Luxembourg and the race for talent: carried interest and impatriates
Luxembourg is today competing for more than capital. It is competing for teams and “installed capacity”: investment decision-making, risk management, investor relations and, more broadly, the front office functions that anchor a platform. Against this backdrop, two recent measures point in the same direction: (i) the new carried interest regime, applicable as from fiscal year 2026, and (ii) the updated impatriate regime, applicable as from 2025.
It is particularly interesting to examine how the two measures fit together. Carried interest aligns incentives over the medium and long term with the actual performance of the strategy; the impatriate regime, for its part, establishes a specific tax framework for the first years following relocation. Together, they can help key functions take root in the country and consolidate over time. However, effective practical application requires meticulous implementation, ensuring authenticity of roles, robust governance, and appropriate documentation.
A. Carried interest “2.0”: broader scope, greater predictability
The reform of the carried interest taxation rules seeks to bring the legislation closer to the commercial reality of incentive schemes and to reduce recurring debates about income characterisation. In simplified terms, the law defines carried interest as the outperformance (excess return) obtained by the beneficiary when the return exceeds a predetermined hurdle, and covers all relevant carried interest structures (for example, a deal-by-deal or whole-fund calculation).
Two elements stand out for their practical impact.
First, “contractual” carried interest is expressly recognised: an economic right agreed upon in a contract (without the need for an ownership interest in the Fund) and linked to the performance of the Fund. In that case, the remuneration is treated as extraordinary miscellaneous income and may, in general terms, benefit from a reduced rate equivalent to one quarter of the progressive rate, yielding a maximum effective tax rate of approximately 12%. This can simplify the implementation of incentive plans, provided the link to the Fund’s outperformance is well defined (metrics, calculation and governance) and unnecessary ambiguities are avoided.
Second, the scope of eligible beneficiaries is expanded on a functional basis. The regime is not limited to employees or officers of the Fund’s general partner or management company but may extend to individuals who directly or indirectly contribute to the Fund’s management and value creation, even under an advisory agreement and, in certain cases, through intermediate entities. This aligns with the organisation of many platforms, where key functions are split between the general partner, AIFM and one or more advisors. It is not uncommon, for instance, for the formal decision to be anchored in Luxembourg while a large part of the analytical support (i.e. deal sourcing, fundraising, investor relations, etc.) is provided from other jurisdictions; the focus, in any event, is on being able to demonstrate the beneficiary’s effective contribution to the management of the Fund.
For structures in which carried interest is associated with a direct interest in the Fund, the law provides for tax treatment of such carried interest as capital gain and an exemption for Luxembourg tax residents where, among other conditions, a participation threshold (below 10%) and a minimum holding period (six months) are met. A technically important but very practical point is the clarification that, for these purposes, the fiscal transparency or opacity of the vehicle is irrelevant (e.g., SCS/SCSp/FCP), which brings predictability to standard market structures.
“For structures in which carried interest is associated with a direct interest in the Fund, the law provides for tax treatment of such carried interest as capital gain and an exemption for Luxembourg tax residents where, among other conditions, a participation threshold (below 10%) and a minimum holding period (six months) are met.”
B. Impatriates: a tax framework for the first years following relocation
In parallel, the reform of the impatriate regime forms part of a clear objective: to reinforce Luxembourg’s ability to attract and retain skilled profiles in an environment of competition among European hubs, by offering a specific tax framework for the first years following relocation. The regime is built around objective eligibility conditions (for example, not having been a tax resident in Luxembourg and the Greater Region during the previous five years, relocation from abroad, a minimum annual base salary of EUR 75,000 and the Luxembourg activity representing at least 75% of working time), together with limits applicable at employer level.
The central incentive is a 50% exemption on gross remuneration (up to EUR 400,000) for a maximum period of eight years. The regime also incorporates specific mechanisms for bonuses (including the profit-participating bonus) and tools aimed at younger profiles (young employee bonus), with potential to support the creation of broader and more scalable teams. In practice, adequate planning is usually the differentiating factor: when the regime is activated, how periods outside Luxembourg or changes in functions are managed, and how day-to-day operations (for example, remote working patterns or frequent travel) are dealt with to avoid creating misalignments with the regime’s requirements.
C. The differentiating factor: designing substance (not just tax efficiency)
From an industry perspective, the real value of these measures lies in their combination and, above all, in their correct implementation.
First, it is of utmost importance that the carried interest (especially the contractual variety) does not operate as a discretionary bonus, but rather as a clearly defined scheme: metrics, conditions and a return-determination process that is replicable and defensible. Added sophistication is not required; consistency is.
Second, mobility must be planned from the outset. The impatriate regime is powerful, but it is not automatic and is subject to certain conditions at both employee and employer level: it is advisable to validate eligibility ex ante for both the employee and the employer, and to avoid misalignments with remote work policies, international assignments or role changes during the application period.
Third, cross-cutting consistency. Contracts (employment or advisory), governance (committees, delegations, reporting) and operational reality must be aligned. In a context of heightened attention to substance, inconsistencies are the primary source of risk and, at the same time, the easiest to avoid with sound design.
D. Conclusion
Luxembourg has reinforced two complementary components: incentivising long-term economic alignment (carried interest) and facilitating the onboarding of talent (impatriates). For investment fund managers and platforms, the opportunity lies in combining them coherently, integrating them into an architecture of roles, governance and remuneration that reflects operational reality and is sustainable over time. When properly structured, this pairing can contribute to the onshoring of capabilities and the consolidation of management teams in Luxembourg.
Disclaimer: This article contains general information and does not constitute legal or tax advice.
Authors
Eduardo Trancho
Partner
Van Campen Liem
