On 22 January 2026, the Luxembourg Parliament (Chambre des Députés) approved law n° 8590 (the Law), introducing a complementary and modernised carried interest tax regime. The new provisions aim to broaden the scope of application and clarify the tax treatment of carried interest for Luxembourg resident individuals, thereby increasing legal certainty in this complex area.
Applicable as from fiscal year 2026, the Law introduces a more favourable tax framework covering a wider array of carried interest structures and expanding the pool of eligible beneficiaries, which was previously limited to employees of Alternative Investment Funds (AIFs). It also addresses longstanding challenges in classifying carried interest income.
BACKGROUND
Luxembourg’s carried interest taxation regime was introduced by the law of 12 July 2013 (the 2013 Law), which transposed Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMs). Under this framework, carried interest received by employees of AIFMs or management companies was taxed either as capital gains or as miscellaneous income, with a temporary preferential regime applying in certain limited circumstances. This preferential regime provided significantly reduced tax rates for qualifying individuals relocating to Luxembourg, subject to strict conditions and a limited timeframe. However, such regime has not been available since 2018. In addition, it was widely regarded as too restrictive (in particular due to the limited list of eligible beneficiaries and the requirement that carried interest be received only after all limited partners had been repaid) and insufficiently clear as regards the distinction between capital gains and other income categories.
The Law has been adopted to address these limitations and to better align the carried interest regime with the government’s policy objective of strengthening Luxembourg’s attractiveness for alternative investment fund management activities. It modernises the definition of carried interest, extends eligibility to a broader yet clearly defined group of professionals involved in fund management, and ensures that the tax treatment more accurately reflects the commercial and operational realities of Luxembourg’s AIF ecosystem
THE NEW REGIME
MODERNISED DEFINITION OF CARRIED INTEREST
The Law defines carried interest as the so-called “outperformance” of an AIF, meaning the performance exceeding a pre-determined hurdle rate. This broad definition accommodates performance fees and incentive fees, as well as any type of carried interest model (whether deal-by-deal or consolidated).
CONTRACTUAL CARRIED INTEREST
A key innovation of the Law is the express recognition of carried interest granted on a purely contractual basis, without requiring the beneficiary to hold an equity interest in the AIF. In such cases, the carried interest qualifies as extraordinary miscellaneous income and benefits from a reduced tax rate equal to one-quarter of the standard progressive income tax rate, resulting in an effective maximum tax rate of approximately 12%.
Following the opinion of the Conseil d’État and the parliamentary amendment adopted in response thereto, the scope of eligible beneficiaries for contractual carried interest has been expressly clarified. Eligibility is limited to natural persons who contribute directly to the management of an AIF. This includes employees, shareholders and directors/managers of AIFs or management companies as well as individuals acting as service providers intervening in the management of an AIF under an advisory services agreement, whether concluded directly or through one or more intermediary entities.
CARRIED INTEREST LINKED TO A PARTICIPATION IN AN AIF
Where carried interest is linked to a direct or indirect participation in an AIF—whether through units, shares, or other securities—it will be treated as a capital gain. Accordingly, under the Law, such income is fully exempt from Luxembourg tax for resident individuals who:
Hold less than 10% of the AIF; and
Receive the carried interest after a minimum holding period of six months.
Importantly, the Law clarifies that, for the purposes of carried interest taxation, the tax transparency or opaqueness of the AIF is disregarded. Accordingly, carried interest received by individuals is treated as a capital gain regardless of whether the AIF is structured as a tax-transparent vehicle (e.g., SCS, SCSp, FCP) or not. This removes the need to assess the nature of income at fund level, thereby simplifying tax compliance and enhancing predictability.
We are pleased to share our expert insights on the key features of the Law with you. Your understanding of these changes is crucial, and we are here to provide you with the necessary information.
For more information, contact Van Campen Liem
Raffaele Gargiulo, Partner - raffaele.gargiulo@vancampenliem.com
Diego Gonzalez Manso, Senior Associate - diego.gonzalezmanso@vancampenliem.com