Carried interest taxation has long been one of the structuring decisions that determine where Luxembourg fund teams choose to be tax-resident, and how cleanly the platform can grow without losing key persons to other jurisdictions. The framework that prevailed between 2013 and the end of 2025, anchored in Article 50ter of the Luxembourg income tax law and introduced by the AIFM Law of 12 July 2013, was a transitional impatriate route with a ten-year time limit and a strict eligibility perimeter.¹ It was useful at launch but had stopped reflecting the way modern fund management teams actually look — multi-jurisdictional, mobile, and built around a mix of employees, partners and external advisors.

The reform adopted by the Luxembourg parliament on 22 January 2026, with the second constitutional vote waived by the Conseil d’État on 3 February 2026, and effective from 1 January 2026, recalibrates the regime around two parallel routes that coexist for the same individual.² Contractual carried interest is taxed as extraordinary miscellaneous income at one quarter of the global rate, on a permanent basis. Participation-linked carried interest falls under the Luxembourg capital gains framework, with the standard six-month holding and the substantial-participation threshold of ten per cent. The eligibility perimeter is broadened to all natural persons effectively involved in fund management.

For sponsors structuring a Luxembourg SCSp, RAIF or SIF or SICAR vehicle, the practical question is no longer whether Luxembourg carried interest can be made workable for a senior team. It is which of the two routes fits the existing carry vehicle, the LPA waterfall and the team’s mobility plan, and how to design the fund’s economics so that the chosen route remains available over the full life of the platform.

1. The pre-2026 framework and what it left unsolved

Article 50ter of the Luxembourg income tax law was introduced by the AIFM Law of 12 July 2013 to attract carry-receiving employees to Luxembourg.¹ The route taxed carry at one quarter of the global rate, but only for employees of regulated AIFMs or their delegates, only for ten years from arrival in Luxembourg, and only for individuals who had not been Luxembourg tax-residents in the five years preceding their move. Carry from investments in risk capital was the eligible category.

The framework worked for impatriate hires inside the perimeter of an AIFM, but it left several structural gaps that became more visible as the Luxembourg fund market scaled. Long-tenured Luxembourg residents who were already on the team when the AIFMD was implemented could not access the regime. Independent partners, non-employee managers and external advisors fell outside its scope. The ten-year clock created an artificial cliff that caused planning issues for senior team members approaching the end of the period. Carry vehicles built around deal-by-deal waterfalls did not always sit comfortably inside the regime. Foreign funds whose Luxembourg-based managers received carry were essentially excluded.

The reform was developed against that backdrop. The objective stated in the legislative file was explicit. Luxembourg wanted a permanent, broader and structurally cleaner regime that would attract and retain fund managers, treat similarly situated individuals consistently and reflect how modern fund economics are actually built.²

2. The reform and its effective date

Bill 8590 was introduced by the Luxembourg government on 24 July 2025 and adopted by parliament on 22 January 2026.² The Conseil d’État waived the second constitutional vote on 3 February 2026, and the law applies to income realised as from 1 January 2026.

The reform repealed the transitional quarter-rate route originally embedded in the AIFM Law and replaced it with two parallel regimes inside the Luxembourg income tax law itself. The two regimes are not alternatives. They are independent classifications applied to different forms of carry, and the same individual can receive both forms across different funds or different products. The structuring conversation, therefore, is no longer about choosing between regimes. It is about designing the fund’s economics so that each carry stream falls cleanly into one or the other.

The reform also explicitly extended its perimeter to existing and new funds and to both Luxembourg and foreign AIFs. A senior manager based in Luxembourg who receives carry from a Cayman feeder, a Delaware blocker or a foreign GP entity can therefore look at the regime on the same footing as a manager whose carry flows from a Luxembourg RAIF. What matters is the qualification of the carry stream and the qualification of the recipient.

3. The contractual carried interest regime

Contractual carried interest is the route built around a contractual right rather than around equity. The recipient is entitled to a share of the fund’s overperformance under a contract — typically the LPA, a side agreement, an employment agreement or a service contract — without holding a participation in the AIF that the carry depends on. This is the most common structuring of carry in funds where the carry recipients are not equity participants in the fund vehicle itself.

Under the new regime, contractual carried interest is treated as extraordinary miscellaneous income and taxed at one quarter of the recipient’s global personal income tax rate.² On the basis of the 2025 income tax brackets used as the reference for the reform, the maximum effective marginal rate is approximately 11.45%. This is a permanent feature of the regime, not a transitional rate. It applies from the first euro received and for the full duration of the carry stream, without a ten-year cliff and without an impatriate-only restriction.

The quarter-rate is the most visible part of the regime, but the structural changes that come with it matter equally. The reform removed the full-capital-recovery precondition that constrained the prior framework, which means that deal-by-deal carry waterfalls are now within scope. It also removed the requirement that the carry come from investments in risk capital, broadening the regime to a wider range of fund strategies. Contractual carry from real estate, private debt, infrastructure or fund-of-funds strategies can fit within the regime where the recipient meets the eligibility test described below.

For sponsors structuring a new Luxembourg fund, the contractual route is the most predictable and usually the most operationally clean. It does not require the carry recipient to take a partnership interest in the fund vehicle, it accommodates a wide range of waterfall designs, and the tax outcome can be modelled with a high degree of confidence.

4. The participation-linked carried interest regime

The second regime applies where the carry is represented by, or inextricably linked to, a direct or indirect participation in the AIF. This is the configuration where the carry recipient holds a partnership interest, units, shares or other equity-style instruments in the AIF or in a layer that is treated as an extension of the AIF.

In that configuration, the carry is taxed under the Luxembourg capital gains framework rather than as miscellaneous income.³ The exemption available to private investors on gains from securities applies where the participation has been held for more than six months and the recipient does not hold a substantial participation. The substantial-participation threshold is set at ten per cent of the AIF’s capital under the standard Luxembourg capital gains rules.

The participation-linked regime makes a deliberate technical adjustment. Tax-transparent funds — common contractual funds and transparent entities such as the SCSp — are treated as opaque for the purposes of this classification.² This means that a carry recipient holding an SCSp partnership interest can be classified within the participation-linked regime, even though the SCSp is otherwise tax-transparent at entity level. Without this adjustment, a transparent fund would have channelled the carry directly to the recipient as a share of partnership income and bypassed the capital gains framework, which would have re-introduced the very gap the reform was trying to close.

The economic outcome of the participation-linked regime is a full Luxembourg exemption in the typical case. A manager who holds, directly or through a carry vehicle, a non-substantial participation in the fund for more than six months and realises a gain on the disposal or on the distribution flowing to the participation pays no Luxembourg income tax on that gain. This is the most attractive treatment available for Luxembourg-based carry recipients and is the route most often pursued where the fund’s economics can support an equity-style carry layer.

5. The eligible perimeter of beneficiaries

The reform redrew the perimeter of beneficiaries on a functional rather than a contractual basis.² The earlier regime was anchored in the employee status within an AIFM. The new regime is anchored in the actual involvement in the management of the AIF.

Two categories qualify. The first covers natural persons performing portfolio management or risk management functions as employees, partners, managers or directors of an AIFM, a management company or an AIF itself. This includes the senior team of an AIFM, the directors of a Luxembourg GP, the managers of a SCSp-form fund and the senior persons of an internally managed AIF where one exists. The second covers natural persons effectively involved in the management of an AIF under a service agreement, whether the agreement is concluded directly or through one or more intermediary entities. This is the route that brings independent advisors, external partners and members of operating teams into the regime, even when they are not employed by the fund or the AIFM.

A clear exclusion remains. Purely administrative roles — back-office, support, secretarial — do not benefit from the regime. The qualifying involvement must be substantive and connected to the management of the fund itself, not to its administration.

The functional anchoring matters in two ways. It makes the regime usable for fund teams whose senior persons are spread across employees, partners, managers and external advisors, which is the dominant pattern in international PE and VC platforms. It also keeps the regime defensible against challenges that would target a tax incentive perceived as available to unrelated personnel.

6. Carry routing in light of the new regime

The new regime reshapes how a Luxembourg fund’s carry is best structured. The pre-2026 framework pushed sponsors toward a relatively narrow design — employee carry inside the AIFM, with limited room for independent partners or for non-employee managers. The 2026 framework gives more design flexibility, but it requires careful upfront attention to which of the two regimes will apply to which carry stream.

Three structuring points come back regularly. The choice between contractual carry and participation-linked carry is made at the level of the LPA and the carry vehicle, not at the level of the individual recipient. Once the LPA documents a carry as a profit share allocated through the partnership waterfall, the carry is contractual. Once the LPA documents a partnership interest held by a carry vehicle whose value reflects the fund’s performance, the carry is participation-linked. The two designs cannot be combined arbitrarily for the same carry stream.

The carry vehicle structure interacts directly with the GP economics described in the GP setup guide. The 5% interest threshold of the AIF safe harbour from municipal business tax applies to the GP’s interest in the SCSp. A separate carry vehicle holding a participation interest in the fund — frequently another SCSp or a Luxembourg SCS — keeps the GP’s interest small while letting the carry recipients hold a participation that qualifies under the participation-linked regime. The design is consistent with how PE structuring already worked, and the new regime fits cleanly on top of it.

The interaction with the AIFM operating model is the third axis. Carry recipients who are employees of a Luxembourg AIFM benefit from the broader eligibility automatically. Carry recipients who are non-employee partners or external advisors must document their effective involvement in the management of the AIF in a way that the qualifying perimeter recognises. Service agreements, management agreements, key-person clauses and written attribution of fund-management responsibilities are the standard instruments used to anchor that involvement.

7. Combination with the impatriate regime

The carried interest reform is part of a broader package designed to consolidate Luxembourg’s competitiveness as a base for fund-management teams. The revised impatriate regime applicable from 1 January 2025 sits alongside the carry reform and addresses a different question. Where carried interest taxation is about how a carry stream is taxed, the impatriate regime is about how the rest of an inbound senior person’s compensation — base salary, bonus, equity — is taxed during the early years of Luxembourg residence.

A Luxembourg-based fund manager arriving from another jurisdiction can therefore benefit from two distinct mechanisms. The impatriate regime softens the Luxembourg tax cost of the recurring compensation package during the early residence years. The carried interest regime applies to the carry stream itself, on a permanent basis if the structural conditions are met, with no time limit and no prior-residence requirement.

The two regimes are independent but complementary. Sponsors structuring a relocation of senior team members usually look at both in the same conversation and design the contractual package to fit each one cleanly. The combined effect is what makes the Luxembourg market more competitive than it had been under the pre-2026 framework, where the carry regime alone had a relatively narrow reach.

8. Practical structuring for sponsors and senior teams

For a sponsor preparing a new Luxembourg fund, the regime should be designed into the LPA, the GP corporate file, the carry vehicle and the team’s individual contracts from the outset. Three practical points are usually worth checking before closing.

The first is the qualification of the carry stream as contractual or participation-linked. Mixed structures — where part of the carry flows as a contractual profit share and part flows as a participation gain — are workable, but each component must be qualified separately. The LPA waterfall and the carry vehicle’s articles must reflect the chosen design without ambiguity.

The second is the eligibility of each carry recipient. Employee status, partner status and service-agreement status each require their own documentation. For external advisors and non-employee partners, the service agreement should explicitly describe the fund-management functions performed, the terms of the engagement and the link between the carry and those functions. A well-drafted service agreement is the practical anchor for the eligibility test.

The third is the substance and Luxembourg footprint of the recipients. The regime is anchored in Luxembourg tax residence and in actual involvement in fund management, both of which are tested against the broader substance file of the fund and its manager. Senior team members whose Luxembourg presence is purely formal will have a harder time defending the regime than members whose presence is operational and documented.

For ongoing administration, the tax compliance workstream takes the regime into the annual personal tax return of each carry recipient. The qualification, the route, the holding period, the substantial-participation analysis and the documentation file must be kept current alongside the fund’s own books and records and the AIFM’s regulatory file. A coherent end-to-end view across the LPA, the carry vehicle, the GP, the AIFM and the individual recipients is what keeps the regime operational and defensible.

9. When the regime is the right answer and when it is not

The new regime is the right answer for most Luxembourg-based fund management teams operating in PE, VC, infrastructure, real estate, private debt and fund-of-funds strategies. Contractual carry recipients access a permanent quarter-rate around 11.45%. Participation-linked carry recipients access a full Luxembourg exemption in the typical case. The eligibility perimeter is broad enough to cover the dominant team configurations.

The regime is less directly useful where carry is paid by entities that fall outside the AIF perimeter altogether or where the recipient’s Luxembourg residence is not real. It also leaves intact the analysis that must be made in the recipient’s home jurisdiction when there is a cross-border element, which is a point that deserves separate attention rather than an automatic assumption that the Luxembourg outcome is replicated abroad.

For sponsors building a Luxembourg platform, the regime is now the structural baseline rather than a special accommodation. Designing the fund’s carry economics around the contractual route or the participation-linked route, with the right LPA mechanics and the right carry vehicle, is part of the standard structuring conversation. Aligning the regime with the GP setup, the AIFM appointment and the broader Luxembourg SPV services for private equity is what keeps the platform coherent over time.

Footnotes

1. Law of 12 July 2013 on alternative investment fund managers, which introduced the original Article 50ter regime for impatriate carry recipients. ↩ ↩²

2. According to the Luxembourg legislator, Bill 8590 was adopted by parliament on 22 January 2026, the second constitutional vote was waived by the Conseil d’État on 3 February 2026 and the law applies to income realised as from 1 January 2026. The reform repealed the prior Article 50ter route and replaced it with the contractual and participation-linked regimes described in this guide. ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

3. Law of 4 December 1967 on income tax (LIR), as amended, including the provisions on extraordinary miscellaneous income and on the capital gains framework applicable to private investors holding non-substantial participations. ↩