Luxembourg adopted a modernised carried interest tax framework in January 2026. For emerging managers building teams in the Grand Duchy, the numbers finally make sense.
For years, Luxembourg had a problem. It was the dominant European fund domicile, but the people actually managing the money were almost always somewhere else. London, Paris, Munich, Zurich. The fund sat in Luxembourg; the investment team did not. The tax treatment of carried interest was a big part of the reason. The old regime was uncertain, narrow, and not competitive with what London or the Channel Islands offered.
That changed on 22 January 2026, when the Luxembourg Parliament adopted Bill No. 8590, creating a dedicated carried interest tax regime effective from 1 January 2026 [1]. I have spent the last few months helping managers understand what this means for their team structures, and the short answer is: Luxembourg is now a serious option for housing your front-office investment professionals, not just your fund vehicles.
What the new regime does
The new law creates a clear, statutory framework for the taxation of carried interest received by investment professionals [1]. It distinguishes between two types of carry, each with its own tax treatment:
Contractual carried interest. This is carry that is paid to an individual under a contractual arrangement (typically an employment contract or a carried interest allocation agreement) rather than through an equity participation in the fund's general partner. Under the new regime, contractual carried interest is classified as employment income but taxed at a reduced effective rate of approximately 11.5% [1][2]. The mechanism is that only one quarter of the carry is subject to the standard progressive income tax rates (which top out at around 46%), resulting in the effective rate of roughly one quarter of the full rate.
Participation-linked carried interest. This is carry received through an equity stake in the fund's GP entity. If the participation is held for more than six months and does not represent more than 10% of the fund's total capital, gains on disposal or distributions are fully exempt from Luxembourg income tax [1][2]. This mirrors the existing participation exemption regime but applies it specifically to carried interest structures.
Who benefits
The regime is designed for "eligible investment professionals," meaning individuals who are directly involved in investment decision-making, portfolio management, or deal origination for qualifying investment vehicles [1]. This covers:
- Fund managers and portfolio managers.
- Investment directors and deal partners.
- Analysts and associates involved in investment decisions, where their compensation includes a carry component.
The qualifying investment vehicles include AIFs managed by authorised or registered AIFMs, as well as certain other regulated investment structures. RAIFs, SIFs, and SICARs all qualify. The fund does not need to be Luxembourg-domiciled; the key condition is that the individual receiving the carry is a Luxembourg tax resident performing their work in Luxembourg [1].
Back-office staff, compliance officers, and administrative personnel who do not participate in investment decisions are not eligible for the preferential treatment. The law draws a clear line between front-office investment professionals and everyone else.
The old regime
To appreciate what changed, you need to understand what was there before. Luxembourg previously had a transitional carried interest regime under Article 213 of the AIFM Law, which was available until 2028 [1][3]. It provided some certainty, but it was narrow and poorly understood. In practice, many managers structured their carry outside Luxembourg because the tax treatment was unpredictable and the effective rates were not competitive.
The transitional regime has been replaced by the new statutory framework. Carried interest arrangements entered into before 1 January 2026 can still benefit from the old rules for a transition period, but new arrangements should be structured under the new regime from the start [1].
Combining carry with the inpatriate regime
Luxembourg's proposition becomes genuinely compelling for international talent when you combine carry with the inpatriate regime. Since 2023, Luxembourg has offered an inpatriate regime that provides a 50% exemption on salary and bonuses for qualifying individuals who relocate to Luxembourg for employment [4][5]. The exemption applies for up to eight years.
An investment professional who relocates to Luxembourg can potentially benefit from both regimes simultaneously:
- Base salary and bonus: 50% exempt under the inpatriate regime, with the remaining 50% taxed at progressive rates [4].
- Contractual carried interest: Taxed at approximately 11.5% effective rate under the new carry regime [1].
- Participation-linked carried interest: Fully exempt if the holding period and participation size conditions are met [1].
For a senior investment professional earning EUR 200,000 in base salary plus EUR 500,000 in contractual carried interest, the combined effective tax rate under both regimes is well below what they would pay in London, Paris, or Frankfurt. The exact numbers depend on individual circumstances, but the gap is material enough to influence relocation decisions.
Conditions and limitations
The new regime is not a blank cheque. Several conditions apply [1]:
- Luxembourg tax residency. The individual must be a Luxembourg tax resident. This means having their habitual residence or their centre of vital interests in Luxembourg. Simply having an employment contract with a Luxembourg entity is not sufficient if the individual actually lives and works elsewhere.
- Substantive activity. The individual must perform genuine investment management activities from Luxembourg. The CSSF's substance expectations for AIFMs apply. The days of registering a Luxembourg entity while making all investment decisions from another country are over [6].
- Qualifying fund. The carry must come from a qualifying investment vehicle. Carried interest from structures that do not qualify as AIFs under AIFMD is not covered.
- Participation limits. For the full exemption on participation-linked carry, the individual's stake must not exceed 10% of the fund's capital, and the holding period must be at least six months [1].
- Anti-abuse provisions. The law includes anti-abuse measures to prevent re-characterisation of ordinary management fees or consulting income as carried interest. The carry must represent a genuine share of the fund's profits above a preferred return hurdle.
What this means for emerging managers
For a first-time fund manager, the carried interest regime matters in two ways:
Personal tax planning. If you are the founding GP and you are based in Luxembourg or considering relocating, the new regime directly affects your after-tax returns from carry. The 11.5% rate on contractual carry, or full exemption on participation carry, is substantially better than the treatment in most other European jurisdictions. Combined with the inpatriate regime, Luxembourg can be the most tax-efficient European base for a fund manager receiving meaningful carry.
Hiring investment talent. If you are building a team and want to attract experienced investment professionals from London, Zurich, or other financial centres, Luxembourg's combined package (carried interest regime plus inpatriate regime) gives you a concrete economic argument. You can model the after-tax compensation and show candidates exactly what the relocation would mean for their take-home. For a Fund II manager looking to scale the team, that makes a real difference in hiring.
The caveat is substance. Luxembourg regulators are increasingly serious about requiring real operational presence. You cannot claim the carry regime benefits if your team is only nominally in Luxembourg. The CSSF expects conducting officers, investment committee meetings, and decision-making activity to take place in the Grand Duchy [6]. That means office space, residence, and a genuine working presence, not a monthly board meeting and a flight home.
Structuring the carry: contractual vs. participation
The choice between contractual and participation-linked carry is not purely a tax question. It also affects governance, alignment of interests, and how the carry arrangement appears to your LPs.
Contractual carry is simpler to set up. You define the carry allocation in an employment or services agreement, and the individual receives it as a form of compensation. There is no need for the individual to invest their own capital into the GP. The downside is that it is classified as employment income (even at the reduced rate), which means social security contributions apply on the full amount. For very large carry payments, social security charges can add meaningfully to the total cost.
Participation-linked carry requires the individual to hold an actual equity stake in the GP entity. This typically means co-investment: the professional puts up real capital (even if modest) for their GP interest. The advantage is full tax exemption on gains if the conditions are met. The disadvantage is added complexity: you need a GP entity structure that accommodates individual equity holders, vesting provisions, good-leaver/bad-leaver mechanics, and transfer restrictions. For a two-person founding team, this is manageable. For a larger team with junior members, it requires more legal infrastructure.
Most managers I work with use a hybrid approach: participation-linked carry for founding partners who have skin in the game, and contractual carry for team members joining later at more junior levels. The combination optimises the tax position for the individuals who receive the largest carry allocations while keeping the structure workable for the broader team.
Competitive context
Luxembourg's regime now sits alongside other European carried interest frameworks. The UK taxes carry at 28% (capital gains rates) or higher for certain structures. France has a regime that can result in rates around 30% after social charges. Ireland has some favourable treatment but with conditions. The Channel Islands (Jersey and Guernsey) remain at 0% personal income tax, but they do not offer EU market access or the AIFMD passport [3].
Luxembourg's effective rates of 11.5% (contractual) or 0% (qualifying participation) are competitive with the Channel Islands on pure tax terms, and they come with the added benefit of an EU-based location, AIFMD passport access, and proximity to the European institutional investor base. For managers who need to be in the EU anyway, it is a strong proposition.
How we help at Infra One
We work with emerging managers on the operational and administrative side of setting up in Luxembourg, from fund formation and ongoing administration to coordinating with your tax advisers on the structuring of carried interest arrangements. We handle the fund-level accounting, investor reporting, and distribution calculations that feed into the carry waterfall, so your tax adviser has clean data to work with.
If you are considering Luxembourg for your fund or your team and want to understand how the new carried interest regime fits into the picture, book a call. We can connect you with the right tax and legal professionals and handle the operational setup.
DISCLOSURE: This communication is on behalf of Infra One GmbH ("Infra One"). This communication is for informational purposes only, and contains general information only. Infra One is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Infra One does not assume any liability for reliance on the information provided herein. © 2026 Infra One GmbH All rights reserved. Reproduction prohibited.
