The Law of 3 February 2026 introduces a competitive carried interest regime applicable from fiscal year 2026, with the ambition of attracting front and middle office employees to Luxembourg.
With this new legislation, Luxembourg firmly establishes itself as Europe’s premier destination for carried interest structures. The regime offers fund managers and investment professionals an unparalleled combination of efficiency alongside the flexibility to accommodate diverse carried interest models.
Eligible beneficiaries
The regime applies to:
- individuals exercising management functions as employee, partner, manager or director with managers, management companies or alternative investment funds; or
- individual service providers involved in the management of an alternative investment fund (“AIF”) under a consultancy services agreement, concluded directly or through one or more entities.
Key features
The new regime covers two distinct forms of carried interest:
- contractual arrangements and
- participation-based arrangements.
Contractual arrangements
Contractual carried interest grants specific rights over the fund’s net assets and income based on a profit-sharing arrangement, without requiring the beneficiary to hold an interest in the AIF. The outperformance corresponds to the performance exceeding a pre-determined hurdle rate.
Such remuneration is subject to a quarter of the global tax rate applicable to the taxpayer (i.e., up to 11.45% effective rate).
Participation based arrangements
Participation-based carried interest covers arrangements where the contractual interest is linked to a direct or indirect participation in the AIF, or where the individual acquires a participation in another vehicle entitling the holder to a carried interest.
The carried interest is not considered taxable income if received more than 6 months after the investment, unless it represents a participation exceeding 10% of a corporate entity. Ordinary income derived from holding shares and not representing the carried interest remains subject to ordinary taxation.
The legal form of the investment vehicle (including partnerships and mutual funds) is neutral for the taxation of participation-based carried interest, removing previous complexities related to tax transparency.
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