New carried interest regime

Potential non taxation

On 24 July, the Luxembourg government approved and deposited a draft law amending the Luxembourg carried interest regime. The proposed changes aim at further reinforcing Luxembourg’s attractiveness for the alternative investment sector.

Key highlights

The draft law introduces 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 currently 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
  • The latter 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)

Furthermore, the proposed wording enables the 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.

The draft law also significantly extends 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.