Luxembourg is pulling out all the stops to cement its position as a magnet for global private capital. With a sweeping new tax regime for carried interest proposed by Prime Minister Luc Frieden’s centre-right government, the Grand Duchy is making it unmistakably clear: it wants to be Europe’s go-to jurisdiction for private markets.
Set to take effect in 2026, the carried interest reform would allow alternative investment fund professionals to benefit from one of the lowest tax rates in Europe.
“The new regime is designed to attract top-tier fund managers by offering a clear and competitive tax structure, aiming to reinforce Luxembourg’s appeal as a base for private equity and venture capital operations,” said law firm Pinsent Masons in a note to clients.
It follows a string of targeted tax incentives unveiled since Frieden’s coalition took office in late 2023. Among them are generous tax breaks for highly skilled foreign professionals and a proposal to align the tax treatment of actively managed ETFs with that of their passive counterparts. Together, these initiatives aim to bolster’s Luxembourg position in the global financial hierarchy.
Overhaul
This latest initiative zeroes in on the tax treatment of carried interest, the share of profits allocated to fund managers once investors have been repaid with a minimum return. The new law, tabled in parliament by Finance Minister Gilles Roth on 24 July, seeks to bring long-awaited clarity and competitiveness to a system that until now offered only patchy relief.
Under the current framework, carried interest is often taxed as ordinary income, with rates reaching as high as 45.78 percent depending on how the carry is structured. That would change significantly under the proposed law. If carry is paid as a performance-linked bonus without requiring the manager to invest in the fund, the tax rate will be capped at 11.45 percent. If the carry is tied to an actual investment and held for at least six months, it may become entirely tax-exempt.
“This is a long-standing demand from the sector that makes sense, especially in light of developments in the UK and Southern Europe,” Roth said in a statement.
Permissive regime
Compared with other jurisdictions, Luxembourg’s proposal is among the most permissive. In the Netherlands, carried interest is set to be taxed at around 36 percent from 2026, according to recent updates by KPMG. The UK is phasing out its capital gains treatment of carry, exposing top earners to effective tax rates close to 47 percent. In the United States, capital gains treatment is still possible, but only for carry earned on investments held for at least three years. Luxembourg’s six-month holding period stands out for its leniency.
This reform does not stand in isolation. It is part of a broader strategy pursued by the Frieden government to reassert Luxembourg’s relevance in a fast-changing financial world.
As of this year, the government introduced new legislation offering a 50 percent income tax exemption for newly arrived professionals, known as impatriates, on annual salaries of up to 400,000 euros. The measure is designed to address persistent talent shortages and to attract senior staff in sectors like asset management, law, and consulting. It replaces an older, more complex regime that was rarely used in practice and has been described by international tax experts as a potential game changer.
And last year, Luxembourg’s finance ministry eliminated the subscription tax that currently applies to actively managed exchange traded funds. The initiative, aimed at putting these funds on equal footing with their passive counterparts, is meant to help Luxembourg keep pace with Ireland, which dominates the European ETF landscape thanks to its favourable tax treatment.
All of these tax measures fit within the vision set out in the Ambitions 2030 roadmap that the government presented earlier this year. The strategy seeks to reposition the country not just as an operational hub for fund services but as a true centre of decision-making and innovation. It calls for attracting more front-office activity, including portfolio management and private capital advisory roles, and places a strong emphasis on blockchain and digital asset development.
Fixing structural weaknesses
The carried interest reform also fixes structural weaknesses in the existing rules. Until now, only employees of fund managers were eligible for tax benefits. The new framework broadens that scope to include board members, shareholders of management companies, and individuals providing services to the fund manager, such as investment advisers and analysts. Tax law specialists at Loyens & Loeff noted that the regime now better reflects the actual structure of modern private capital teams.
Clarifications in the law also address common ambiguities. For example, if a manager voluntarily invests their own capital into the fund, it does not disqualify them from receiving tax-advantaged carry. Nor do popular fund structures like SCSp, Raif or FCP disqualify recipients, even though these vehicles are normally treated as tax transparent. Under the proposed rules, transparency will be switched off solely for the purpose of applying the carried interest exemption.
Golden age?
Some observers see in the reform a deliberate attempt to recreate what was once known in Germany as the golden age of carried interest. Until 2004, German managers operating through limited partnerships were able to treat their carry as capital gains rather than income, resulting in effective tax rates of zero in some cases. The regime was dismantled under political pressure. Luxembourg, by contrast, is moving in the opposite direction.
Whether this moment will mark the start of a new golden age for private equity in Luxembourg remains to be seen. But the direction is clear. The Frieden government is betting that legal certainty, administrative simplicity, and low tax rates will do more to attract global capital than regulation or rhetoric.