Skip to content 
Article by Diogo Duarte de Oliveira, Partner at Baker & McKenzie, Chiara Bardini, Tax Counsel at Baker & McKenzie, Oliver Hoor, Partner at Atoz and Marie Bentley, Chief Knowledge Officer at ATOZ
I heard that a new beneficial tax regime applies in Luxembourg to carried interest, from the year 2026. What are the benefits of this new regime?
The recently adopted regime (the “New Regime”), applies to carried interest acquired under a contract (“Contractual Carry”) or to carried interest strictly linked to, or represented by, a direct or indirect investment in the underlying fund, which is held for more than six months (“Participation Carry”).
In both cases, carried interest compensates the fund manager with a share of the fund’s overperformance. This aligns the manager’s interests with those of the investors. In other words, the manager cannot receive ordinary bonuses through this method.
The New Regime provides for the following:
– Full tax exemption of Participation Carry, provided that the taxpayer (together with any family member) has not held, in the five preceding years, a participation of 10% or more in the capital of the company in which the participation is owned.
– A 75% exemption of Contractual Carry, resulting in a maximum marginal tax rate of approximately 11.45% (depending on the manager’s overall income).
Do I need to be an employee of the fund to benefit from the regime?
No. The New Regime applies to individuals, whether employees or not, involved in fund management and remunerated for overperformance through asset selection and/or management. Those who may benefit include investment advisors, partners of the management company, independent directors, and members of the investment committee. The regime excludes purely administrative roles.
Which type of fund’s carried interest is concerned?
The New Regime covers carried interest from alternative investment funds (AIFs). These are defined as collective investment undertakings that raise capital from multiple investors to invest it according to a defined investment policy for their benefit.
By default, Luxembourg RAIFs fall under this definition, but other funds and entities may qualify as AIFs if they meet the above requirements, regardless of their corporate form.
Is the New Regime reserved for carried interest from new Luxembourg funds?
No. It applies to any AIF—domestic or foreign, new or existing.
Is the New Regime reserved for new carried interest arrangements only?
No. It applies to both new and existing arrangements. The New Regime is broader than the previous regime and it is structured so that it automatically applies to existing carried interests that benefited from the previous regime. Starting 1 January 2026, carry-holders should be in an equal or better position under the New Regime.
If the requirements for the New Regime are met, do I need to file an application?
No specific application is required. However, the income that is partially or fully exempt must be reported on the annual tax return.
Is the beneficial regime reserved for carried interest granted only after investors receive a minimum return?
The applicability of the New Regime is no longer subject to the requirement that the investors receive full repayment of their investment in the fund. The New Regime also applies to carried interest paid during the life of the fund, such as in so-called “deal-by-deal” carry arrangements.
Is there a specific “hurdle rate” to be observed?
The existence of a hurdle rate is implicit in the definition of “overperformance”, even though the New Regime is not subject to the respect of an explicit minimum return by the investors. However, the amount of the carried interest must align with market practice, which can reasonably be assumed if the remuneration was negotiated with or accepted by third-party investors.
If I benefit from the New Regime in Luxembourg, could I still be taxed on the same income elsewhere?
Depending on residence and sourcing rules, the same carried interest may be taxable under the domestic law of other jurisdictions. A case-by-case review is necessary.
Luxembourg’s extensive network of double tax treaties aims to mitigate double taxation arising from overlapping taxation in different jurisdictions. Carry holders should pay special attention to their tax residence to mitigate the risk of dual residence and accrued but unpaid carry income upon a change of residence.
If I become a Luxembourg resident, how would my household’s other income be taxed?
Luxembourg residents are taxed on their worldwide income at marginal rates ranging between 8% and 42%. Several exemptions (e.g., non-speculative financial gains) and preferential regimes (e.g., the inpatriate regime, offering a 50% exemption on annual remuneration up to EUR 400,000 for eight years starting from the year following relocation to Luxembourg) apply. Broad deductions and allowances are also available for family-related expenses.
If I hold a carry share, i.e. a Participation Carry, where the carried interest is embodied in the participation itself, does the New Regime only apply to capital gains?
No. The exemption applies to other income from the participation, such as dividend and partial redemption proceeds, as the New Regime recognizes that AIF overperformance does not necessarily take the form of capital gains.
If I hold a Participation Carry where I mandatorily have to acquire an ordinary direct or indirect participation in the fund, what happens if I sell such participation?
Any gain realized upon disposal of the participation mandatorily acquired is exempt. However, fully disposing the participation ends the carried interest regime on any other income from the carried interest inextricably linked to that participation (this may also apply to a partial disposal of the mentioned participation, depending on the specific terms of the Participation Carry).
If I hold a Contractual Carry or Participation Carry and also hold a separate participation in the same fund, how will I be taxed on the income therefrom?
Income from a separate participation, voluntarily acquired, will be taxed under the standard rules, though exemptions may apply. Events concerning the separate participation, such as its disposal, will not affect the application of the New Regime to the carried interest.
If I hold a Participation Carry in a transparent fund, do I need to look through the fund to qualify the income from that invested carry?
No. For simplicity’s sake, under the New Regime and for the sole purpose of taxing carried income, an otherwise tax-transparent fund is treated as tax-opaque. Consequently, a carried interest payment by the fund retains its formal classification as a carried interest for the purpose of applying the New Regime, regardless of the classification of the fund’s underlying income. This exception to the tax transparency does not apply to income for other investments in the fund, such as LP shares.
When does the New Regime apply?
The New Regime applies as from 1 January 2026. It has been adopted by the Luxembourg Parliament and is intended to be permanent.
