The recent adoption of Luxembourg’s new carried interest tax regime provides a more transparent and structured framework. This reduces uncertainty and aligns Luxembourg with international standards, thereby increasing its attractiveness for fund managers and investment professionals.
Luxembourg has long positioned itself as a leading European hub for alternative investment funds. With the adoption of a new carried interest tax regime, the legislator has now taken a decisive step to enhance the country’s attractiveness for fund managers and investment professionals.
The new adopted law introduces a clearer, more structured framework for the taxation of carried interest, addressing long-standing uncertainties while aligning Luxembourg with competitive international standards. In doing so, it reduces interpretative risks and enhances predictability for fund sponsors and executives.
"In competitive financial centres, predictability is often as important as the headline tax rate. This reform significantly reduces ambiguity and places Luxembourg on firmer footing when sponsors assess where to base their investment teams."
~ Elisabeth Adam, Partner
What Does the New Regime Offer?
- Clarified Taxation: The new regime now formally distinguishes between (i) purely contractual carried interest (not linked to Alternative Investment Funds - “AIF”- participation) and (ii) carried interest tied to AIF participations. Contractual carried interest benefits from a preferential tax rate—up to 11.45%—enshrining a practice that previously existed only on a temporary basis. Carried interest linked to AIF participations continues to be taxed as speculative income if realised within six months and exempt after this period unless the participation is substantial (over 10%). The regime also introduces a rule disregarding the usual tax transparency of partnerships and FCP (fonds communs de placement) for carried interest, ensuring consistent treatment regardless of underlying income realized within the structure.
- Broader Beneficiary Scope: The new regime expands eligibility beyond employees of AIFMs or management companies. Now, it includes individuals who perform investment management functions for an AIF—whether as employees, partners, managers, or directors—provided their roles are substantive, such as portfolio or risk management (excluding purely administrative functions). It also covers service providers involved in AIF management under consulting agreements, whether contracted directly or through intermediaries.
- Modernised Structures: The removal of the requirement for full investor recovery before carry is paid allows for deal-by-deal carry structures, aligning Luxembourg with international fund industry practices and increasing flexibility for managers and investors alike.
"The adaptability of the regime recognises the diverse structures of modern fund management structure and teams. However, on the scope of beneficiary, the requirement that roles be “substantive” and the definition of eligible service providers may still leave room for interpretation, potentially leading to requests for guidance from the tax authorities."
~Nadège Le Gouellec, Partner
A Competitive Signal to the Market
The introduction of a dedicated regime is also a strategic move in the broader European context. Competing jurisdictions — notably in the UK and certain EU member states — have long offered specific carried interest frameworks. As part of the contemplated measure of the Luxembourg government to attract senior talent, adding legal certainty to the personal tax regime applicable to senior talent is a welcome adjustment to attract not only fund but the entire fund ecosystem including investment manager to the same hub.
With the new carried interest regime, Luxembourg signals that it intends to remain a full-service jurisdiction — not only for fund vehicles and structuring, but also for the human capital that drives investment performance.
From a market perspective, the reform is likely to have three principal effects:
- Talent Attraction and Retention
A clear regime enhances Luxembourg’s appeal for portfolio managers, deal teams and senior executives who may otherwise relocate to competing financial centres. - Consolidation of Luxembourg’s role as Europe’s leading cross-border fund domicile.
- Ecosystem Deepening
Increased presence of investment professionals fosters growth in related sectors, including legal, tax, accounting and governance services.
"The new Luxembourg carried interest regime is a game-changer for fund professionals, combining a significantly lower tax rate with enhanced flexibility, and setting a new benchmark for the European investment landscape."
~Aurélie Budzin-Dang, Counsel
Conclusion
Luxembourg’s new carried interest regime represents more than a technical tax reform. It is a strategic recalibration aimed at enhancing legal certainty, reinforcing competitiveness and strengthening the country’s position in the global fund landscape.
By modernizing the tax treatment of performance-based remuneration in the investment sector, the legislator sent a clear message: Luxembourg intends not only to host funds, but also to host the people who manage them.
This article was written by Partners Elisabeth Adam and Nadège Le Gouellec together with Counsel Aurélie Budzin-Dang and was originally published on the Luxembourg Times website.
