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As anticipated in our recent Maples Group update "Recent Amendments to Luxembourg's Proposed New and Improved Carried Interest Tax Regime"1, Luxembourg has enacted a modernised, two-pronged carried interest tax framework, reinforcing its position as a leading European hub for alternative investment funds.
Subject to the finalisation of the formal adoption process through the waiver of the second vote (expected in the coming days), the new regime will apply to carried interest paid out as of fiscal year 2026, irrespective of when the fund has been set up or when the carry entitlement has been attributed.
The new regime sets out a very attractive tax framework, broadening the scope of eligible beneficiaries and introducing additional flexibility to structure the carried interest.
Categories of Carried Interest and Tax Treatment
The new regime distinguishes between two categories of carried interest:
- Contractual carried interest: carry paid on a purely contractual basis and not linked to a participation in the fund is classified as extraordinary miscellaneous income and taxed at one quarter of the individual's global rate, resulting in an approximate maximum effective tax rate of 11.45%; and
- Participation-linked carried interest: carry represented by or linked to a participation in an alternative investment fund will not be taxable provided that the participation is held more than six (6) months and remains at or below 10% of the fund's share capital.
Scope of Beneficiaries
While the former regime was only available to employees of alternative investment fund managers or management companies, the new law significantly widens the scope of beneficiaries and defines two categories of eligible natural persons:
- Individuals holding management roles within alternative investment funds, alternative investment fund managers, or management companies. This includes not only employees but also shareholders, managers or directors of these entities; and
- Individual service providers involved in the management of an alternative investment fund via an advisory agreement, including when they act through intermediary
The regime focuses on functions directly related to investment management such as portfolio and risk management, excluding purely administrative roles.
Operational Flexibility Aligned to Market Practice
The framework is deliberately flexible to accommodate prevalent fund economics and structures, including deal-by-deal waterfalls, bad-leaver conditions and clawbacks.
The new regime is not subject to any caps or time limitations, aligning with operational needs across the fund lifecycle.
Certainty that Accelerates Luxembourg's Competitiveness
Luxembourg's new carried interest regime aims to reinforce Luxembourg's position as a leading European fund domicile and decision‑making centre.
In practical terms for sponsors and managers, this regime delivers lower headline taxation on contractual carry, potential full tax exemption on participation-linked carry, all within a clarified eligibility perimeter.
Footnote
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
