Navigating carried interest in Luxembourg

Yes.

Luxembourg distinguishes two carried interest regimes:

• Contractual carried interest does not require any direct or indirect participation in the AIF and is taxed as capital gains at a specific rate of one quarter of the global tax rate (currently 11.45%). 
   
• Participation‑linked carried interest requires a direct or indirect interest in, or representation through, the AIF and is taxed as speculative gains. A full exemption applies if the AIF interest is held for more than six months and the holding does not exceed 10%. For carried interest taxation only, the AIF’s legal form (opaque vs. transparent) is disregarded, so participation‑linked carried interest is always treated as speculative gains regardless of the AIF’s underlying income. By contrast, income from a standard AIF participation follows the AIF’s tax status and the nature of the underlying income.

Carried interest may be paid even if investors have not fully recovered their initial investment. However, because carried interest is defined as a share of the AIF’s outperformance, a market standard hurdle rate must be met before investors agree to share any surplus with the beneficiaries of the carried interest. The hurdle rate must not be set abnormally low, as this could trigger the anti-abuse rule.  The carried interest must be genuine and not a disguised salary or bonus (e.g., it cannot be expressed as a percentage of salary with predictable recurrence). 

For participation-linked carried interest, the link to a participation must have economic reality in terms of (i) amount, which may be understood as having a meaningful size, and (ii) duration, which would be interpreted as respecting certain holding period.
See other conditions related to the beneficiaries below.

The carried interest regime applies to all individuals involved in the management of an AIF irrespective of their professional status. This includes, among other, employees of AIFs or AIF managers, investment advisers, independent board members, or consultants etc.  Individuals performing pure administrative functions should fall outside the scope. 

The regime applies to carried interest derived from both domestic and foreign AIFs. AIFs are defined as collective investment undertakings, including their investment compartments, which raise capital from a number of investors with a view to investing it, in accordance with a defined investment policy, for the benefit of those investors and do not require authorization pursuant to Article 5 of Directive 2009/65/EC (which is relevant for UCITS). 

No.

The above tax regimes remain subject to the application of the Luxembourg anti-abuse rules.