LUXEMBOURG Trends and Developments Contributed by: Diogo Duarte de Oliveira, Antonio Weffer, Amar Hamouche and Olivier Dal Farra, Baker McKenzie Luxembourg
Luxembourg Domestic Developments: Strengthening the Platform for Investment Funds and Talent CIV exemption on reverse hybrid rules Luxembourg’s domestic developments in 2026 include targeted clarifications that have international implica - tions for investment fund structures and cross‑border investment flows. A key example is the clarification by the Luxembourg authorities of the CIV exemption under the reverse hybrid rule. The reverse hybrid rule can subject certain Luxembourg tax transparent enti - ties (such as CLPs/SLPs/FCPs) to corporate income tax where associated enterprises hold more than 50% and treat the entity as tax opaque, unless the CIV exemption applies. The CIV exemption was clarified through Circular L.I.R. No 168quater/2 of 12 August 2025, outlining a broad interpretation of “securities”, diversification assessed through investment policy and market risk exposure, and a practical benchmark that a fund is not considered diversified in principle if more than 30% is invested in securities from a single issuer, unless justified. The circular also addresses “widely held” cri - teria, including that a limited number of investors may still qualify in launch or liquidation phases and that in master‑feeder structures the assessment is made at the level of feeder investors. A particularly market‑relevant point is that Luxem - bourg UCIs, SIFs and RAIFs are treated as CIVs in themselves without needing to check other condi - tions, thereby providing a clearer compliance frame - work. Carried interest reform: aligning the tax framework with market practice Luxembourg has also modernised its carried inter - est framework in a way that enhances the country’s competitiveness as an investment funds management and talent hub. The Luxembourg law on carried inter - est dated 3 February 2026 clarifies and broadens the definition of carried interest, now described as a par - ticipation in the overperformance of an AIF, based on rights to the fund’s net assets or proceeds.
ensure consistent interpretation by all member states. Stronger penalty regimes are envisaged for certain DAC modules, and there is emphasis on more sys - tematic use of exchanged data, including automatic reconciliation with national systems. DAC6 is identified as a specific focus area. It is expected that hallmarks will be clarified and stream - lined, potentially integrating “economic substance” concepts associated with the Unshell EU Directive. The expectation of a DAC recast proposal in 2026 and the Tax Omnibus timeline means that 2026 should be treated as the year in which the EU begins to ration - alise the accumulated “layering” of transparency and anti‑avoidance regulations. Indirect tax and withholding tax: ViDA and FASTER enter implementation planning Although the focus of this article is international tax, two EU projects in 2026 have cross‑border opera - tional consequences that clients regularly treat as part of their “international tax” risk landscape. The first is ViDA, formally adopted on 11 March 2025 with a phased rollout through 2035, including digital reporting requirements for cross‑border B2B trans - actions from 1 July 2030 and alignment of domestic real‑time reporting systems by 1 January 2035. For Luxembourg businesses, the practical implication is the need for multi‑year roadmap planning around invoicing, data architecture and platform roles. The second is FASTER, adopted and in force from 30 January 2025, with member states required to trans - pose by 31 December 2028 and application from 1 January 2030. FASTER introduces a standardised EU digital tax residence certificate and a framework for quick relief at source or quick refunds for withholding taxes on certain portfolio income, supported by Certi - fied Financial Intermediaries and reporting obligations. Luxembourg’s role as a cross‑border investment plat - form means that intermediaries and investors should treat the 2025–2028 runway as an implementation period, not merely a future compliance date.
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