Key changes
The proposed law aims to create a clearer, more sustainable, and more competitive framework through several key changes:
- More individuals would be eligible for the regime. The proposal opens the door beyond just employees to include anyone serving a fund or its manager, such as independent directors or non-employee partners.
- Establishing a Permanent and Unified System: This new framework makes the favorable quarter tax rate for contractual carried interest a permanent feature, available to all qualifying individuals, not just those who recently moved to Luxembourg.
- "Deal-by-deal" carry structures would now qualify. The draft bill removes the old rule requiring investors to be fully repaid their initial investment first, explicitly making this common type of carried interest eligible for the favorable treatment.
To understand the full scope of this reform, we provide below a side-by-side comparison of the old and new regimes. We then take a closer look at the key measures and what they would mean for the industry.
|
Criteria |
Current Regime |
Proposed Regime (Bill 8590) |
|
Eligible Beneficiaries |
Individual employees of an Alternative Investment Fund (AIF) manager or management company only. |
A formal relationship with the AIF manager is not required. The regime broadly applies to any individual providing services to the fund manager—such as managers, independent directors, and advisors—regardless of their employment status. |
|
Timing of Carried Interest Payment |
After full reimbursement of investors' initial capital. |
Allowed on a “deal-by-deal” basis; no requirement for full investors’ reimbursement. |
|
Form of Entitlement |
1) Contractual right or 2) Shareholding. |
The same dual structure is maintained: 1) Contractual right or 2) Shareholding. |
|
Tax Treatment (Contractual Right) |
Speculative gain taxed at marginal/progressive rates. A reduced rate (quarter of global rate) was possible for certain “impatriates” under a temporary regime. |
Classified as extraordinary income, taxed at a permanent reduced rate (one-quarter of the global rate). |
|
Tax Treatment (Shareholding) |
Speculative gain; tax-exempt if the participation (≤10%) is held for more than 6 months. |
Speculative gain; the same tax exemption applies if the participation (≤10%) is held for more than 6 months. |
|
Transparent Entities |
The tax treatment depends on the underlying nature of the fund's income (look-through approach). |
For the application of the shareholding regime, the income is always treated as a speculative gain, regardless of the fund's underlying income (no look-through). |
Carried interest is essentially a performance fee that rewards a fund manager for generating strong returns. It represents a share of an investment fund's profits, but it is only paid after the investors have first received a pre-defined minimum return, known as the "hurdle rate". Because this income is uncertain and directly linked to long-term performance, legislators consider it fundamentally different from a regular, fixed salary. The primary benefit of this distinction is significant: by not being classified as salary, this income is subject to a more favorable tax treatment and is generally exempt from the social security contributions that would otherwise apply.
At the heart of this legislative reform is a clear intention to replace legal ambiguity with a durable, predictable framework for investors and fund managers alike:
Expanded Eligibility: More Professionals Can Now Benefit
The current carried interest regime is narrowly restricted to employees of an Alternative Investment Fund (AIF) manager or its management company. The new bill significantly broadens this scope to include any individual who provides services an AIF manager and receives carried interest. Consequently, the regime's benefits should extend to employees of other entities, like investment advisory firms, and to non-employees such as independent directors of the AIF or partners of the management company.
Two-Tier Approach to Carried Interest: A Low Tax Rate or Full Exemption:
The proposed regime makes a distinction between two forms of carried interest:
-
Contractual carried interest:
This type of carried interest is granted on a purely contractual basis, based on a right that gives a specific share in the outperformance of an AIF. It is awarded to an individual, such as a fund manager or an advisor serving the manager, without obliging them to subscribe in the fund. This structure represents the simplest form of carried interest. It is set to be taxed favorably as extraordinary income at one-quarter of the applicable marginal rate (i.e. at around 11% instead of 45.78%).
This new permanent framework effectively would replace and enhance the former temporary regime introduced in 2013. That temporary scheme, which would be repealed, offered the same quarter tax rate but was strictly limited to managers who moved to Luxembourg between 2013 and 2018. As the benefits from this old regime were set to expire in 2028 anyway, the government has chosen to make its core benefit—the reduced tax rate—a permanent and broadly available feature of the new system.
Any individuals still benefiting from the old rules would automatically transition to this new permanent regime, which is at least as favorable, since it offers an equivalent tax rate without the previous time limits or immigration restrictions.
-
Investment-Linked Carried Interest
The draft bill provides a different, potentially more favorable, treatment for carried interest that is linked to a personal investment. This second regime applies when the carry is either inextricably linked to a direct or indirect participation in the fund or is represented by such a participation. This means the manager either co-invests alongside other investors or acquires a specific security representing their right to the carry. The income from this type of carry is treated as a speculative gain, which can become fully tax-exempt, provided the participation (of 10% or less) representing the carried interest is held for more than six months.
To ensure consistency, the draft bill specifies that for tax-transparent funds such as (special) limited partnerships or mutual funds, this income is always treated as a speculative gain, regardless of the nature of the fund’s underlying income.
Eligibility of “Deal-by-Deal” Carried Interest
A significant change in the proposed law is the eligibility of "deal-by-deal" carried interest structures for favorable tax treatment. The draft bill achieves this by removing a key restriction from the previous regime which mandated that investors had to be fully repaid their initial capital before any carried interest could be distributed. This former condition effectively excluded arrangements where managers are compensated as each underlying asset is realized, favoring "whole-of-a-fund" models instead. The bill's commentary acknowledges that while this change introduces a risk of managers being overpaid during the fund's life, common market practices like "claw-back" clauses—which compel managers to return any excess distributions—are in place to mitigate this issue.
Measures to Prevent Misuse of the Regime :
The draft bill addresses the risk of potential abuse in its commentary on the articles. The primary concern is to prevent fixed or predictable professional income, such as a standard bonus, from being disguised as carried interest simply to benefit from the more favorable tax regime. The commentary provides an example of a potential abuse, such as a purported "carried interest" that is recurring or calculated as a percentage of salary. To prevent this, the text states that any arrangement must have genuine commercial and financial substance and also refers to Luxembourg's general anti-abuse rules in other contexts, like setting an abnormally low performance threshold ("hurdle rate").
Entry into force
According to the draft bill, the new legislation is scheduled to enter into force and apply starting from the 2026 tax year. This means the modernized rules for carried interest would be applicable to income realized on or after January 1, 2026. The bill was submitted to the Luxembourg Parliament on July 24, 2025, and must still pass through the full legislative process before being formally enacted as law.
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For any further questions or assistance, please do not hesitate to contact your trusted Tiberghien advisor.
Maxime Grosjean (maxime.grosjean@tiberghien.com) – Senior associate
Edouard Tiry (Edouard.tiry@tiberghien.com) - Associate
