New Luxembourg Carried Interest Tax Regime formally enacted

Following the waiver of the second constitutional vote granted by the Luxembourg Conseil d’État on 3 February 2026, Bill of Law No. 8590 amending the tax regime applicable to carried interest has been formally adopted. The new regime applies to income realised as from 1 January 2026.

The reform marks a significant step in Luxembourg’s strategy to further strengthen its position as a leading European jurisdiction for the structuring of carried interest in the alternative investment industry, by combining legal certainty with an attractive and market-aligned tax framework.

The new provisions significantly broaden the scope of beneficiaries, from the traditional employees of alternative investment fund managers to independent individuals directly and indirectly involved in the “active” management of alternative investment funds.

Background

The new regime largely reflects the bill of law initially submitted to the Luxembourg Parliament on 24 July 2025. For further details, please refer to our recent article.

The most notable amendment introduced during the legislative process concerns the scope of eligible beneficiaries, which has been broadened while addressing the concerns raised by the Conseil d’Etat in its opinion of 21 October 2025.

Key features of the new regime

With effect from 1 January 2026, the regime expressly distinguishes between two forms of carried interest:

Contractual carried interest

Remuneration granted solely on a contractual basis, without any requirement for the carried holder to hold a participation in the relevant alternative investment fund. Classified as extraordinary income, such income is taxed at one quarter of the applicable progressive income tax rate, resulting in a maximum effective tax burden of 11.45 per cent (including the solidarity surcharge); and

Participation-linked carried interest

Remuneration intrinsically linked, or represented by, a direct or indirect participation in the relevant alternative investment fund. The portion of income attributable to the outperformance of the fund is exempt from Luxembourg personal income tax, provided that such participation (i) has been held for a minimum period of six months and (ii) represents less than 10 per cent of the equity of the fund. For the purposes of application of the regime, the tax transparency of the fund (if applicable) is disregarded.

The application of the regime is limited to individuals who are tax resident in Luxembourg and, accordingly, does not affect carried interest recipients who are not Luxembourg tax resident, even where such carried interest is derived from a Luxembourg alternative investment fund.

As another remarkable evolution, the new regime abolishes the temporal constraints included in the previous regime requiring for limited partners to have fully recovered their capital before payment of any carried interest. This change effectively formalise the acceptance of “deal-by-deal” carried interest model.

New beneficiaries’ eligibility

The reform substantially enlarges the category of eligible beneficiaries. The regime now applies to Luxembourg tax-resident individuals who are actively involved in the management of alternative investment funds, including:

individuals performing investment, risk or portfolio management functions as employees, directors, managers or shareholders of the fund manager, management company or the fund itself; and
individuals involved in the management of the fund as service provider under advisory arrangements, whether such services are delivered directly or indirectly through one or more intermediary entities, including entities established outside Luxembourg.

The legislative commentary expressly clarifies that individuals performing purely administrative functions remain excluded from the scope of the regime.

Conclusion

The new carried interest tax regime provides enhanced legal certainty and increased alignment with prevailing market standards, while positioning Luxembourg among the most attractive European jurisdictions for carried interest structuring. It is specifically designed to support fund managers, investment professionals and advisers actively engaged in the management or advisory of alternative investment funds, including front-office roles.

Combined with the revised impatriate regime applicable as from 1 January 2025, the reform underlines Luxembourg’s ambition to attract highly skilled professionals and to consolidate its role as a key European hub for alternative asset management.