LUXEMBOURG Trends and Developments Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
Carried interest : attracting fund managers Since 2013, Luxembourg has provided a dedicated tax regime for carried interest applicable to individuals who are employees of alternative investment funds (AIFs), managers (AIFM) or AIF management compa - nies. The Law of 3 February 2026 (the “2026 Law”) marks a significant modernisation of Luxembourg’s carried interest regime, applicable from the 2026 tax year. Carried interest is a core feature of the private equity and alternative investment industry, functioning as a performance-based remuneration mechanism align - ing the interests of fund managers and investors. The reform therefore addresses a strategically important aspect of Luxembourg’s financial ecosystem. This reform must be understood within a broad policy objective: Luxembourg seeks to strengthen its attrac - tiveness as a leading European hub for AIFs while simultaneously ensuring greater legal certainty and alignment with international tax standards. Notably, the reform consolidates the legal position that carried interest retains a capital-type character rather than employment or professional income, providing pre - dictability for taxpayers. The 2026 regime does not introduce a completely new framework but rather clarifies, expands and refines the rules established under the 2013 AIFM Law, thereby resolving practical uncertainties and adapting the One of the most significant developments lies in the extension of the personal scope of the regime. Under the previous framework, the regime applied exclusive - ly to employees of AIFM. By contrast, the 2026 Law adopts a broader and more flexible approach. • The regime now applies to all individuals contrib - uting to the management of an AIF, regardless of employment status. • This includes partners, directors, consultants and service providers involved in management func - tions. regime to market developments. Broadened scope of beneficiaries
(HNWI), it offers a structured and tax-efficient way to participate in early-stage growth companies. Tax incentives relating to government bonds Luxembourg has also introduced targeted incen - tives to promote investment in sovereign debt instru - ments. In particular, certain government bonds benefit from an exemption of interest income from personal income tax. The exemption of interest income from certain government bonds primarily relates to specific sovereign bond issuances meeting defined statutory criteria, rather than to all public debt instruments. In practice, this measure has notably been implement - ed through the introduction, as from the 2026 tax year, of the Luxembourg “Defence Bond”, a retail sovereign bond issued by the Luxembourg State. This instru - ment is characterised by the following key features. • It is a state-issued bond with a fixed maturity (typi - cally three years) and a fixed coupon (eg, 2.25% per annum for the 2026 issuance). • It is accessible to retail investors, in tranches of EUR1,000, up to a maximum of EUR150,000 per person and per bank. • It will be listed on the Luxembourg Stock Exchange and fully repaid at maturity. • It benefits from Luxembourg’s AAA sovereign credit rating, resulting in a low-risk investment profile. • The bond issued was fully allocated on the retail market in less than a day. From a tax perspective, the key feature is that interest received by individual investors, resident in Luxem - bourg investing in a private capacity, is fully exempt from personal income tax, whether under the standard taxation rules or the withholding tax regime applicable to savings income. This measure aims to enhance the attractiveness of low-risk investment products while encouraging the mobilisation of private capital toward public financing. From a private wealth perspective, it provided inves - tors, particularly high-net-worth individuals, with an additional tax-efficient allocation option within a diver - sified portfolio, combining capital preservation with favourable tax treatment.
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