Luxembourg Proposes Major Carried Interest Tax Reform: What It Means for Expats in Finance and Private Equity

Luxembourg’s Ministry of Finance has proposed a sweeping overhaul of the country’s carried interest tax regime — a move that could have significant implications for professionals working in private equity, venture capital, and other alternative investment sectors.

The changes, introduced in a draft bill submitted to Parliament on 19 July 2025, aim to bring clarity, certainty, and competitiveness to Luxembourg’s tax environment, especially in light of ongoing international scrutiny on private fund structures.

What Is Carried Interest?

Carried interest (often called "carry") refers to a share of profits that general partners of investment funds receive as performance compensation — typically taxed at a favorable rate in many jurisdictions.

Luxembourg currently offers a preferential tax treatment for eligible carried interest income under Article 152bis of its tax law. The regime is often a deciding factor for fund professionals choosing to live and work in the country.

Why the Overhaul?

The government says the proposed reform is designed to:

• Clarify eligibility criteria
• Provide legal certainty on tax treatment
• Better align Luxembourg’s regime with international standards

The goal is to make the country more attractive to global asset managers while avoiding accusations of loopholes or abusive tax planning.

Key Proposed Changes

1. Redefined Scope of Eligible Individuals
   
   Only employees or managers with a direct or indirect stake in qualifying alternative investment funds (AIFs) will benefit from the preferential rate.
2. Clearer Definitions for Eligible Funds
   
   Carried interest must be linked to funds that fall under the EU’s AIFM Directive or equivalent regulation.
3. Tax Rate Clarified
   
   The effective tax rate on carried interest will remain at a flat 25%, compared to Luxembourg's top marginal tax rate of around 45%.
4. Timing of Taxation
   
   Income will only be taxed when it is actually paid — not accrued — helping reduce ambiguity.
5. Exclusions
   
   Carried interest received by investment vehicles themselves, or passive investors, is excluded from the favorable regime.

Impact on Luxembourg’s Expat Finance Community

For the thousands of expats working in private equity, VC, and fund administration roles in Luxembourg, this reform is a major development:

• It could reassure fund managers who are paid via carried interest that Luxembourg remains a fiscally attractive hub.
• By tightening definitions, the reform may exclude some existing arrangements or require restructuring.
• Tax certainty and legal clarity may encourage more global fund professionals to move to Luxembourg or stay long-term.

Law firms and tax advisors expect a wave of contract reviews, fund audits, and structural adjustments ahead of implementation.

The proposed changes are now in Parliamentary review. If passed, they could become law as early as Q4 2025 or January 2026. Professionals are being advised to review carried interest arrangements now and prepare for compliance.

Read more: ashurst.com/en/insights/luxembourg-proposes-major-overhaul-of-carried-interest-tax-regime

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