Luxembourg Unveils Comprehensive Tax Reforms for 2026, Including Carried Interest, Start-up Investments, and Individual Income Tax Changes

Major Tax Overhaul for 2026 and Beyond

Luxembourg is set to implement a series of significant tax reforms beginning in 2026, with further changes to individual income tax classes slated for 2028. These updates, announced by the Luxembourg government, include a new tax credit designed to stimulate investments in start-ups, a substantial overhaul of carried interest taxation, and a move towards a unified personal income tax class. The reforms are intended to modernize the Grand Duchy's tax framework, enhance its competitiveness, and support economic growth.

Reforming Carried Interest Taxation

A key component of the 2026 tax agenda is the reform of the tax regime applicable to carried interest. Draft law no. 8590, submitted to parliament on July 24, 2025, proposes a significant restructuring. This reform is anticipated to be adopted by early 2026 and will apply from the 2026 tax year.

The proposed changes introduce two distinct categories for carried interest:

• Contractual Carried Interest: This will be taxed at a reduced rate, with a maximum effective rate below 12%, specifically around 11.45% based on 2025 rates.
• Participation-Linked Carried Interest: This may benefit from a full tax exemption under specific conditions, particularly if the individual's stake is less than 10% and held for over six months.

The reform aims to attract 'front-office activities' to Luxembourg and reinforce its position as a leading hub for alternative investment funds.

New Tax Credit for Start-up Investments

To foster innovation and entrepreneurship, Luxembourg has introduced a new tax credit for investments in eligible start-ups. The law of December 19, 2025 (draft law no. 8526), establishes a 20% income tax credit for individual taxpayers investing in qualifying young, innovative companies.

Key features of this new credit, effective from the 2026 tax year, include:

• An annual cap of €100,000 per investor.
• A minimum investment of €10,000 per eligible start-up.
• A maximum benefit capped at a 30% ownership threshold per investor and a total of €1.5 million per start-up across all eligible investors.

This measure seeks to mobilize private capital for early-stage funding and diversify the shareholder structure of start-up entities.

Changes to Individual Income Tax Classes

A significant reform impacting individual taxpayers is the proposed transition to a single income tax class. Draft law no. 8676, introduced on January 6, 2026, aims to replace the current three-class system (Classes 1, 1a, and 2) with a unified 'Tax Class U'. This change is scheduled to take effect from January 1, 2028.

The reform seeks to modernize the income tax framework, eliminate disparities based on marital or family status, and provide a more equitable system. To ensure a smooth transition, a 25-year transitory period will be in place for couples previously subject to joint taxation under Class 2, allowing them to retain existing benefits or opt for the new system.

Accompanying measures include:

• An increase in the tax-free allowance to €26,650, effectively doubling it from the current €13,230.
• A new early childhood tax allowance of €5,400 per year per child under three.
• An enhanced single-parent tax credit, raised to €4,008 from €3,504.

Prime Minister Luc Frieden stated that the reform is a 'significant step toward a fairer and more transparent tax regime,' emphasizing that the state 'should not influence tax liabilities based on family composition.'