Luxembourg’s government has unveiled Draft Bill No. 8590 (submitted on 24 July 2025), proposing sweeping reforms to the personal tax regime on carried interest for Alternative Investment Fund (AIF) managers. The reforms aim to modernize legal structures, enhance clarity, and bolster Luxembourg’s competitiveness as a premier domicile for private equity and asset management.

🚀 Why the Reform Matters

Luxembourg has long hosted significant AIF capital but faced criticism over an outdated and fragmented carried interest regime. The previous frameworks were temporary, restrictive, or unclear in scope—and capped new entrants. Bill 8590 addresses this by creating a permanent, transparent, and inclusive tax treatment for carried interest across European and international standards.

✅ What’s New

1. Two-Part Tax Treatment

• Contractual Carried Interest: If not tied to an equity stake in the AIF, taxed as “extraordinary income” at 25% of the global income tax rate (~11–13%).

• Participation‑Linked Carried Interest: If tied to ownership in the AIF and representing ≤ 10% equity for over six months, it may be fully tax-exempt; otherwise subject to standard progressive rates (up to ~45.8%) .

2. Expanded Beneficiary Scope

No longer limited to employees of AIFMs. Now includes general partners, management company staff, independent directors, and consultants—providing legal certainty across varied structures.

3. Deal‑by‑Deal Flexibility

The reform removes requirements for carried interest to wait until full fund capital recovery, enabling “deal-by-deal” payment structures aligned with modern carry models.

4. Tax Transparency Improvements

Carry paid through transparent vehicles (e.g. SCSp, FCP) is now consistently taxed regardless of underlying tax treatment, reducing ambiguity for fund structures.

5. Effective Date & Transition

If approved, the regime becomes permanent starting fiscal year 2026. The existing 2013/2018 transitional carry regime will be repealed; current beneficiaries may transition seamlessly to the new regime.

🌍 Implications for Global Investors and Fund Managers

• Strategic Talent Attraction: Clear, favorable carry taxation enhances ability to attract and retain fund professionals in industries like PE and VC.

• Alignment with Global Standards: Structures are harmonized with the UK and southern European frameworks, reducing cross-border tax friction.

• Operational Advantages: Broader eligibility and deal-by-deal flexibility support more dynamic fund structuring and incentive alignment.

• Due‑Diligence Clarity: Legal consistency across carry structures and beneficiaries simplifies tax planning and compliance across multinational portfolios.

🧭 What to Monitor

• Legislative process: timing and any evolution during parliamentary debate

• Interpretation of key terms (e.g. “participation,” “ordinary interest”) that affect eligibility thresholds

• How transitional beneficiaries align within the new framework

• Interaction with other tax incentives (e.g. expatriate or stock‑option regimes)

📝 Final Take

Luxembourg’s carried-interest reform is its most consequential since 2013. By offering a permanent, inclusive, and tax-efficient structure, the state reaffirms its status as an attractive hub for AIF professionals and capital. For global private equity, venture capital, and asset management players, the new regime simplifies incentives, clarifies legal risk, and promotes innovative deal architecture—all elements essential to future fund domiciliation and talent strategy.

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