Luxembourg introduces revised carried interest regime to enhance the country's attractiveness for the private equity and alternative investment industry

Following Finance minister, Gilles Roth, announcement at the Nexus 2025 tech symposium on AI and innovation on 18 June 2025 , the Government released on 24 July 2025 draft bill 8590 introducing a revised carried interest regime. 

The draft bill intends to enhance as well as clarify, the tax treatment of carried interest for attracting alternative investment fund managers in Luxembourg and strengthen the financial sector and economy. It lays down a clear and competitive framework for the taxation of carried interest income. 

Carried interest compensates the General Partner (GP) and managers of Alternative Investment Funds (AIF) with a percentage of the profits on the fund’s investments, once the fund has returned the investors’ capital and surpassed a minimum hurdle rate of return.

While Luxembourg had already implemented specific tax provisions on the tax treatment of carried interest in 2013 upon transposing the Alternative Investment Fund Managers Directive (AIFMD) into national law, its application was limited in time. 

The new proposed tax treatment of carried interest eliminates those limits and distinguishes between two types of carried interest:

• Contractual carried interest (i.e. carried interest which is not inseparably linked to a participation in an AIF or represented by a participation in an AIF): the income will qualify as a speculative gain, taxable as extraordinary income at ¼ of the taxpayer’s global tax rate (i.e. an effective tax rate which should not exceed 12%).
• Carried interest which is inseparably linked to a direct or indirect participation in an AIF or when the carry is represented by such a participation: carried interest income will qualify as speculative gain. However, no taxation will arise providing the participation has been held for more than 6 months and providing the individual does not hold a substantial shareholding in a corporate vehicle (i.e. not more than a 10% shareholding).

In addition, the draft bill significantly enlarges the scope of the carried interest qualifying for the above tax treatment:

• The draft bill defines carried interest in a broad manner, as the entitlement to part of the outperformance of an AIF, received based on specific rights bearing over the fund's net asset value and income. Therefore, any fund qualifying as an AIF should be in scope, irrespective of the asset class.
• The proposed revised carried interest tax regime will apply to employees of AIFM, AIF management companies and other related group companies.
• It will extend to certain non-employees that may receive carried interest entitlement, for example, independent board members of an AIF.
• Carried interest may be delivered directly or indirectly by an AIF, for example, via an AIF management company or the GP.
• There is no requirement for AIF investors to be refunded for their investments before carried interest is paid, thereby allowing for “deal by deal” carry models.
• For carried interest which is inseparably linked to a participation in an AIF or when the carry is represented by such a participation, it is irrelevant for purposes of these rules whether an AIF is tax transparent or opaque from a Luxembourg perspective.  
• The proposed revised carried interest tax regime will apply to both individuals already residing in Luxembourg and newcomers to Luxembourg.

The draft bill foresees that the new carried interest tax regime will apply as from 1 January 2026.

The measures laid down in the draft bill are very welcome to facilitate the growth of the Luxembourg Asset Management sector and demonstrate Luxembourg’s commitment to supporting the development of the economy.

They come in addition to other tax measures recently adopted or upcoming, such as the enhanced and simplified expatriate tax regime, the creation of a tax credit for business angels, the introduction of an employee stock options tax regime for start-ups and the 1% decrease of the corporate income tax rate.