News and developments
Draft Law 8590 | Carried interest tax regime overhaul
Jul 25, 2025 - On 24 July 2025, Draft Law No 8590 was submitted to the Luxembourg Parliament (Chambre des Députés) intending to update and render more attractive the tax regime for carried interest granted to managers of alternative investment funds (“AIF”).
The proposed changes aim at attracting more front office employees to Luxembourg by increasing the scope of beneficiaries and taking into account various forms of carried interest.
Background
The proposal is in line with the 2023-2028 coalition program of the government that committed to provide for an attractive framework for alternative investment funds and their managers including a review of the carried interest tax regime.
The existing carried interest tax regime was introduced by the Law of 12 July 2013 relating to alternative investment fund managers transposing the AIFM directive 2011/61/EU including a standard regime and a temporary favourable regime. The standard regime is dedicated to employees of the alternative investment fund manager (“AIFM”) or management company and provided for the full taxation of the carried interest based on a profit-sharing right and the application of the ordinary regime for capital gains (which could result in the tax exemption of the capital gains realized after a 6-months holding period) on the portion of the carried interest that could be linked to the disposal of a participation held by the manager in an underlying corporate entity. The temporary favourable tax regime provides for a reduced taxation of the carried interest for a period of 10 years at the quarter of the applicable global tax rate under the condition that the beneficiary redomiciled to Luxembourg before 2018.
The Draft Law draws from this regime and the feedback it received thereon to propose amendments that increase legal certainty and broaden the scope of eligible persons and forms of carried interests.
Proposed tax regime
The Draft Law broadens the scope of eligible persons and provides for a different tax regime depending on whether the carried interest is a contractual arrangement only or involves the holding of an interest.
Eligible individuals
Eligible persons are broadly defined as including any natural person who can be the manager or any other person at the service of the manager or the management company of an AIF. Commentaries to the Draft Law mention that the beneficiary can be employed by another entity than the AIFM, such as an advisor, and be in a relationship other than employment with the AIFM, such as an independent director.
Compared to the existing regime, the scope of the proposed regime is broader and not limited to employees of the AIFM or the management company.
Contractual arrangements
Participation based arrangements
Interaction with existing carried interest regime
The Draft Law that should come into force, if approved by the parliament, in 2026 intends to abolish the existing carried interest tax regime as from fiscal year 2026. The commentaries provide that the new rules are sufficiently broad provide for a more favourable taxation of all beneficiaries under the current carried interest regime.
Key Takeaways
The current carried interest tax regime is being phased-out as some shortcomings were identified. The Draft Law provides for a favourable tax regime to a larger variety of carried interest arrangements available in the market. In addition, it enlarges the scope of eligible beneficiaries previously limited to AIFM employees. In addition, it should limit preexisting difficulties pertaining to the qualification of the income received when the beneficiary is also an employee.
Author: Pol Mellina, Partner, Daniel Riedel, Partner, Ali Ganfoud, Senior Counsel Jul 25, 2025 - On 24 July 2025, Draft Law No 8590 was submitted to the Luxembourg Parliament (Chambre des Députés) intending to update and render more attractive the tax regime for carried interest granted to managers of alternative investment funds (“AIF”).
The proposed changes aim at attracting more front office employees to Luxembourg by increasing the scope of beneficiaries and taking into account various forms of carried interest.
Background
The proposal is in line with the 2023-2028 coalition program of the government that committed to provide for an attractive framework for alternative investment funds and their managers including a review of the carried interest tax regime.
The existing carried interest tax regime was introduced by the Law of 12 July 2013 relating to alternative investment fund managers transposing the AIFM directive 2011/61/EU including a standard regime and a temporary favourable regime. The standard regime is dedicated to employees of the alternative investment fund manager (“AIFM”) or management company and provided for the full taxation of the carried interest based on a profit-sharing right and the application of the ordinary regime for capital gains (which could result in the tax exemption of the capital gains realized after a 6-months holding period) on the portion of the carried interest that could be linked to the disposal of a participation held by the manager in an underlying corporate entity. The temporary favourable tax regime provides for a reduced taxation of the carried interest for a period of 10 years at the quarter of the applicable global tax rate under the condition that the beneficiary redomiciled to Luxembourg before 2018.
The Draft Law draws from this regime and the feedback it received thereon to propose amendments that increase legal certainty and broaden the scope of eligible persons and forms of carried interests.
Proposed tax regime
The Draft Law broadens the scope of eligible persons and provides for a different tax regime depending on whether the carried interest is a contractual arrangement only or involves the holding of an interest.
Eligible individuals
Eligible persons are broadly defined as including any natural person who can be the manager or any other person at the service of the manager or the management company of an AIF. Commentaries to the Draft Law mention that the beneficiary can be employed by another entity than the AIFM, such as an advisor, and be in a relationship other than employment with the AIFM, such as an independent director.
Compared to the existing regime, the scope of the proposed regime is broader and not limited to employees of the AIFM or the management company.
Contractual arrangements
Participation based arrangements
Interaction with existing carried interest regime
The Draft Law that should come into force, if approved by the parliament, in 2026 intends to abolish the existing carried interest tax regime as from fiscal year 2026. The commentaries provide that the new rules are sufficiently broad provide for a more favourable taxation of all beneficiaries under the current carried interest regime.
Key Takeaways
The current carried interest tax regime is being phased-out as some shortcomings were identified. The Draft Law provides for a favourable tax regime to a larger variety of carried interest arrangements available in the market. In addition, it enlarges the scope of eligible beneficiaries previously limited to AIFM employees. In addition, it should limit preexisting difficulties pertaining to the qualification of the income received when the beneficiary is also an employee.
Author: Pol Mellina, Partner, Daniel Riedel, Partner, Ali Ganfoud, Senior Counsel