Recent Amendments to Luxembourg’s Proposed New and Improved Carried Interest Tax Regime

Overview and Objectives

On 17 November 2025, the Luxembourg Parliament published amendments to the new draft carried interest law in response to guidance by Luxembourg’s Council of State (the “State Council”) on clarifying the scope of beneficiaries and other points.¹

Notably, the amendments focus on clarifying the scope of who can benefit from the carried interest regime namely individuals engaged in the management of Alternative Investment Funds (“AIFs”), Alternative Investment Fund Managers (“AIFMs”) and management companies, who are acting as employees, managers and directors, as well as individuals with advisory roles involved with the AIF’s management.

By way of background, the draft carried interest law was first published on 24 July 2025 by the Luxembourg government as Bill No. 8590 (the “Bill”) and aimed at overhauling and significantly improving the carried interest tax regime for AIFs. ²

1. The Bill distinguishes between two categories of carried interest:
   contractual carried interest taxed at a maximum Luxembourg individual income tax rate of 11.45%; and
2. participation-linked carried interest, which qualifies for a full tax exemption from Luxembourg individual income tax under certain circumstances. Additionally, the proposed legislation broadens the pool of eligible beneficiaries and accommodates the wide array of carried interest structures currently used in the market. The Bill is expected to be voted on and approved in the coming weeks and be applicable as from 1 January 2026.

This Bill is further proof of Luxembourg’s ongoing strategy as an optimal location for investments and international business.

Key Features of the Proposed Regime

The Bill is intended to attract and retain top talent and key fund management activities, especially “front office” functions by offering a tax efficient and flexible carried interest regime.

Clarified scope of beneficiaries. The Bill extends access to individuals who, directly or indirectly, render services to or participate in the management of an AIF.

Following the State Council’s opinion of 21 October 2025, the Luxembourg Parliamentary Finance Committee submitted on 17 November 2025 an amendment clarifying the definition of eligible individuals to include:

1. individuals who are performing management functions (including risk management functions) (including risk management functions) at an AIFM, management company, or AIF and acting as an employee, partner, manager, or director;
2. Individual service providers who are performing AIF management functions under an advisory services agreement.

The scope of such individuals specifically includes also non-Luxembourg residents but excludes individuals performing only administrative functions.

Two carried interest regimes to choose from. The Bill introduces two categories of carried interest that benefit from the tax regime:

“Contractual carried interest” which refers to remuneration based on performance that is not linked to any equity stake in the AIF (i.e., no capital or co-investment requirements). This income is classified as “extraordinary income” and taxed at one-quarter of the normally applicable rate, resulting in a maximum Luxembourg individual income rate of 11.45% (including surcharges). ³

“Participation-linked carried interest” which is inseparably linked to a direct or indirect equity holding in the AIF (e.g., carry units, preferred units, or interests acquired through a carry limited partnership). This is treated as speculative gain, with a full exemption applying if the underlying participation is held for more than six months and the individual holds less than 10% of the AIF’s capital.

Operational flexibility. The Bill provides significant operational flexibility. There is no requirement that investors recover their entire commitment before carrying distributions, so “deal-by-deal” waterfalls are expressly permitted. Carried interest may be paid directly by the AIF, its general partner, the AIFM, or another group entity, provided the amount is fully allocated to the individual beneficiary.

Existing beneficiaries of Luxembourg’s old carried interest regime will migrate automatically to the new regime without loss of benefits. The Bill also acknowledges the existence of “bad leaver” clauses and clawback mechanisms to ensure alignment of interests between managers and investors.

Anti-abuse and safeguards. To prevent abuse, the Luxembourg tax administration retains the power to deny favourable treatment where payments mimic fixed remuneration unrelated to fund performance. In certain cases, an arm’s-length valuation may be required such as where carry units are acquired for consideration between related parties.

Other State Council Confirmations

The State Council also confirmed in its opinion the two types of carried interest (i.e., mentioned above “contractual” or equity based) and the technical basis for achieving the reduced income tax rates.

Next Steps

The amended Bill has now been submitted to the State Council for its final opinion, and a final vote is expected to occur in the course of December 2025. The new regime is scheduled to enter into force on 1 January 2026, applying to income realised from that date.

Stakeholders should review existing carry structures to assess transition opportunities, model tax outcomes under both the contractual and participation-linked buckets, prepare documentation and valuation processes to substantiate compliance with the new rules and consider Luxembourg as a domicile for future general partner, front office and advisory functions.

How Can We Help

Our Luxembourg Funds & Investment Management and Tax practices are assisting clients with this new process and can adequately manage communication with the CSSF to approve any amendments to your prospectus via this new system.

Further Information

For further information, please liaise with your usual Maples Group contact or any of the persons listed on this page.