New Tax Regime for Carried Interest in Luxembourg

Reminder: Carried interest (performance-based remuneration) refers to the share of profits an alternative investment fund (“AIF”) allocates to its managers once a predefined performance threshold (the hurdle rate) has been exceeded. It is a success fee designed to align the interests of investors and fund managers.

On 24 July 2025, the government, represented by the Minister of Finance, submitted Bill No. 8590, aimed at clarifying and modernising the tax treatment of carried interest for Luxembourg tax residents. The reform seeks to enhance legal certainty and strengthen Luxembourg’s attractiveness as a hub for the alternative funds industry.

I. Key Highlights

1. Broader Scope of Beneficiaries

The regime will no longer be limited to employees of management companies or AIF managers. It will now extend to any individual providing services to fund managers, including:

employees of service providers (e.g., advisory firms),
independent directors,
partners or other non-employees.

2. Two Types of Carried Interest and Their Tax Treatment

a) Contractual carried interest

Based solely on a contractual right, without equity participation in the fund.
Classified as a speculative gain, taxed at 25% of the global progressive rate, i.e. approximately 11.45% at the marginal rate.

b) Participation-linked carried interest
The remuneration is linked to a direct, indirect, or represented equity participation in the AIF.

Also classified as a speculative gain, but fully exempt from tax if the following conditions are met:
- participation below 10%, and
- holding period exceeding 6 months.
The exemption should cover both capital gains and distributed income, although practical details remain to be clarified.
For simplification purposes, the tax benefits (as described above) remain applicable even where transparent entities are interposed.
If the carried interest is channelled through a tax-transparent vehicle, it is deemed to derive directly from the fund and thus remains eligible.

3. Additional Key Changes

The new regime makes the reduced tax treatment permanent, unlike the previous temporary framework (limited to 10 years for certain inbounds between 2013 and 2018).
It removes the requirement for investors to first recover their contributed capital before carried interest distributions, thereby allowing deal-by-deal structures (profit participation on an investment-by-investment basis).

4. Entry into Force and Transition

If adopted, the regime will apply as from 1 January 2026. Beneficiaries under the former regime will automatically transition to the new framework, without losing any tax advantages.

II. Why This Reform Matters

Enhanced legal certainty for beneficiaries.
Competitive tax regime: reduced rate (maximum 11.45%) or full exemption subject to conditions.
Better alignment with market practice: broader range of beneficiaries, greater flexibility, and softer tax treatment.
A strong signal reaffirming Luxembourg’s position as a leading European hub for alternative investment funds.

III. What’s Next?

The bill is currently under parliamentary review. If adopted, it will apply from 2026. This reform demonstrates Luxembourg’s clear ambition to:

attract front-office functions in the fund industry,
modernise its tax framework,
and remain competitive in an increasingly demanding international environment.

At Omnitrust, we are closely monitoring these developments and stand ready to:

analyse your carried interest exposure,
assess the eligibility of your structures or contractual arrangements,
and assist you in implementing or adapting your carried interest schemes.

Feel free to contact us to learn more.