Carried interest: Luxembourg modernises its tax regime

The new regime applies exclusively to individuals who qualify as Luxembourg tax residents, including within the meaning of any applicable tax treaty provisions.

The new measures apply from tax year 2026 and introduce two distinct tax treatments for carried interest.

1. Contractual carry
   
   A contractual carry is granted free of charge without any obligation to invest in the fund.
   
   It qualifies as extraordinary miscellaneous income, and gains are taxable at a quarter of the overall tax rate (approximately 11.5%). The new regime does not entail any time limit, contrary to the previous 10-year restriction.
   
2. Investment carry
   
   In both cases below, provided the carried interest is held for at least six months, the proceeds realised on disposal will not be taxable.
   
   Investment carry with inseparable ordinary investment
   
   This refers to a carried interest contractually granted to the individual for free but conditional on a proper co-investment in the fund (directly or indirectly) via the acquisition of an ordinary interest on a pari passu basis with the other investors.
   
   Only the carried interest portion (i.e. the outperformance-related return) benefits from the preferential tax treatment. Any gain on the ordinary investment is subject to the standard tax rules.
   
   Investment carry in form of carried interest represented by an investment (“carried invest”)
   
   In this case, the carried interest is acquired in return for payment, typically via a dedicated vehicle (e.g. a Luxembourg société en commandite spéciale or a foreign partnership). An ordinary interest pari passu with other investors may also be acquired, but this is not a condition for the tax treatment of the carry itself.
   
3. Expanded scope of eligible individuals
   
   The new regime applies not only to employees but also to any individual who is either a fund manager or provides services to alternative investment fund managers, regardless of employment status. Following a State Council (Conseil d’Etat) opinion, the text now clarifies that it applies to individuals performing management functions as employees, partners, managers or directors of managers, management companies or alternative investment funds, as well as to individuals providing services involved in the management of an alternative investment fund under a contract for the provision of advisory services, whether concluded directly or through one or more entities.
   
4. General clarifications
   
   Neutrality as to legal form of fund: the tax treatment applies irrespective of the fund’s legal form (partnership, company or otherwise).
   
   Removal of requirement for investors to recover their full investment before carry is paid: “deal-by-deal” carry structures can benefit from the new measures.