Luxembourg has substantially reformed its carried interest regime, effective from the 2026 tax year, which could benefit alternative investment managers in the region.
This new legislation introduces two specific regimes applicable to different types of carried interest: contractual carried interest, which will be subject to a maximum personal income tax rate of 11.45 per cent, and participation-linked carried interest, which may qualify for a full tax exemption under specified conditions.
The Luxembourg Parliament approved this legislative proposal yesterday, marking a significant shift in the existing carried interest framework. The reform aims to broaden the scope of beneficiaries and align the regime with other carried interest models prevalent in the market.
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The final law clearly defines the beneficiaries of the new carried interest regime. It applies to individuals who either:
- Perform investment management functions (such as portfolio and risk management, excluding purely administrative roles) as employees, shareholders, managers, or directors of managers, management companies, or alternative investment funds.
- Act as service providers involved in the management of an alternative investment fund under a consultancy agreement, whether engaged directly or through one or more intermediary entities.
Private credit funds domiciled in Luxembourg, or those considering establishing a presence there, may need to review their carried interest arrangements in light of the new framework. The provisions will apply to any carried interest received from the tax year 2026 onwards.
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“The revised bill materially strengthens Luxembourg’s position as a leading European investment platform and fund hub,” said Guilhèm Becvort, a Luxembourg-based partner in the global tax practice of law firm White & Case.
“Building on a well-established and sophisticated legal framework for cross-border investment structuring, Luxembourg now introduces a clear and competitive carried interest regime, enhancing predictability and legal certainty for asset managers.
“Beyond reinforcing Luxembourg’s attractiveness as a fund domicile and decision-making centre, these reforms provide the stability and flexibility required for managers to structure, manage and scale their global investment platforms and worldwide operations from Luxembourg over the long term.”
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