Luxembourg new carried interest regime - Update following draft law amendments
Luxembourg new carried interest regime - Update following draft law amendments
In our previous Tax Alert, we had shared that the Luxembourg tax framework applicable to carried interest was evolving.
As part of the legislative process, certain adjustments, adopted on 14 November, are proposed to be introduced. It is confirmed that this new regime is expected to apply from 1 January 2026 onwards.
Key Highlights
The key elements of the proposed new law are unchanged and include the following:
- Confirmation of the introduction of a differentiation between two types of carried interest:
- Purely contractual carried interest, i.e. not linked to any form of investment: Such carried interest, which is so far taxed at a rate of up to 45.78% (+1.4% dependence insurance contribution) will in the future be taxed at ¼ of the beneficiary’s global tax rate, i.e. a maximum of 11.45% (+1.4% dependence insurance contribution).
- Carried interest linked to an investment:This carried interest will be taxed according to regular capital gains rules, i.e. not taxable if held for more than 6 months and the beneficiary does not hold a substantial participation (more than 10% of the shares/quota of the underlying vehicle).
- Inclusion of a wider scope of AIF such as debt funds. It also no longer requires investors to be repaid first and will thus include deal-by-deal arrangements.
- Extension of the scope of beneficiaries that is no longer restricted to employees of the AIFM or management company, but can include external individuals, such as directors, advisors or employees of related entities. The recent amendment aims at bringing further clarification and details with respect to eligible beneficiaries.