Luxembourg reshapes its carried interest regime for the modern fund market

Luxembourg has entered 2026 with one of the most significant updates to its carried interest tax framework in more than a decade. The reform adopted by Parliament on 22 January 2026 modernises the regime, aligns it with contemporary fund structures, and strengthens Luxembourg’s position as a leading jurisdiction for alternative investment funds. This reform moves Luxembourg beyond a patchwork of temporary rules and into a coherent framework designed for the next phase of private capital growth.

Below, we set out the key changes and what they mean for managers, service providers, advisers and others operating within Luxembourg’s fund ecosystem, and why these developments matter for the jurisdiction’s future positioning.

A broader scope of eligible beneficiaries

One of the most important updates is the widening of who can benefit from carried interest treatment. Historically, eligibility was limited to employees of AIFMs and fund management companies. The reform now acknowledges the distributed nature of modern fund operations, where value creation sits across multiple advisory and service entities.

Eligibility now extends to:

• Employees of related advisory or service firms
• Independent directors and consultants
• Non-employees involved in fund management, including shareholders or individuals with roles linked to performance

This broader scope removes longstanding ambiguity and better reflects how private markets teams operate across legal entities. It also strengthens Luxembourg’s ability to attract and retain senior investment talent in a competitive European market.

Expanded coverage of AIF structures

The reform aligns the carried interest regime with the diverse range of structures widely used by private equity, venture capital, real estate, infrastructure and private credit managers.

The updated rules apply to regulated AIFs and also to popular transparent structures, including:

• SCS (société en commandite simple)
• SCSp (société en commandite spéciale)
• FCPs (fonds commun de placement)

This ensures tax consistency regardless of whether a manager chooses a transparent or corporate vehicle and removes unnecessary structural bias. Managers now have greater flexibility in how they design their fund platforms.

Two defined carried interest regimes: investment linked and contractual

To reduce uncertainty and misclassification risk, the reform introduces two distinct types of carried interest.

1. Investment linked carried interest

This applies where an individual holds a direct or indirect participation in the fund. In these cases, carried interest can be fully exempt from income tax if:

• The individual’s interest in the fund does not exceed 10%
• The holding is maintained for at least six months

This structure reinforces genuine entrepreneurial alignment by rewarding individuals who commit capital and accept economic risk alongside investors.

1. Contractual carried interest

This applies where carry is granted without an investment stake. Under the updated rules, contractual carry:

• is taxed at a capped rate of 11.45%
• is treated as extraordinary income
• is no longer subject to the previous time-based restrictions

Importantly, the reform also accommodates modern deal by deal carry models, providing clarity for strategies where individual transaction economics are increasingly important.

A permanent and competitive long-term framework

The revised regime replaces temporary and inconsistent provisions with a stable, permanent framework that provides long term certainty. In doing so, Luxembourg reinforces its position as a leading European fund domicile by:

• Aligning carried interest taxation with international market practice
• Offering clearer rules for domestic professionals and those relocating
• Ensuring consistency across both regulated and unregulated structures

Taken together, these reforms show Luxembourg’s intent not simply to maintain competitiveness but to strengthen its role as a primary hub for private capital in Europe.

What this means for fund managers in 2026 and beyond

For both emerging and established sponsors, the modernised regime offers:

• Clearer rules for designing carry plans
• Greater flexibility in structuring management ecosystems
• Enhanced attractiveness for senior talent
• Better alignment with investor expectations and modern compensation models

Managers should review existing arrangements to confirm eligibility, consider transition options, and assess whether adopting the new framework delivers structural or economic benefits. For many firms, the reform presents an opportunity to refresh legacy compensation models that no longer reflect the current commercial environment.

How Belasko supports the transition

At Belasko, we support private capital managers in navigating regulatory, tax and operational change. Our Luxembourg team actively monitors legislative developments, including the evolving carried interest landscape, to help client’s future proof their structures, remain compliant and optimise performance outcomes.

To discuss how these changes may affect your fund or carried interest arrangements, contact Greg McKenzie ([email protected]), Country Head Luxembourg.