Carried interest is a share of an alternative investment fund’s performance allocated to people involved in its management. From 1 January 2026, Luxembourg tax law distinguishes two forms. One is based only on a contract. The other is inseparably linked to a direct or indirect participation in the fund.
That distinction comes before the tax rate. A payment described as carry in a limited partnership agreement does not enter one route merely because of its label. The legal right, the recipient’s role and any investment in the fund must be read together.
The reform in force from 2026
The Law of 3 February 2026 amended Articles 99bis and 132 of the Income Tax Law. It applies to income realised from 1 January 2026. The current provisions appear in the Income Tax Law coordinated at 1 January 2026.
The reform repealed the temporary carried-interest provision in Article 213 of the AIFM Law. It removed that provision’s new-arrival test and ten-year limit. The statutory analysis now focuses on the carry right and the person’s function in or around AIF management.
The two routes can coexist. One person may hold an investment-linked carry entitlement in one fund and a purely contractual right in another. Each right is classified separately.
Contractual carried interest
Contractual carry arises when the performance right is exclusively contractual. The right must give specific entitlement to the net assets or income of an alternative investment fund and be granted to an eligible natural person.
Qualifying income is treated as extraordinary miscellaneous income. Article 131 taxes it at one quarter of the recipient’s global personal income tax rate.
This wording does not create one fixed carried-interest rate. The global rate depends on the recipient’s taxable income, tax class and other relevant elements. A quoted maximum percentage can therefore misstate the result for a particular year or person.
The contractual route does not require the carry recipient to hold the participation that represents the performance right. A separate co-investment can exist, but the carry being classified under this route must remain exclusively contractual.
Participation-linked carried interest
The second route covers carried interest inseparably linked to a direct or indirect participation in the AIF, or represented by that participation. It falls within Article 99bis on speculative gains.
The holding period is central. If more than 6 months pass between acquisition or creation of the participation and its disposal, the speculative gain from the carry is not taxable under Article 99bis. This exclusion remains subject to Article 100, which can tax gains connected with a substantial participation.
A holding period of 6 months or less does not meet the exclusion. The disposal then remains within the speculative-gain rules. The dates attached to the actual participation must be used rather than the launch date of the wider fund platform.
For an AIF organised as a common fund or as a tax-transparent entity within Article 175, the law treats the performance interest as a speculative gain regardless of the nature of the income earned by the fund. This prevents the underlying income categories from passing through solely for the carried-interest classification.
The two routes compared
| Point | Contractual carry | Participation-linked carry |
|---|---|---|
| Legal basis of the right | Exclusively contractual | Direct or indirect fund participation |
| Tax category | Extraordinary miscellaneous income | Speculative gain, subject to Article 100 |
| Main tax rule | One quarter of the recipient’s global rate | Six-month holding test and substantial-participation review |
| Investment required for the carry right | No | Yes |
The table is a starting point. A complex carry vehicle can contain contractual rights, ordinary co-investment and a separate performance participation. Those elements should not be collapsed into one tax label.
Eligible recipients
The 2026 provisions cover natural persons working in the management chain of an AIF. This includes employees, partners, managers and directors performing management functions at the AIF, an AIFM or a relevant management company.
An individual service provider can also qualify when involved in AIF management under an advisory-services contract. The contract can be direct or run through one or more intermediary entities. Merely supplying an administrative service does not establish involvement in fund management.
The recipient’s residence and Luxembourg tax status remain separate questions. Eligibility defines the income classification. It does not by itself give Luxembourg the right to tax a non-resident on every payment from a foreign or Luxembourg fund.
Luxembourg and foreign funds
The regime is not limited by its wording to a Luxembourg product such as an SCSp or RAIF. The legislative file 8590 confirms the intended broader reach.
A foreign AIF can therefore be relevant when a Luxembourg-taxable fund professional receives qualifying carry. The foreign vehicle must still satisfy the AIF concept, and the right must meet the contractual or participation-linked conditions. The existence of a foreign partnership or carry company does not settle the Luxembourg classification on its own.
Points that can change the result
The tax outcome can change if the legal right and the cash flow diverge. A contractual entitlement routed through a participation is not necessarily still exclusively contractual. A participation that also carries ordinary investment returns may need its performance and co-investment elements separated.
Transfers and reorganisations can also reset or complicate the six-month holding analysis. Article 100 must be checked whenever the recipient’s direct and indirect interests could amount to a substantial participation.
Finally, accounting and payroll treatment should follow the legal classification. The fund, carry vehicle, employer and recipient may each record a different part of the arrangement, but the underlying agreements must describe one consistent economic right.
Conclusion
Luxembourg’s 2026 regime starts with the legal form of the carry. Exclusively contractual carry can be taxed at one quarter of the recipient’s global rate. Participation-linked carry follows the six-month rule and remains subject to the substantial-participation provisions. Recipient eligibility, residence and the fund structure must then be tested separately.
Related service
Turn this topic into action
If this topic has a direct impact on your business, explore our Luxembourg fund formation support to structure carry vehicles and keep their accounting and tax treatment consistent.
Frequently Asked Questions
What changed for carried interest from 1 January 2026?
Since 1 January 2026, Luxembourg distinguishes contractual carry from carry inseparably linked to a fund participation. Contractual carry can receive the quarter-global-rate treatment. Participation-linked carry follows the tax rules for gains on the underlying participation.
How is contractual carried interest taxed?
Qualifying contractual carry is extraordinary miscellaneous income taxed at one quarter of the recipient's global income tax rate. This is not a fixed percentage. The result depends on the person's taxable income and tax position.
How is participation-linked carried interest taxed?
A disposal more than 6 months after the participation was acquired or created is normally outside the speculative-gain charge. The separate rules for a substantial participation can still apply. A shorter holding period does not receive that exclusion.
Who can qualify for the 2026 regime?
Eligible persons are natural persons who perform management functions as employees, partners, managers or directors within the relevant AIF, AIFM or management-company chain. An individual service provider involved in AIF management can also qualify, directly or through intermediary entities.
Does the regime apply only to Luxembourg funds?
The legislation is framed by reference to an alternative investment fund rather than a Luxembourg-only product. A foreign fund can therefore fall within the regime, but the beneficiary, the carry right and Luxembourg's taxing jurisdiction must still meet the statutory conditions.
