Draft Bill 8590 adopted: Enhancing the carried interest tax framework

At a glance

The Luxembourg Parliament has adopted today the draft Bill n°8590, introducing a revised carried interest tax regime. The scope of regime is broadened and clarified, allowing carry holders to be taxed between 0% and 12%, depending on the type of carried interest, subject to meeting the applicable conditions.

This revised framework further strengthens Luxembourg’s position as a destination of choice for the alternative investment industry.
 

A closer look

Tax alert: Revised carried interest regime now enacted

The Luxembourg Parliament has adopted today the draft Bill n°8590, introducing a revised carried interest tax regime applicable from 2026 tax year.

The new regime is simplified, better defined, and offers enhanced tax benefits, as outlined below.
 

Two types of carried interest, two tax treatments

• Contractual carried interest (i.e. not linked to a participation in an alternative investment fund (AIF), or not represented by such as a participation): Income will qualify as a speculative gain and will be taxed as extraordinary income at one quarter of the taxpayer’s global tax rate, resulting in an effective tax rate of approximately 12%).

• Carried interest linked to an AIF participation (directly or indirectly, or where the carry is represented by such a participation): Income also qualifies as speculative gain but is fully exempt from tax, provided the participation is held for more than six months and the individual does not hold a substantial interest (i.e. not more than 10%) in a corporate vehicle.
   

Eligible carry holders

The regime applies to individuals actively involved in the management of AIFs, including:

• Individuals performing management functions (as employees, partners, managers, or directors) of an AIF, an AIF manager, or a management company; and
• Individuals involved in AIF management under a service agreement, regardless of whether such agreement is entered into directly with the AIF or indirectly through one or more intermediary entities.

It should also be noted that:

• The regime excludes individuals performing purely administrative functions.

• Beneficiaries must be Luxembourg tax residents for both domestic and treaty purposes.

• The scope of eligible beneficiaries was amended following comments from the Council of State.
   

Additional details

• Carried interest qualifying under the law is treated as speculative gain under Luxembourg tax principles.

• The regime does not require prior full reimbursement of investors and may therefore apply to deal-by-deal carried interest models.

• The capital gain treatment of carried interest will be preserved, regardless of whether the underlying AIF is treated as tax transparent or opaque for Luxembourg tax purposes.

The Deloitte Luxembourg personal tax team remains at your disposal to discuss the potential impacts on your individual situation.

The Parliament also adopted a resolution under which the Luxembourg government will have to assess the impact of the revised carried interest regime in two years and potentially propose adjustments if needed.