). This favorable rate has no time limit.
- Participation-Linked Carried Interest: Income from arrangements tied to a participation in the AIF is treated as a speculative gain and can be tax-exempt if held for more than six months.
Greater Operational Flexibility
The draft law removes the requirement that investors must recover their full investment before carried interest payments can be made, aligning Luxembourg with “deal-by-deal” market practices. It also permits payments of the carried interest through the AIF itself, the AIF manager, or general partner.
Looking Ahead
If implemented, the new carried interest regime would take effect in the 2026 fiscal year, with existing beneficiaries automatically transitioning to the new framework. This reform marks the most significant change to Luxembourg’s carried interest regime since over a decade.
