Carried interest Luxembourg: Modernising the regime to boost financial competitiveness
On 24 July 2025, the Luxembourg government submitted draft bill no. 8590, proposing significant improvements to the tax regime for profit sharing for the managers of a capital investment at the expense of the investors, or carried interest. The new regulation is scheduled to take effect in 2026. The Ecovis experts explain how companies can benefit from the new rules.
The legislative initiative aims to enhance Luxembourg’s appeal as a financial hub by attracting front-office functions and providing legal certainty to alternative investment fund (AIF) managers in Luxembourg and investors.
Key enhancements of the draft bill
- Broader eligibility: The new rules apply not only to employees of an AIF manager or management company only but also to independent directors, advisors, and any service providers.
- Permanent reduced tax rate: A flat one-quarter rate replaces the temporary expatriate regime and now applies broadly to contractual carried interest.
- Recognition of ‘deal-by-deal’ carry: Carried interest structures not requiring full investor reimbursement are now eligible for favourable tax treatment.
- Clarification for transparent entities: Income from participations will always be classified as speculative gain, regardless of the underlying income.
Two-tiered tax treatment
- Contractual carried interest: Taxed as extraordinary income at a reduced flat rate (~11%+)
- Investment-linked carried interest: Classified as speculative gain, fully tax-exempt if the participation is ≤10% and held for over 6 months.
Companies should review existing carried interest structures now. We can support you in this process.Arnaud Yamalian, Managing Director, ECOVIS IFG Audit S.A. – Luxembourg
Safeguards and anti-abuse measures
To prevent misuse, the draft law requires that carried interest must have genuine economic substance. Fixed or predictable remuneration disguised as carry will not qualify. Luxembourg’s general anti-abuse rules apply to deter artificially low hurdle rates or recurring bonus-like structures.
Date of implementation
The law is expected to apply from 1 January 2026, covering income realised on or after this date. The legislative process is ongoing, but the government’s commitment to legal clarity and competitiveness is evident.
Advice for clients
AIF managers and their advisors should begin preparing for the new regime by reviewing existing carried interest structures. Ensuring that documentation aligns with the eligibility criteria under the revised regime is key.
For further information please contact:
Arnaud Yamalian, Managing Director, ECOVIS IFG Audit S.A. – Luxembourg
Email: arnaud.yamalian@ecovis-audit.lu
