Background
The original draft bill was submitted in July 2025. Further information can be found in our previous newsletter. While the core features of the new regime generally align with the July 2025 draft, one of the main changes concerns the scope of eligible beneficiaries, as explained below.
How does the new regime work?
The new regime applies to income realised from 1 January 2026 onwards, providing for two types of carried interest:
Contractual Carried Interest - Performance-based compensation granted purely on a contractual basis without the beneficiary requiring any equity participation in the fund. It qualifies as extraordinary miscellaneous income and is taxed at 25% of the individual's overall income tax rate (i.e. approximately 11.5%).
Participation-Linked Carried Interest - Carry rights are represented by, or linked to, a direct or indirect co-investment in the fund. Income (i.e. the return related to outperformance) is exempt from Luxembourg personal income tax if the participation is held for more than 6 months and does not exceed 10% of the fund.
What are the new developments regarding beneficiaries and eligibility criteria?
In addition to fund managers who are employees, the new regime extends carried interest treatment to independent service providers who offer investment management services under advisory or consultancy agreements. Examples include:
Individuals performing management functions as employees, partners, managers or directors of managers, management companies or alternative investment funds; and
Individuals involved in the management of an alternative investment fund under a services agreement, whether directly or through one or more entities.
What are the other important considerations regarding the new regime?
The new regime removes the previous requirement for investors to have fully recovered their initial investment before they can receive carried interest. Carried interest can now be paid on successful investments as they are realised, even if the fund has not yet returned all capital to investors overall, i.e. on a deal-by-deal basis.
Those who benefited from the previous temporary tax regime, which is due to expire in 2028, will automatically transition to the new permanent framework.
Conclusion
This tax measure offers an attractive proposition to fund managers, investment management professionals, and advisers in the management or advisory of alternative investment funds. The measure aims to reinforce Luxembourg's financial services sector as a premier destination for 'front office' fund management activities, thereby solidifying the Grand Duchy's position as Europe's leading fund domicile and investment management hub. It also complements Luxembourg's enhanced expatriate tax regime, which favourably treats newly arrived residents.
Keep in touch
If you require further guidance or wish to discuss your particular situation, please contact your trusted advisor at Tiberghien or any of the authors of this publication. They are on hand to help you navigate this new regime and optimise your personal situation. Follow our news page for more legal updates.
