LUXEMBOURG Trends and Developments Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
ing 2024, remain subject to this previous version of the impatriate regime as long as the conditions for its application are met, unless the employee expressly asks for the application of the new impatriate regime. This reform strengthens Luxembourg’s appeal to inter - national talent and indirectly benefits private wealth clients by enhancing the jurisdiction’s human capital and economic dynamism. Carried interest: attracting fund managers Luxembourg has implemented a dedicated tax regime for carried interest applicable to individuals who are employees of AIF managers or AIF management com - panies. This regime clearly distinguishes between the following. Carried interest received as a contractual entitlement (not linked to an investment), which is taxed as speculative income Although now expired, the regime previously offered a quarter-rate tax treatment for carried interest received by impatriates (new residents), which served as a strong incentive for attracting talent. The authors of the article advocate for the reintroduction of this reduced rate on a permanent basis, arguing that it would significantly enhance Luxembourg’s competi - tiveness in the private equity space. Indeed, intro - ducing a reduced rate (such as a half or quarter rate) would bring Luxembourg in line with more competi - tive jurisdictions and reinforce its position as a leading fund domicile.
Carried interest embedded in financial instruments (eg, LP units or carried shares), which may benefit from capital gains treatment if certain conditions are met Under this regime, capital gains derived from the sale of carried interest-linked investments (eg, carried shares) are fully exempt, provided the investments are held for more than six months and do not constitute a significant shareholding (ie, less than 10% of the capital in the first opaque entity that is part of the fund structure, which would typically be a master holding entity sitting below the investor-facing fund vehicle). This framework enhances Luxembourg’s appeal for structuring private equity and alternative investment funds. However, while the current carried interest regime is well-defined, it remains complex and limited in scope. As recently announced by the Luxembourg govern - ment, amendments to the regime are expected with the aim of attracting more fund managers to the juris - diction. In this context, a simplified and more gen - erous tax treatment for carried interest not linked to investments (such as a flat reduced rate) would reduce administrative burdens and increase the regime’s attractiveness for fund professionals.
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