The Chamber of Deputies has approved reforms to modernise and expand the carried interest tax regime, introducing permanent, clearer rules that broaden eligibility, update terminology to “outperformance,” and retain a reduced tax rate for performance-based incentives to strengthen the country’s appeal for fund managers and financial services.
Luxembourg’s Chamber of Deputies has approved a reform that clarifies and modernises the tax treatment of carried interest, building on rules initially introduced on 24 July 2025.
The reform seeks to strengthen the nation’s financial appeal by providing legal certainty and expanding the eligibility criteria for fund managers to benefit from specialised tax regimes. Key changes include the permanent adoption of a reduced tax rate—taxing certain performance-based incentives at one-quarter of the standard rate—and broadening the definition of beneficiaries to include non-salaried advisors and independent directors.
By removing restrictive conditions, such as the mandatory full repayment of investor capital before managers can receive incentives, the government intends to attract high-value “front office” activities to the jurisdiction.
Terminology updated to reflect “outperformance”
The bill updates the terminology from “capital gains” (plus-values) to “outperformance” (surperformances) relative to a hurdle rate. The hurdle rate is a minimum rate of return that must be met before profits are shared with managers.
Consistent income qualification
The bill stipulates that carried interest will be treated as speculative profit regardless of the fund’s legal form (such as a common placement fund or a tax-transparent entity) or the nature of the underlying income
Expanded eligibility for beneficiaries
The carried interest regime is broadened beyond AIF (alternative investment fund) manager employees to include a wider range of individuals involved in fund management. Eligible beneficiaries now include natural persons who actively participate in AIF management as employees, partners, managers, directors, or as service providers under consultancy or advisory agreements.
Broader fund coverage
The regime now extends to deal-by-deal AIFs, allowing managers to benefit from carried-interest tax treatment when carried interest is received upon the realisation of underlying assets, subject to meeting conditions.
Two categories of carried interest
The law confirms two distinct types of carried interest:
- Contractual carried interest: Not linked to fund participation; typically granted free of charge and payable once outperformance is achieved. Taxed at one quarter of the overall tax rate ( approximately 11.5%).
- Participation-linked carried interest: Linked to direct or indirect fund participation or holding. If held for more than 6 months, income is generally tax-exempt, unless the beneficiary holds a substantial participation exceeding 10%, in which case it is treated as speculative profit.
Permanent tax framework
The bill moves away from a temporary, restrictive regime toward a permanent tax framework. Key features include:
- 1/4 global tax rate: Carried interest received on an exclusively contractual basis will be permanently taxed at one-quarter of the global tax rate.
- Abolition of the 10-year limit: Unlike the previous temporary regime, there is no longer a 10-year time limit for this tax treatment, recognising that many investments take longer to mature.
- Elimination of immigration requirements: The tax benefit is no longer restricted to managers who moved to Luxembourg within a specific historical window (2013-2018), making it available to both current and future residents.
