LUXEMBOURG Trends and Developments Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
individuals in purely administrative roles to prevent using carried interest as disguised remuneration. Clarified distinction between carried interest types The reform provides essential clarity on two distinct categories of carried interest, as follows. Contractual (non-invested) carried interest Contractual carried interest is granted without an underlying capital contribution to the fund’s vehicle. In this case, the manager is not required to subscribe to a participation in the investment fund to be eligible for the carried interest. Carried interest entitlements are granted to the manager for no consideration, are not materialised by shares and are not intimately linked to an investment in the AIF. However, holders of con - tractual carried interest entitlements have the right to hold, in the same way as “ordinary” investors (“limited partners”), a participation in the AIF – but they are not required to do so. From 2026 onwards, contractual carried interest benefits from a permanent quarter rate taxation (ie, 25% of the progressive income tax rate – marginal rate of 45.78%). Previously, this favourable rate was available only to impatriates, resulting in inconsistent treatment between similarly situated managers. The reform eliminates this asymmetry and reaffirms Lux - embourg’s desire for a level playing field. Invested carried interest The Luxembourg invested carried interest regime tar - gets carried interest received either on the basis of carried interest rights materialised by shares in the AIF that yield carry interest or on the basis of a carried interest that is intimately linked to an ordinary direct or indirect investment in the AIF. This relates to the manager’s participation in the fund (either via ordinary investment or carry shares). • Carry interest intimately linked to an ordinary direct or indirect investment in the AIF refers to a con - tractual entitlement to carried interest, for which the manager is mandatorily required to take an ordinary direct or indirect stake in the AIF. In this case, the investment goes hand in hand with the attribution of the carried interest.
• Carried interest rights materialised by shares that yield carry interest refers to the case where the manager is offered the opportunity to acquire such rights for consideration through an investment (commonly referred to as “carry shares”), usually via an ad hoc vehicle (eg, a Luxembourg special limited partnership or a foreign law partnership) irrespective of an investment as an ordinary inves - tor in the AIF. Taxation of the invested carried interest depends on the holding period: when the interval between the acquisition or constitution of these carried interest investments and their realisation exceeds six months, the speculative profit resulting from the carried inter - est does not constitute a taxable income, unless the shareholding in the AIF represents a significant share - holding in a tax opaque AIF. A shareholding is con - sidered significant if it directly or indirectly represents more than 10% of the AIF’s capital (which is very rare in practice). In this case, capital gains are taxed at half the progressive rate of income tax (marginal rate of 22.89%). Investments realised within six months are taxable (progressive income tax rate – marginal rate of 45.78%). The reform reinforces that only genuine carried inter - est benefits from this treatment. As a result, any income that does not reflect entrepreneurial risk fol - lows standard tax rules. In addition, any income from other investments is sub - ject the common tax regime applicable to investment income (eg, dividends, interest, capital gains) and the transparency of the AIF will not be disregarded. This includes: • ordinary direct or indirect investments in the AIF to which a contractual entitlement to carried inter - est is intimately linked and which are mandatorily subscribed to by the carry holder; and • any ordinary shares freely subscribed to by the carry holder. Tax transparency exception To ensure consistent treatment across different fund structures, the reform introduces a rule disregarding the tax transparency of AIFs solely for the application
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