As announced by the Luxembourg Government in its action plan to enhance Luxembourg competitiveness and attractivity, Bill of Law no 8590 was submitted on 24 July 2025 to the Luxembourg Parliament (hereafter the "Bill") to clarify certain elements of the existing carried interest regime, expand its scope and innovate on certain aspects.
The current carried interest regime (whether structured or not under units, shares or rights representing a financial investment, issued by an alternative investment fund ("AIF")) was not always clear.
Key takeaways of the proposed new carried interest regime
Clarification of the scope of respective taxation between pure contractual carried interest and carried interest linked to a participation in an AIF:
- Contractual carried interest (i.e. unrelated to a participation in an AIF and granting return to the manager without need for investment by him in the AIF): the Bill formally and permanently enshrines the preferential treatment that existed under the temporary regime that was established in 2013 and ended in 2018, and whereby return under the contractual carried interest regime would be taxed at one quarter of the standard income tax rate (i.e. up to 11.45%).
- Carried interest inseparably related to a participation in the AIF would continue to be taxed as speculative income if realised within 6 months and would be exempt after 6 months unless the participation constitutes a substantial participation (i.e. a participation of more than 10%).
Importantly, the Bill introduces a rule that disregards the standard tax transparency of partnerships qualifying as AIFs or fonds communs de placement ("FCPs") when applying the carried interest rules. The nature of that partnership's or FCP's underlying income will not affect the classification of carried interest as speculative income in the hands of the individual beneficiary.
Broader beneficiary scope: The personal scope of eligible beneficiaries is expanded. Going forward, access to the carried interest regime would no longer be restricted to employees of an AIFM or a management company. Professionals who are involved in the AIF's management – for example as independent board members of the AIF, partners of the management company, or employees of another entity such as an investment advisory company – may now also qualify.
Removal of the full-investment recovery condition: The requirement for investors to have fully recovered their initial contribution before any carry can be paid is removed. This adjustment brings into scope "deal-by-deal" carry structures, which are common in practice but were previously excluded from the regime due to this condition.
The Bill will go through the usual legislative process. If adopted, the new rules would apply as from the 2026 tax year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.