Luxembourg’s attractiveness to the alternative investment industry is not defined solely by its revised carried interest tax framework. As highlighted in the 2024 annual report of the Luxembourg Private Equity and Venture Capital Association, based on data from Preqin, Luxembourg is already the domicile of 43% of all European private equity funds. When this new framework is viewed alongside the country’s well-established ecosystem and the recent tax initiatives undertaken by the government, Luxembourg is clearly positioned as a destination of choice for the alternative investment industry. It is in this context that the revised carried interest tax regime is set to be introduced with effect from the 2026 tax year.
By way of reminder, managers (in broad terms) of alternative investment funds (AIFs) generally receive a performance-linked remuneration once a preferred return (hurdle rate) has been achieved. This remuneration represents the carried interest. An attractive carried interest regime can therefore encourage private equity firms to expand their presence in Luxembourg and incentivise managers to relocate there.
Key measures of the revised carried interest regime
Under the new regime, carried interest received by an eligible individual may be either fully exempt or taxed at an effective rate below 12%, provided certain conditions are met. Unlike many other jurisdictions, Luxembourg faces fewer budgetary pressures to introduce or increase taxes, which supports the expectation that this regime will be sustainable over time. In addition, the regime may be combined with the inpatriate tax regime, which provides for a 50% exemption on qualifying remuneration up to €400,000.
From a technical perspective, carried interest will be treated as a capital gain for Luxembourg tax purposes. This clarification puts an end to the long-standing debate regarding its potential recharacterisation as employment income subject to general anti-abuse provisions.
Importantly, the application of the regime does not require investors to have been fully reimbursed first and may therefore apply to deal-by-deal carried interest models, subject to the implementation of potential clawback or escrow mechanisms to protect investors.
The capital gain character of carried interest will be preserved regardless of the tax transparency or opacity of the underlying AIF from a Luxembourg tax perspective.
Purely contractual carried interest will be taxed at one quarter of the global tax rate, resulting in an effective tax rate below 12%. By contrast, carried interest structured through shares or units, or linked to equity participation or co-investment, may benefit from the standard full exemption on capital gains, provided the relevant conditions are met (notably, a participation of less than 10% held for more than six months at the time of disposal). The difference in effective tax treatment reflects the fact that contractual carried interest does not require any upfront investment to generate income, whereas equity-based carry generally involves the acquisition of shares or units at market value to derive any return (if not acquired at market value, some employment tax considerations could arise).
Scope of the regime
The beneficiaries of the regime are defined as individuals directly managing, or providing services to entities managing, AIFs, including:
Individuals performing management functions as employees, partners, managers, or directors of an AIF, an AIF manager, or a management company; and
Individuals involved in the management of an AIF under a service agreement, regardless of whether such agreement is entered into directly with the AIF or indirectly through one or more intermediary entities.
The regime does not apply to individuals performing purely administrative functions.
The scope of eligible beneficiaries was the subject of extensive debate and was amended from the initial draft legislation, which explains why the law was not formally adopted before the end of 2025. Now that the revised wording has received the approval of the Council of State, the law is expected to be voted on at the beginning of 2026 and to apply from the 2026 tax year, as initially anticipated. Accordingly, carried interest proceeds received in 2026 should benefit from the regime, provided all the conditions are met.
Points of attention
To benefit from the regime, individuals must be tax resident in Luxembourg, not only under domestic law but also under any applicable tax treaty. If an individual is regarded as resident in another jurisdiction, Luxembourg may not have taxing rights over the gain, in which case the benefits of the regime would be lost. Any relocation to Luxembourg should therefore be carefully planned in light of the individual’s personal situation.
