Luxembourg’s Bill No. 8590 introduces a modernised carried interest tax regime to attract fund managers and deal teams

On 24 July 2025, the Luxembourg government submitted Bill No. 8590 to Parliament, introducing a new personal income tax framework applicable to carried interest received by individuals. The reform aims to enhance Luxembourg’s competitiveness in the alternative investment fund (AIF) space by providing a permanent, modernised regime aligned with international market practice. The bill explicitly seeks to strengthen Luxembourg’s ability to attract investment professionals, including front-office teams and deal makers, thereby reinforcing the country’s positioning beyond fund domiciliation.

Key takeaways

• Two distinct tax treatments:
– contractual carried interest: taxed at one quarter of the individual’s income tax rate (i.e. which corresponds 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 fully exempt if the participation is held for more than six months and represents 10% or less of the AIF’s capital.

• The scope of eligible beneficiaries is significantly broadened and no longer limited to employees of the AIFM or management company.

• The bill allows deal-by-deal carry structures to benefit from the regime.

• For participation-linked carry, partnerships (SCS, SCSp) and FCPs are treated as non-transparent solely for the purposes of applying the carried-interest rules.

• The temporary regime introduced in 2013 is repealed, and Article 99bis L.I.R. is modernised to create a single, permanent framework.

Background of the existing regimes

As a reminder, carried interest refers to performance-related remuneration typically earned by fund managers once the fund has achieved a minimum return for investors (the Hurdle Rate). Two tax regimes currently apply in Luxembourg. The general regime, set out in Article 99bis (1a) of the Luxembourg Income Tax Law (L.I.R.), governs the speculative-income treatment of carried interest. In parallel, a temporary preferential regime introduced via Article 213 of the Law of 12 July 2013 on alternative investment fund managers (the “AIFM Law”) remains applicable to a limited number of individuals. This transitional regime, closed to new entrants since 2018, allows qualifying individuals who relocated their tax residence to Luxembourg between 2013 and 2018, and who had not been Luxembourg tax residents or earned Luxembourg professional income in the five preceding years, to benefit from a reduced tax rate of one quarter of the global personal income tax rate for a maximum period of ten years. This temporary regime will cease to apply after 2028.

Despite this framework, legal uncertainty and a restrictive scope have limited the practical reach of the existing rules. Bill No. 8590 aims to address these shortcomings by clarifying applicable tax treatments and broadening access to the regime, while aligning it more closely with international market practices.

Two distinct tax treatments

The bill provides for two alternative tax treatments depending on the nature of the carried interest:

Contractual carried interest, where no direct or indirect participation in the alternative investment fund (AIF) is held, will benefit from a preferential tax rate equal to one quarter of the standard income tax rate (i.e. which corresponds to an effective rate of approximately 11.45% for individuals in the highest bracket). This regime targets performance-based remuneration granted free of charge under a contractual arrangement, without requiring a capital contribution or equity stake in the fund.

Participation linked carried interest
Where the carried interest is inseparably linked to a direct or indirect participation in the AIF, or where the carry entitlement is represented by such a participation, the tax treatment is determined by the holding and realisation of that participation. Only the portion of the return that qualifies as carried interest falls within this rule; any ordinary return on the participation remains subject to the tax regime applicable to the AIF.

Under the bill, gains realised on participation-linked carried interest are not taxable if the participation has been held for more than six months and does not constitute a substantial shareholding within the meaning of Article 100 L.I.R. In practice, this condition is met where the participation represents 10% or less of the AIF’s capital. The bill does not specify whether an actual disposal is required to trigger the exemption or whether distributions of carried interest may also qualify as a realisation once the six-month holding period is satisfied. This point may require clarification in practice or through future guidance.

For the sole application of this rule, the bill overrides the usual tax transparency of AIFs organised as an SCS, SCSp or FCP, ensuring that the participation linked to carried interest is respected regardless of the fund’s underlying assets or income. According to the exposé des motifs, the regime may also apply where carried interest is received through an intermediary vehicle, provided the economic entitlement ultimately accrues to the individual beneficiary.

Where carried-interest participations are allocated without consideration, any benefit in kind remains subject to general tax principles.

Extended scope of beneficiaries

One of the most impactful changes is the extension of the scope of beneficiaries. The new regime will no longer be limited to employees of the AIFM or the management company. It will also apply to any individual who is directly or indirectly involved in managing the fund. This includes a broader range of persons contributing to the fund’s operations, reflecting current market practice in the alternative investment sector.

To prevent misuse, the draft law contains anti-abuse provisions, notably to discourage the recharacterisation of fixed or recurring compensation as carried interest without a genuine link to fund performance.

Repeal of the temporary regime and modernisation of Article 99bis

The new regime repeals the temporary favourable regime introduced in 2013 (Article 213 of the AIFM Law) and modernises the standard regime under Article 99bis L.I.R., which remains the core legal basis for the taxation of carried interest. It introduces a single, comprehensive and permanent framework that accommodates a broader range of carried-interest structures, including deal-by-deal waterfalls, as well as the ability to apply the regime even where carried interest is routed through intermediate vehicles (such as carry partnerships), provided the remuneration ultimately accrues to the individual beneficiary.

What’s next?

The bill will now follow Luxembourg’s legislative procedure, including a review by the Council of State and discussion in a parliamentary committee. It will then be submitted to a first vote in the Chamber of Deputies. A second constitutional vote, normally required after a three-month interval, may be waived if the Council of State agrees. If adopted, the new regime would enter into force on 1 January 2026.

Our team remains available to assist you in assessing how the proposed changes may affect your current remuneration schemes or future structuring.