How carried interest are treated under Luxembourg law?
The current regime
Currently previous rules (temporary provisions and Article 99bis) had limited scope and legal uncertainty.
This new regime corrects those limitations by :
- widening the type of beneficiary eligibility.
- Creating two categories of carried interest and two specific tax systems
- Considering the problems that managers have experienced in the past like tax transparency of their Carried Interest Vehicle or the mechanism of deal by deal water (US style)
This new regime will definitely attract fund managers in Luxembourg.and retain fund managers and key investment‑talent (“front‑office”), enhancing Luxembourg’s position as a global Alternative Investment Fund (AIF) hub.
Key Features of the New Regime
Two Distinct Carried Interest Categories:
The new regime creates two categories of carried interests :
Contractual carried interest
- No requirement to hold fund equity.
- Taxed as “extraordinary income” at 25% of normal income tax rate, approx. ~11.45% maximum. No time limitation on eligibility.
Participation‑linked carried interest
- Tied to a direct/indirect shareholding in the AIF (free carry or co‑investment).
- Taxed as capital gains—fully exempt, if held longer than six months and <10% fund ownership.
The new regime creates also give more flexibility :
Wider Beneficiary Eligibility
Beyond employees of AIFMs: includes consultants, advisors, board members, and service providers—even if employed outside Luxembourg.
Employment status is not a condition anymore
Simplified Mechanics & Clarity
The regime allows the same benefit for fund setup with a US waterfall ie Deal‑by‑deal distributions. Whereas in the past the regime would only allow a benefit but the need to await until full investor repayment).
Legal form of AIF ignored: both transparent and opaque vehicles treated equally for tax purpose if the carried interest is received by these vehicles.
Regulated or
Unregulated 