New Luxembourg Carried Interest Regime: Key Tax Changes

On 22 January 2026, the Luxembourg Parliament voted Bill No. 8590 aiming at modernizing and clarifying the tax regime applicable to carried interest and performance-based remuneration in the Luxembourg fund industry (the “Law”).

The Law clarifies the tax framework of the carried interest and expands eligibility, providing greater legal certainty for fund managers and investors. It aims to attract more high-value fund activity and reinforce Luxembourg’s position as a competitive hub for top-tier talent in the alternative investment sector.

This reform not only supports the growth of the local fund ecosystem but also aligns Luxembourg with international standards, making it an even more attractive destination for global investment expertise.

1. Overview of the New Carried Interest Regime

The Law addresses long-standing ambiguities in the interpretation of the existing carried provisions to new carry holders and aims to adapt it to modern fund structures and practices.

The Law reshapes the existing framework through three key dimensions:

• Who is covered? The new regime will extend beyond employees of management companies to include also individuals occupying managerial or decision-making roles within an AIF, AIFM or a management company (i.e. partners directors and board members) but also individuals providing management-related services to an AIF pursuant to an advisory or comparable agreement, either directly or through advisory firms. Individuals performing purely administrative functions are however expressly excluded from the application of the regime.
• What is covered? The requirement for carry holders to fully recover their capital before carried interest is paid is removed, allowing ‘deal-by-deal’ distribution models to benefit also from these new rules.
• How does it articulate with prior regime? The existing temporary regime is not renewed but its beneficial tax rate is effectively incorporated (i.e. one-quarter of the taxpayer’s global tax rate) into the new legislation for certain types of carried interest – see below.

2. Tax Treatment of the Different Types of Carried Interest

The Law establishes two main categories of carried interest, each with a distinct tax treatment designed to reflect its economic nature.

Contractual carried interest

This refers to a performance-based remuneration granted exclusively on a contractual basis, so that it is not linked to a participation in the fund.

Such remuneration is taxed as extraordinary miscellaneous income (revenus divers extraordinaires), benefitting from a favorable tax rate equal to one-quarter of the global tax rate of the taxpayer concerned.

This treatment aligns with the former transitional regime but is now made permanent in presence of contractual carried interest.

Carried interest linked to a participation

Two situations are envisaged by the Law as falling under this category:

• Where carried interest is indissociably linked to a direct or indirect participation in the fund while established on a contractual basis – the carried interest income is distinct from the ordinary income derived from the participation; and
• Where it is represented by a participation in the fund so that such participation materializes the carried interest, so-called “carried invest”. The carried invest is in this case typically paid through a participation in a dedicated investment vehicle such as a Luxembourg or a foreign partnership.

Such types of remuneration are taxed as speculative gains, but can benefit from an exemption from tax if not considered as substantial (i.e. not representing more than 10% of the share capital of the fund/investment vehicle) and if held for a period of more than 6 months.

The tax treatment of the entity in which the carry holder holds a participation is irrelevant for the application of the regime – a stake in a tax-transparent entity will still be recognized.

3. Entry into Force

The new regime will apply as from tax year 2026. Existing beneficiaries of the transitional carried interest regime will be migrated automatically to the new permanent framework, ensuring continuity and predictability.