Luxembourg Overhauls Carried Interest Tax Regime to Attract Fund Talent

Parliament Adopts Landmark Tax Reform

On January 22, 2026, the Luxembourg Parliament officially adopted Bill No. 8590, enacting a significant overhaul of the country's carried interest tax regime. This legislative move is designed to enhance Luxembourg's competitive standing as a premier European fund center and to attract active fund management and front-office talent to the Grand Duchy. The new measures are set to apply from the 2026 tax year.

The reform addresses previous limitations and ambiguities in the tax treatment of carried interest, aiming to provide greater legal certainty for Alternative Investment Fund (AIF) managers and their staff.

Dual-Category Carried Interest Framework

The revised legislation introduces a clear distinction between two primary categories of carried interest, each with its own tax treatment:

• Contractual Carried Interest: This refers to carried interest that is not intrinsically linked to an equity stake in an AIF. It will be classified as 'extraordinary income' and taxed at one-quarter of the recipient's global tax rate, with a maximum effective rate of approximately 11.45%, including surcharges. A key feature of this category is the removal of previous temporal limitations, recognizing the often-extended cycles of investment funds.
• Participation-Linked Carried Interest: This category applies to carried interest that is inseparably tied to a direct or indirect equity holding in an AIF. Such income can qualify for a full tax exemption if the participation does not exceed 10% and is held for a minimum period of six months. Should these conditions not be met, the income will be subject to standard progressive tax rates, potentially reaching up to 45.78%.

Expanded Scope and Strategic Rationale

The reform significantly broadens the scope of eligible beneficiaries beyond traditional AIF manager employees. The new framework now encompasses a wider range of individuals, including employees of investment advisory companies, independent AIF board members, management company partners, and any individual directly or indirectly providing services to AIF managers or management companies.

This legislative update is considered Luxembourg's most substantial carried interest reform since 2013. It is part of a broader governmental strategy to modernize the country's tax system and enhance its appeal to international talent, complementing other recent initiatives such as the modernized impatriate tax regime. The government's objective is to align its tax framework with current market practices and to attract qualified personnel in active fund management, thereby solidifying Luxembourg's position in the global financial sector.