Carried interest in Luxembourg: how fund managers are taxed in 2026

Carried interest in Luxembourg after the 2026 reform

Carried interest is the share of a fund's profit that goes to the people who manage it, once investors have received their money back with a preferred return. It is typically 20% of the profit above a hurdle of around 8%. For a senior partner it can exceed years of salary, so its tax treatment shapes where fund professionals live.

Luxembourg rewrote its carry rules with effect from tax year 2026. Parliament adopted bill no. 8590 on 22 January 2026, and the second constitutional vote was waived on 3 February 2026. The old temporary regime for managers who arrived between 2013 and 2018 is replaced by two permanent regimes open to every resident fund professional.

The first regime covers contractual carry: a right to share in the fund's outperformance granted by contract, without an investment in the fund. It is taxed at a quarter of the individual's global tax rate, which caps the effective rate at about 11.45%. The second covers participation-linked carry: carry shares, carry units or an interest in a carry vehicle. It is treated as a speculative gain and is exempt if the participation is held for more than six months and is below 10%.

Budget bill no. 8800, filed on 7 October 2026, proposes to extend the six-month period to twelve months from 2027. This guide covers the rules, the people, the structures and the traps, with examples and a calculator.

Two kinds of carry, two tax treatments

The law sorts carry by its legal form, not by the type of fund or the source of its profit. Before 2026, advisers argued whether carry was salary, business profit or a gain, and the answer often depended on how the fund was taxed.

Contractual carry is a right granted free of charge, for example in the employment contract, the partnership agreement of the manager or a separate carry letter. The holder does not have to invest in the fund. The right is not represented by, or inseparably linked to, a participation in the fund. It is paid, directly or indirectly, by the fund once performance thresholds are met. The income is classified as extraordinary miscellaneous income and taxed at one quarter of the holder's global rate.

Participation-linked carry is carry that comes with, or is represented by, a participation in the fund: carry shares in a fund company, a class of units, or an interest in a dedicated carry vehicle such as a special limited partnership (SCSp). It is always treated as a speculative gain, whether the fund distributes capital gains, dividends or interest. The tax transparency of the fund or the carry vehicle is ignored for this purpose, so the gain keeps its character on the way up. The gain is exempt if the participation is held for more than six months and does not exceed 10% of the fund or vehicle.

Arendt notes that participation-linked carry comes in two forms. With a pari passu co-investment, only the carry part benefits; carry bought for a price through an SCSp needs no co-investment.

Law and practice: Bill no. 8590 amending the Income Tax Law (LIR), adopted on 22 January 2026, dispensation from the second vote on 3 February 2026, applicable from tax year 2026; Article 99bis LIR on speculative gains; repeal of the temporary regime in Article 213 of the AIFM Law of 12 July 2013. Summaries by Mourant, Stibbe and Arendt.

Who can use the regime and what counts as carry

After the Council of State called the first version of the bill too broad, the adopted text defines the beneficiaries in the law. The test is what the person does, not their employment status.

• Luxembourg tax residents. The regime applies to individuals resident in Luxembourg, including within the meaning of the applicable tax treaty. It does not change the position of non-residents, even if the carry comes from a Luxembourg fund.
• Management functions. Employees, partners, managers and directors of an alternative investment fund manager (AIFM), a management company or the fund itself, who carry out investment management: portfolio management, risk management or related front-office work.
• Advisers. Individuals involved in managing a fund under a services or advisory agreement, directly or through one or more entities, including entities outside Luxembourg. Independent board members can qualify.
• Not administrative staff. The legislative commentary excludes people whose role is purely administrative. A fund accountant or transfer agent employee does not become a carry holder by receiving a bonus called carry.
• Alternative investment funds. The carry must come from an AIF in the sense of the AIFM rules, whatever its legal form: SCSp, SCS, SICAV, RAIF, SIF, SICAR or a foreign AIF.

The income must also be carried interest in the economic sense: a share of the fund's profit that depends on its performance, normally above the usual hurdle. A fixed amount, or a payment that does not depend on the fund's results, is remuneration and is taxed as salary or business income. The law contains anti-abuse safeguards against fixed pay being relabelled as carry.

The old condition that investors must first recover their full investment has been abolished. A whole-of-fund European waterfall still works, and so does a deal-by-deal American waterfall, usually with an escrow and a clawback.

Law and practice: Bill no. 8590 as amended after the opinion of the Council of State of 21 October 2025; commentary of the articles on eligible persons; PwC Luxembourg on the narrowed scope; Loyens & Loeff on the definition of carried interest.

How the quarter rate works, with figures

The global rate is the average rate of income tax, including the solidarity surcharge, on the person's whole taxable income for the year, carry included. The contractual carry is then taxed at one quarter of that rate. Because the global rate rises with income and the Luxembourg top marginal rate is 45.78% (42% plus the 9% surcharge), a quarter of it can never exceed about 11.45%.

In practice, the larger the carry, the closer the effective rate gets to 11.45%. For a resident in tax class 1 with a salary of EUR 150,000, our calculations give these results under the 2026 scale:

The last column shows the cost at progressive rates. On EUR 1 million the regime saves about EUR 347,000.

Two details often surprise people. A stake is measured in the fund or the vehicle that holds the carry, so a small team vehicle where one partner holds 40% of the units fails the 10% test for that partner, even if the vehicle holds a tiny share of the fund. And the holding period runs from the acquisition of the participation, not from the date of each investment by the fund.

Law and practice: Calculations by BCA EU on the 2026 class 1 scale (unchanged from tax year 2025), solidarity surcharge of 7% or 9% above EUR 150,000 of taxable income, employee social security of about 12.95%; contractual carry at a quarter of the global rate as described by Mourant (maximum 11.45%). Taxation of a failed participation at progressive rates up to 45.78% per Stibbe.

Carry vehicles, the GP, AIFM substance and VAT

Most Luxembourg private funds are organised as a special limited partnership (SCSp) with a general partner (GP), usually a Luxembourg SARL, and an external or internal AIFM. The carry sits in one of three places: in the fund agreement as a contractual right, in a separate class of interests in the fund, or in a dedicated carry vehicle that holds that class for the team.

1. Choose the form of the carry.Contractual carry needs no investment but costs up to 11.45%. Participation-linked carry can be exempt, but the team must buy and keep units, each below 10%.
2. Set up the team vehicle.A carry SCSp is the usual choice: tax transparent, flexible, with no minimum capital and a limited partnership agreement that can mirror the fund's waterfall.
3. Price the entry.Units are bought at fair value at the start of the fund, when the expected value of the carry is low. A price that is too low can create a taxable benefit.
4. Align the waterfall.Hurdle, catch-up, carry percentage and clawback must be identical in the fund agreement and the vehicle agreement, so that what the team receives is clearly a share of outperformance.
5. Keep the timeline.Keep a register of acquisition dates; under the proposed 12-month rule, a late joiner's units may still be speculative at an early exit.

The GP and the AIFM need real substance. The new regime rewards investment management done from Luxembourg, and the tax authorities will look at where decisions are taken. An AIFM authorised by the CSSF needs at least two conducting officers, a Luxembourg office, staff in proportion to the assets managed and documented portfolio and risk management. A GP SARL that only signs documents prepared elsewhere weakens both.

VAT on management fees. Management of alternative investment funds as defined in the AIFM Law is exempt from Luxembourg VAT under Article 44(1)(d) of the VAT Law, which implements Article 135(1)(g) of the EU VAT Directive. Portfolio and risk management by the AIFM qualify. A GP that only holds its interest passively is not a VAT taxable person; a GP that invoices services to the fund is, and those services are exempt only if they are fund management. Carry itself is a profit share, not consideration for a supply, so it is normally outside the scope of VAT.

Law and practice: AIFM Law of 12 July 2013 and CSSF practice on AIFM substance; Law on commercial companies of 10 August 1915 (SCSp and SARL); Luxembourg VAT Law Article 44(1)(d) and AED Circular 723ter, as summarised by Deloitte Luxembourg. Our guide to the RAIF, SIF and SCSp covers the fund side.

Impatriates, social security, non-residents and the 2027 proposal

Impatriates. Since 2025, employees recruited from abroad with a salary of at least EUR 75,000 can have 50% of their salary exempt, up to EUR 400,000 a year, until the end of the eighth tax year after arrival. The exemption covers employment income. Carry is taxed under its own rules. The two combine well: a lower taxable salary lowers the global rate, so the quarter rate on contractual carry is lower too.

The old regime has gone. The temporary regime in Article 213 of the AIFM Law applied only to employees who moved to Luxembourg between 2013 and 2018, for ten years, and only after investors had recovered their investment. It is repealed. Existing beneficiaries move to the new regime, which is at least as favourable.

Social security. Pension and health contributions are levied on professional income. Genuine carry, taxed as miscellaneous income or a speculative gain, is generally outside them; a payment that depends on staying rather than on performance is pay, and contributions follow. Ask your adviser whether the 1.4% dependency contribution, which also applies to some investment income of residents, is due on your carry.

Non-residents and cross-border workers. The regime applies only to Luxembourg tax residents. Their salary is taxed in Luxembourg for the days worked there, but carry is usually taxed in the country where they live, under its rules, unless the treaty treats it as employment income and allocates part of it to Luxembourg. A French resident AIFM employee is not helped by the Luxembourg quarter rate. Moving before a carry event can help, but check exit taxes at home first.

Budget bill no. 8800. The 2027 budget bill proposes to extend the speculative period for movable assets, including shares held privately, from six to twelve months, and to make corresponding changes to the carry rule in Article 99bis LIR. If adopted as filed, it would apply from tax year 2027. For participation-linked carry, the exemption would then require a holding period of more than twelve months. The published summaries mention no transitional rule, so teams admitted to a carry vehicle in 2026 should check their dates against exits expected in 2027.

Law and practice: LIR Article 115, No. 13b (impatriate regime from 1 January 2025); Social Security Code on contribution bases; bill no. 8800 (Budget 2027) filed on 7 October 2026, summarised by Goodwin and PwC Luxembourg; the bill still has to pass and may change.

Luxembourg next to the UK, Germany and France, and the pitfalls

In 2026 the UK moved carry into income tax and France raised its flat tax, while Luxembourg widened its regime. A simplified comparison at top rates:

Salary tax, living costs and treaty issues for managers who move mid-fund narrow the gap, but for a team that really manages from Luxembourg it stays large.

• Disguised salary. Carry that is guaranteed, fixed or paid regardless of fund performance is remuneration. So is a carry pool where amounts are decided each year by management, like a bonus.
• No real hurdle. A share of profit from the first euro, with no preferred return for investors, is harder to defend as carried interest in the sense of the law.
• Mismatched waterfall. If the carry vehicle pays the team on a different basis from the fund waterfall, the link to outperformance is weakened.
• The 10% test. Count stakes at the level of the vehicle that holds the carry. Small teams and founder vehicles often fail it.
• Leavers and clawback. Put vesting, forfeiture and clawback in the vehicle agreement and document any repayment.
• Reporting. Report the carry in the annual tax return (form 100) with the vehicle's statements, the fund agreement, the waterfall calculation and proof of your role. Keep the file for at least the limitation period: five years, longer in some cases.

Law and practice: UK Finance Act provisions on carried interest from 6 April 2026, per RSM UK; Germany: Section 18(1) No. 4 and Section 3 No. 40a of the Income Tax Act and the Federal Fiscal Court judgment of 11 December 2018 (VIII R 11/16), per Noerr; France: 2026 Finance and Social Security Laws raising the CSG on capital income to 18.6%, per GPA.

Estimate the Luxembourg tax on your carry

Simplified estimate for a Luxembourg tax resident in class 1, under the 2026 scale. The salary is used only to find your global or marginal rate; the tax on the salary itself is not shown. Use it to compare the two forms of carry and to see what the 12-month proposal would change.

Carried interest in Luxembourg: frequent questions