Following our previous publication on the draft Bill of Law No. 8590 issued on 29 August 2025, the legislative process has now been completed. On 22 January 2026, the Luxembourg Parliament formally adopted the Bill, which proposed a significant reform of the Luxembourg tax regime applicable to carried interest (the Law)2. This reform modernises the pre-existing regime to enhance Luxembourg’s position as jurisdiction of choice for fund professionals by providing greater flexibility as to their remuneration package and extending the scope of eligible beneficiaries.

Key Features of the Law

1) A clear remuneration package

As previously mentioned, the New Law offers a permanent and more advantageous tax regime for carried interest by distinguishing between two types of carried interest:

• Contractual carried interest: Carried interest which is granted free of charge and without any capital investment requirements (i.e. the beneficiary is not obliged to invest in the AIF). The Law makes the previous temporary preferential regime permanent. Income under the contractual carried interest is considered extraordinary income and is taxable at ¼ (one quarter) of the taxpayer’s personal income tax rate (i.e., with an effective rate between 11 and 12%). There is no holding period condition at the level of the beneficiary.
• Participation-based carried interest: Carried interest which is inseparably linked to a direct or indirect participation in an AIF or when the carry is represented by such a participation. Participation-based carried interest may be fully exempt under the new rules provided the employee has held its participation for more than six (6) months (and the individual’s shareholding does not exceed 10% in a corporate vehicle).

2) Extended scope of eligible beneficiaries

As opposed to the old carried interest regime, the Law extends the carried interest regime not only to employees of AIFs but to also any individual who is either a fund manager or provides services to AIFMs, regardless of its professional status (no administrative function, however).

3) Deal-by-deal carry models

The Law also simplifies the entitlement to the carry regime and lifts the previous requirement that investors were to recover their full investment before carry was paid. Under the new regime, it is now possible to structure a carry deal-by-deal for the key managers of an AIF.

Changes Between the Draft and the Adopted Law: Refined Personal Scope

One of the points where the Law diverges from the initial draft concerns is on the personal scope of eligible carry holders.

The Bill of Law had proposed a very broad extension of the regime, covering employees of management companies, related group entities, as well as certain non‑employees (e.g. independent board members or individuals with contractual carry rights). The wording was considered too broad and a source of potential confusion. The adopted text refines and clarifies the categories of eligible beneficiaries. According to the Law, eligible carry holders are the following:

• Individuals performing management functions: this will include employees, partners, managers, or directors of AIFMs, management companies, or AIFs
• Service providers involved in the management of an AIF under an advisory agreement, either directly or through an intermediary structure.

Entry Into Force and Practical Implications

The Law is applicable with retroactive effect as of 1 January 2026. This reform is expected to reinforce Luxembourg’s attractiveness for fund managers and key functions, consolidating the country’s role as a leading European fund jurisdiction.

However, one should not overlook the tax implications associated with the specific nature of Luxembourg and its labour market, where a significant proportion of employees are cross-border workers. For these employees, the tax rules of their place of residence will apply in addition to or instead of the rules set out above.

1: Law from 3 February 2026 modifying: 1° Luxembourg Income Tax Law from 4 December 1967 (LITL) ; 2° Alternative Investment Fund Manager Law from 12 July 2013 (AIFM Law) (loi du 3 février 2026 portant modification : 1° de la loi modifiée du 4 décembre 1967 concernant l’impôt sur le revenu ; 2° de la loi modifiée du 12 juillet 2013 relative aux gestionnaires de fonds d’investissement alternatifs).

2: Draft Law modifying: 1° Luxembourg Income Tax Law from 4 December 1967 (LITL) ; 2° Alternative Investment Fund Manager Law from 12 July 2013 (AIFM Law) (Projet de loi portant modification : 1° de la loi modifiée du 4 décembre 1967 concernant l’impôt sur le revenu ; 2° de la loi modifiée du 12 juillet 2013 relative aux gestionnaires de fonds d’investissement alternatifs).