Luxembourg Overhauls Carried Interest Tax Rules to Boost Competitiveness

Luxembourg’s Parliament has approved a far-reaching reform of the carried interest tax regime, marking what many legal analysts call the most significant change in more than a decade. On 22 January 2026, lawmakers adopted Bill No. 8590, designed to modernize tax treatment for performance-based income tied to investment funds.

Under the new framework, carried interest is divided into two main categories. Contractual carried interest — performance pay not linked to equity stakes — is now subject to a lower tax rate of up to around 11.45 %, while participation-linked carried interest can be tax exempt if certain conditions are met, such as holding a qualifying participation in a fund for more than six months. Studies show this aligns Luxembourg’s regime with other competitive international markets.

A key change from previous law is the broadening of who can benefit: the reform extends preferential treatment beyond fund managers to include employees, directors, partners or service providers connected to alternative investment funds. This addresses a longtime industry concern and reduces legal ambiguity about eligibility.

The reform also removes old constraints such as the requirement that investors must be paid back before carried interest holders receive their share, making the regime suitable for deal-by-deal arrangements common in modern fund structures. Legal experts argue this flexibility enhances Luxembourg’s attractiveness for front-office talent and private capital.

Supporters say the new rules provide greater legal clarity and competitive edge for Luxembourg’s fund industry, bolster the country’s position as a leading European hub for alternative investment funds, and help draw and retain skilled professionals in a high-value sector.

Read more: stibbe.com/publications-and-insights/luxembourg-adopts-comprehensive-carried-interest-tax-reform

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