LUXEMBOURG Trends and Developments Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
The regime is now aligned with industry practice, rec - ognising that carried interest is not limited to formal employment relationships. Dual structure : contractual vs invested carried interest A cornerstone of the reform is the confirmation of the distinction between two types of carried interest, each subject to specific tax rules. Carried interest received as a contractual entitlement (not linked to any investment of any form) – previously taxed at the marginal rate unless certain very spe - cific conditions were met, the 2026 Law introduces a major change: the quarter-rate taxation (¼ of the progressive tax rate) becomes permanent and gener - ally applicable. It is no longer limited to impatriates. In addition, the reform clarifies that taxation occurs only upon receipt, not upon the grant of the right. This results in a significant strengthening of the regime’s tax attractiveness and long-term stability. It also removes uncertainties relating to the potential qualification of the grant of carried interest as a tax - able benefit in kind. Finally, the tax rate reform con - tributes to an overall simplification of the applicable tax framework. Invested carried interest (ie, where carried interest is linked to an actual investment, either through carry shares, or via contractual rights intrinsically linked to an equity participation in the AIF) – the regime intro - duces a refined approach based on holding periods: • If the relevant investment is held for more than six months, the carried interest is exempt from taxa - tion (subject to specific rules such as substantial shareholding provisions). • Short-term gains (≤ six months) are fully taxable at progressive rates. This framework creates a strong incentive for long- term alignment between investors and fund manag - ers by favouring sustained holding periods. It also enhances legal certainty and addresses several tech - nical inconsistencies that existed under the previous regime.
Removal of restrictive distribution conditions The reform abolishes the requirement that investors must recover their full capital before carried interest is distributed. This change: • aligns with market-standard remuneration models (ie, deal-by-deal distribution models); and • allows greater flexibility in structuring fund eco - nomics. Exception to the tax transparency principle as a structural innovation The 2026 Law introduces a limited exception to the tax transparency principle for AIFs, solely for the pur - poses of applying the carried interest regime. This ensures that: • the qualification of income as carried interest is no longer affected by the legal form of the fund; and • the regime applies consistently to both transparent and opaque structures. This framework enhances Luxembourg’s appeal for structuring private equity and alternative investment funds. DAC8 and enhanced tax transparency As from 1 January 2026, Luxembourg has implement - ed the seventh amendment to the Directive on Admin - istrative Cooperation (DAC8), significantly expanding the scope of automatic exchange of information within the European Union. This new framework introduces mandatory reporting and due diligence obligations for crypto-asset service providers, requiring them to col - lect and report detailed information on crypto-asset transactions and users to the tax authorities, which is subsequently exchanged between member states. DAC8 is largely based on the OECD’s Crypto-Asset Reporting Framework (CARF) and aims to address the challenges posed by the decentralised and cross-bor - der nature of digital assets, which historically limited tax authorities’ ability to monitor income and gains derived from such transactions. In addition, the direc - tive broadens existing transparency mechanisms by extending reporting obligations to new categories of financial information, including certain life insurance
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