Revamping The Carried Interest Regime In Luxembourg

Dechert is a global law firm that advises asset managers, financial institutions and corporations on issues critical to managing their business and their capital – from high-stakes litigation to complex transactions and regulatory matters. We answer questions that seem unsolvable, develop deal structures that are new to the market and protect clients' rights in extreme situations. Our nearly 1,000 lawyers across 19 offices globally focus on the financial services, private equity, private credit, real estate, life sciences and technology sectors.

Explore Firm Details

To enhance Luxembourg's competitiveness and attractiveness for asset managers, the Luxembourg government has submitted bill No. 8590 (The Bill) to the Luxembourg parliament...

Luxembourg Tax

Article Insights

Olivier Gaston-Braud’s articles from Dechert are most popular:

within Tax topic(s)
with readers working within the Securities & Investment industries

Dechert are most popular:

within Tax, Wealth Management and Criminal Law topic(s)
in United States

Key Takeaways

The proposed revamp carried interest regime would provide as of fiscal year 2026:

A purely contractual carried interest arrangement would be taxed at a maximum rate of 11.45%.
Carried interest based on participation in an alternative investment fund (AIF) would be tax-free, subject to a six-month holding period.
The scope of the regime would be broadened to include all individuals involved in managing an AIF.

To enhance Luxembourg's competitiveness and attractiveness for asset managers, the Luxembourg government has submitted bill No. 8590 (The Bill) to the Luxembourg parliament to revamp the carried interest regime.

Luxembourg already has a carried interest regime that was introduced in the Luxembourg Alternative Investment Fund Managers (AIFM) Law¹, but it has long been considered to be restrictive, and certain aspects were unclear. The Bill aims to expand the current regime and make it clearer to interpret and apply.

Types of Carried Interest Arrangements:

The new regime will cover two types of possible carried interest arrangements:

Contractual carried interest (unrelated to an actual investment in AIF, but related to the performance of an AIF). This carried interest would be taxed as extraordinary income at one quarter of the tax rate applicable on the ordinary income tax scale (i.e., a maximum of 11.45% in 2025).
Carried interest based on participation in an AIF (related to an actual equity investment in the AIF). If the carried interest is organised via a direct investment in the AIF or via a carry vehicle, the gain would be treated as a speculative gain, and thus not subject to tax if realised more than six months after the acquisition of the said participation. The Bill further specifies that interests in transparent funds, such as an SCS² or an SCSp³, would also benefit from this regime (i.e. disregarding the tax transparency).

Scope of the Regime:

If the Bill becomes law the new regime would benefit all individuals directly or indirectly involved in the management of an AIF, including not only employees of the management company and of the AIFM, but also employees of an investment manager or investment advisory company, and even individuals not bound by an employment contract (such as directors of the AIF, its General Partner or shareholders of the management company).

Timing

The Bill is moving through the legislative process and is being examined and potentially amended by the Luxembourg parliament. If adopted, it is expected to take effect in 2026.

Footnotes

1. Loi du 12 juillet 2013 relative aux gestionnaires de fonds d'investissement alternatifs

2. A Société en Commandite Simple or a limited partnership.

3. A Société en Commandite Spéciale or a special limited partnership

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.