Luxembourg’s new carried interest tax regime is in force

Key advantages

The new carried interest regime applicable to Luxembourg‑resident individuals provides for:

• A reduced personal income tax rate of 11.45% on contractual carried interest, i.e. carried interest not materialised through a participation in a fund.

• An exemption from Luxembourg personal income tax on (i) carried shares and (ii) carried interest entitlements that are inextricably linked to a direct or indirect participation in an Alternative Investment Fund (AIF), subject to a six‑month holding period and percentage‑threshold conditions.

Clarification of the eligible beneficiaries

The adopted legislation broadens the scope of eligible beneficiaries and aligns the regime with the various carried interest models currently used in the market.

Whereas the initial draft contained a broadly formulated definition of eligible beneficiaries, the final version of the law clarifies that the new carried interest regime applies to individuals who (i) perform management functions as employees, partners, managers or directors of investment fund management entities or AIFs, or (ii) provide services to AIFs under a service agreement entered into directly or through one or more intermediary entities.

For a detailed description of the new carried interest regime, we invite you to consult our previous publication on this topic.

Impact on the financial sector

The provisions of the new law strengthen the competitiveness of the Luxembourg financial sector and provide a solid foundation for attracting asset managers and other fund‑industry professionals to the country.