LUXEMBOURG Trends and Developments Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
of the carried interest regime. This measure removes distortions stemming from whether the underlying vehicle is legally opaque or transparent. As a result, the analysis focuses on the economic nature of car - ried interest rather than the legal form of the AIF. Removal of the capital return condition The prior requirement that investors must first fully recover their capital before any carried interest could accrue has been removed. This change is particularly relevant for deal-by-deal carry arrangements, increas - ingly common in private equity and venture capital, where returns are assessed at the transaction level rather than on a whole of fund basis. Expected market impact Overall, the reformed regime provides clarity, flex - ibility and international competitiveness. It supports Luxembourg’s position as a jurisdiction of choice for fund sponsors seeking to attract high value talent and establish pan-European management platforms. At the same time, it introduces safeguards that reduce the risk of misusing carried interest as disguised sal - ary, thus increasing the regime’s credibility with inter - national tax authorities. Introduction of the Start-Up Tax Credit (Effective 2026) Encouraging early-stage innovation A second major development is the creation of a Start- Up Tax Credit, introduced by legislation adopted in late 2025 and applicable from tax year 2026. Luxem - bourg’s objective is to diversify its economic model, support innovation and attract private capital to early- stage companies. The measure complements existing regimes such as the impatriation allowance and profit participation rules, and responds to long-standing calls for a more structured state-backed incentive for individual investors. Eligible investors To access the new tax credit, the investor must: • be a tax resident or assimilated non-resident indi - vidual; • subscribe and fully pay new shares or equivalent equity instruments; and • maintain the investment for at least three years.
Importantly, employees and founders of the start-up are excluded from claiming the credit, avoiding situ - ations where the incentive could be used to reward insiders rather than attract new external capital. Eligible investment structures The regime applies to investments made: • directly into share capital; and • through tax transparent partnerships such as SCS or SCSp. However, the credit is denied where the investment is made through a business activity or professional enterprise, so that the incentive remains focused on private individuals contributing risk capital.
Qualifying start-up entities To qualify, a start-up must:
• be a resident collective entity or a PE of a collec - tive entity established in an EEA member state, subject to Luxembourg corporate tax or subject to an equivalent tax regime; • have fewer than 50 employees; • hold assets or turnover of ≤ EUR10 million; • be less than five years old; • carry on an innovative activity – an activity is con - sidered to be innovative when at least two individu- als work on a full-time basis for the start-up entity and the start-up entity has incurred research and development (R&D) expenses representing at least 15% of its total operating expenses during at least one of the three financial years preceding the tax year for which the start-up tax credit is claimed; • not be active in excluded sectors (including audit, accounting or certain non-innovative activities); and • not be a company in difficulty under EU law. These conditions ensure that the incentive targets genuinely innovative, high growth potential compa - nies. Eligible investment amount and credit computation The investment in the share capital of the start-up entity must be:
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