LUXEMBOURG Trends and Developments Contributed by: Diogo Duarte de Oliveira, Antonio Weffer, Amar Hamouche and Olivier Dal Farra, Baker McKenzie Luxembourg
It distinguishes between: • Contractual Carried Interest (Contractual CI), which does not necessarily require an investment in the AIF, though such investment is permitted; and • Carried Interest Linked to Fund Participation (Par - ticipation CI), which is inextricably tied to a direct or indirect holding in the AIF. Contractual CI benefits from a 75% exemption, result - ing in a maximum marginal rate of 11.45%. The Lux - embourg law on carried interest opens the favourable treatment to Contractual CI interest that does not nec - essarily take the form of capital gains, which until now was not common in the Luxembourg market practice. Participation CI, on the other hand, is fully exempt if the participation is held for more than six months and does not qualify as an “important participation” (if the taxpayer, together with any members of his house - hold, never held, in the five preceding years, 10% or more in the share capital of the company in which the participation is held).
The reform removes the full recovery investment condition and aligns the framework with AIF indus - try trends. This is significant because carried inter - est arrangements in private capital are increasingly diverse in legal form, and legal certainty around ben - eficiary eligibility and instrument treatment is a com - petitive factor for locating fund management functions and decision‑makers. Talent and substance: enhanced inpatriate regime Luxembourg’s international tax competitiveness in 2026 is also influenced by labour mobility measures. For instance, an upgraded inpatriate regime is appli - cable as from 2025, replacing complex cost‑based exemptions with a clear and straightforward 50% exemption of gross annual remuneration, available until the end of the eighth tax year following the year the employee started work. While these changes are domestic, they interact with international tax trends by shaping where key per - sonnel and highly skilled employees are located and where decision‑making substance is built, confirming Luxembourg’s strong position as a leading financial centre in the EU.
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