Luxembourg Parliament adopts new carried interest tax regime

On 22 January 2026, the Luxembourg Parliament approved Bill of Law No. 8590, completing the legislative process for the reform of the Luxembourg carried interest tax regime.

The law largely reflects the framework presented in our earlier newsflash on the bill (available here) . Certain elements were, however, further specified during the parliamentary process, in particular with respect to the scope of eligible beneficiaries, as outlined below.

As explained in our earlier newsflash, the reform seeks to strengthen Luxembourg’s competitiveness in the alternative investment fund (AIF) sector by establishing  a permanent and market-aligned framework for the taxation of performance-based remuneration. with the explicit objective of attracting and retaining investment professionals and deal teams performing front-office functions in Luxembourg. The rules as approved remain broadly consistent with the bill initially submitted to Parliament. The final text nevertheless introduces targeted clarifications adopted during the legislative process, primarily to enhance legal certainty regarding the personal scope of the regime.

Clarification of the scope of eligible beneficiaries

During the legislative process, the Luxembourg State Council (Conseil d’État) raised concerns that the original wording of the bill defining eligible beneficiaries of the carried interest regime was overly broad and could give rise to legal uncertainty. In response, Parliament refined the relevant provisions to more precisely delineate the individuals eligible to benefit from the regime. Following these clarifications, the State Council  withdrew its formal objection, allowing the bill to be approved.

As approved, the Luxembourg carried interest regime applies to natural persons who fall within one of the following categories:

• individuals performing investment management functions in relation to an AIF, including portfolio management or risk management activities, whether acting as employees, partners, managers or directors; or

• individuals providing services involved in the management of an alternative investment fund under a contract for the provision of advisory services, whether concluded directly or through one or more entities.

Purely administrative or support functions are not intended to fall within the scope of the regime. These clarifications preserve the legislator’s intention to reflect market practice while significantly improving legal certainty.

Key features of the Luxembourg carried interest tax regime (as approved)

The reform approved by Parliament confirms the core elements described in our previous legal news, including:

• Two distinct tax treatments depending on the structure of the carried interest:
  – contractual carried interest, granted without any direct or indirect participation in the AIF, is taxable at one quarter of the individual’s progressive income tax rate (corresponding to an effective rate of approximately 11.45% for individuals in the highest bracket);
  – participation-linked carried interest, whether inseparably linked to or represented by a participation in the AIF, may be exempt from Luxembourg income tax where the participation is held for more than six months and does not constitute a substantial shareholding within the meaning of Article 100 L.I.R. (generally 10% or less of the AIF’s capital).

• A significantly broadened personal scope, no longer limited to employees of AIFMs or management companies.

• Accommodation of deal-by-deal carried interest structures, following the removal of the requirement that investors must first have fully recovered their capital before carried interest may be paid.

• A targeted exception to tax transparency: for participation-linked carried interest, AIFs structured as Luxembourg SCS (common limited partnership), Luxembourg SCSp (special limited partnerships) or FCP are treated as non-transparent solely for the purposes of applying the carried interest rules, ensuring consistent tax treatment irrespective of the fund’s legal form.

• Repeal of the temporary carried interest regime introduced in 2013 and modernisation of Article 99bis L.I.R., resulting in a single, permanent statutory framework.

Entry into application

The new carried interest regime applies as from the 2026 tax year and is not subject to any specific administrative formalities or advance approval requirements.

Our team remains available to discuss how the approved rules may affect existing carried interest arrangements or future structuring considerations.