Two complementary approaches to carried interest
The updated framework distinguishes between two main forms of carried interest, providing clearer guidance on their respective tax treatments.
- Contractual carried interest, where remuneration is not linked to a direct or indirect participation in an alternative investment fund, is treated as extraordinary income and taxed at one quarter of the applicable progressive income tax rate, resulting in an effective maximum tax rate of approximately 11.45%.
- Participation-linked carried interest, where remuneration is linked to an actual investment interest in an alternative investment fund, follows a different approach. Where the participation does not exceed 10% of the fund’s capital and is held for more than six months, the income is aligned with capital gains principles and may benefit from full personal income tax exemption.
These two pillars provide a clearer and more flexible framework for structuring carried interest arrangements across a wide range of alternative investment strategies and fund structures.
Broader scope of beneficiaries
The revised framework adopts a broader and more realistic view of who may benefit from the carried interest regime. Rather than focusing narrowly on specific employment relationships, it recognises individuals performing management functions or otherwise actively involved in the management of alternative investment funds.
This includes professionals engaged in investment decision-making, portfolio management and strategic oversight, whether acting as employees, partners, directors or under management or services arrangements. The approach reflects the operational reality of modern asset management platforms, which often operate across multiple entities and jurisdictions.
Alignment with market practice
The updated regime also allows for greater flexibility in how carried interest can be structured and realised over time, including remuneration models linked to individual transactions rather than exclusively to the end of a fund’s lifecycle.
This flexibility is particularly relevant in private markets, where investment horizons, exit timing and performance measurement can differ significantly between strategies.
Overall, the reform illustrates Luxembourg’s continued efforts to adapt its financial framework in line with the evolving needs of global asset managers, while maintaining predictability and coherence within its regulatory and tax environment. It also aligns with Luxembourg’s Ambitions 2030, notably the objective of attracting additional middle- and front-office activities and supporting the financial centre’s continued progression up the investment value chain, particularly in the alternative assets space.