Carried Interest Luxembourg: Using modernised rules win over fund managers
Luxembourg is reforming the tax treatment of carried interest for alternative investment fund managers (AIFMs). The aim is to increase Luxembourg’s attractiveness as a financial centre. Fund managers are being encouraged to locate not only their funds but also their decision-making and management teams in Luxembourg. The regulation will apply from the 2026 tax year onwards, following publication of the law in the Luxembourg Official Gazette.
Carried interest is a profit-sharing mechanism allowing managers to participate in a fund’s outperformance once predefined performance thresholds are exceeded. Until now, the Luxembourg tax framework was limited in scope, temporary in nature and primarily targeted at employees. The draft law 8590 adopted by the Luxembourg Parliament in January 2026 significantly modernises this framework, explain the Ecovis experts.
Key changes introduced by the reform
The new law expands the category of eligible beneficiaries. In addition to employees, the carried interest regime now applies to self-employed managers, consultants and members of boards of directors, reflecting the operational reality of the alternative asset management industry.
The reform also provides long-term legal certainty by making the favourable tax treatment permanent. For carried interest granted under contractual arrangements without equity participation, taxation at one quarter of the global income tax rate is now embedded in the law on a lasting basis.
Where carried interest is linked to a qualifying participation in a fund, the regime allows for full tax exemption, subject to strict conditions, including limited ownership thresholds and minimum holding periods.
By clarifying the applicable rules and eliminating divergent interpretations, Luxembourg is seeking to strengthen its competitive positioning compared to other European jurisdictions, where the taxation of carried interest remains uncertain or increasingly restrictive.
Do you want to relocate your funds and management team to Luxembourg? We can assist you with the relocation process.
Arnaud Yamalian, Managing Director, ECOVIS IFG Audit S.A. – Luxembourg
Strategic objective: attracting front-office activities
Beyond fiscal considerations, the reform clearly targets the development of front-office activities, such as investment decision-making and active portfolio management. While Luxembourg is already a leading hub for fund administration and risk management (middle and back office), the government aims to anchor strategic decision-making functions within the country and attract highly qualified professionals.
What affected fund managers should do
Fund managers and professionals benefiting from carried interest arrangements should review their existing structures and contracts ahead of the 2026 tax year. Proper structuring and documentation will be key to ensuring eligibility for the new regime and optimising tax outcomes in compliance with the revised legal framework.
