How the Carried Interest Reform Could Redefine Luxembourg’s Fund Landscape
Insights from the 2025 ALFI Private Assets Conference
By Lenny Verlaine, Goldbridge Investment Club
Picture by Lenny Verlaine, Goldbridge Investment Club
Inside ALFI Private Assets Conference, where Gilles Roth addressed the new carried interest reform. A development that could reshape Luxembourg’s position in the global fund value chain and further elevate its standing within the international private capital landscape. Lets dive in.
On September 30th, Lenny Verlaine from the Goldbridge Investment Club attended the 2025 ALFI Private Assets Conference, where Luxembourg’s Minister of Finance, Gilles Roth, addressed the highly anticipated and widely welcomed carried interest reform. Later that day, a dedicated panel of experts explored its implications for the Grand Duchy’s Private Equity ecosystem — a development that could reshape Luxembourg’s position along the global fund value chain and further elevate its standing within the international private capital landscape.
The following article outlines what the reform entails, why it matters, and explores how it could influence the evolution of the private assets industry.
A pivotal moment for Luxembourg’s Private Equity sector
On 18 June 2025, at the Nexus Tech Symposium, Luxembourg’s Minister of Finance, Gilles Roth, hinted at a major upcoming reform that would once more put the Grand Duchy on the radar of global Private Equity players. A month later, on 24 July 2025, the government officially submitted Draft Bill No. 8590 to Parliament, introducing a new, modernised and permanent carried interest regime, providing greater clarity and long-term stability to the country’s tax framework.
The ALFI Private Assets Conference - one of Luxembourg’s flagship industry events bringing together leading figures from the country’s fund ecosystem - took place shortly after the announcement of the new bill. During his keynote address, Minister Roth revisited the subject of the reform, reaffirming the government’s commitment to strengthening Luxembourg’s competitiveness as a European fund hub.
Understanding carried interest and why it matters
Before diving into the reform itself, it is worth clarifying what carried interest actually means.
In the world of Private Equity (PE) and Alternative Investment Funds (AIFs), carried interest (or “carry”) represents the performance-based share of profits that fund managers, typically the General Partner (GP) and other key investment professionals, receive once investors have recovered their initial capital and achieved a predefined minimum return, known as the hurdle rate.
This mechanism aligns managers’ incentives with the success of the fund itself, ensuring they benefit only when their investment decisions generate strong returns for investors.
However, the tax treatment of such income varies widely across jurisdictions. Striking the right balance between competitiveness and fairness has therefore become a central issue for fund hubs like Luxembourg, London, Paris or Dublin.
Luxembourg already had a preferential carried interest regime introduced in 2013 when it implemented the Alternative Investment Fund Managers Directive (AIFMD). But this framework was temporary, narrow in scope, and closed to new entrants in 2018, leaving a legal vacuum for modern fund structures. Draft Bill 8590 aims to fill that gap with a permanent and comprehensive solution.
The 2025 carried interest reform
The new regime, proposed under Draft Bill No. 8590, introduces two distinct categories of carried interest, providing clarity and flexibility to reflect the structure and dynamics of today’s alternative investment industry.
1. Contractual carried interest
This category applies to carried interest granted purely through contractual agreements, for example under a fund’s Limited Partnership Agreement (LPA), without requiring the recipient to hold an equity stake in the fund.
Under the new law, this income is treated as extraordinary (speculative) income and taxed at one-quarter of the individual’s global income tax rate, resulting in an effective maximum rate of around 11.45%. Any income derived from a separate investment that the beneficiary makes in the AIF is taxed under the regular rules. This structure ensures consistent and transparent taxation, offering clarity for both fund managers and tax authorities in how performance-based income is treated.
2. Participation-linked carried interest
The second category applies where carried interest is inseparably linked to a participation in the fund (such as carried shares or partnership units). Here, taxation follows the capital gains logic:
Tax-exempt if the carried interest represents 10% or less of the fund’s capital and is held for more than six months;
Taxed at regular progressive rates (up to 45.78%) if the participation is sold within six months or if the 10% threshold is exceeded.
For this rule, the tax transparency of AIFs in partnership form is turned off, ensuring equal treatment across legal forms and avoiding “dry tax” situations. Where carry shares are granted free of charge, their initial value may be taxed as a benefit in kind.
This distinction ensures that both contractual and equity-based carry structures, whether used in traditional PE funds or newer deal-by-deal models, fall under a single, coherent legal framework.
A modern framework for a modern industry
The reform goes beyond tax rates. It modernises the system by:
Expanding eligibility to include not only AIF managers and employees but also independent directors, consultants, advisory partners, and shareholders of management companies;
Removing outdated conditions, such as the requirement that investors recover their entire capital before carry can be paid, now allows deal-by-deal distributions common in modern private equity funds;
Neutralising the AIF’s legal form, ensuring consistent tax treatment regardless of whether the fund is structured as a partnership or corporate vehicle.
These updates make the Luxembourg regime both broader and more realistic, reflecting the complex, international nature of modern fund structures.
Beyond the reform: Luxembourg’s long-term vision for private capital
The carried interest reform is not an isolated measure. It fits within a much wider tax modernisation agenda launched by the Luxembourg government since late 2024, including:
A corporate income tax cut from 17% to 16%;
An enhanced expatriate regime to attract international professionals;
Incentives for business angels and start-ups; and
Clarifications to fund taxation rules.
Together, these initiatives reaffirm Luxembourg’s ambition to remain Europe’s most trusted home for private capital, a jurisdiction that listens, adapts, and innovates while maintaining compliance with international standards.
During his speech, another key focus for Minister Gilles Roth was the future of financial supervision within the European Union. The minister urged fund professionals to actively engage with policymakers in Brussels, cautioning that ongoing discussions about transferring supervisory powers over investment funds from national regulators, such as Luxembourg’s CSSF, to a single EU authority under ESMA could create additional hurdles and reduce the operational efficiency of the fund industry.
According to Roth, such a move would risk adding unnecessary layers of bureaucracy and distancing supervision from the on-the-ground expertise that national authorities provide. Instead, he advocated for a pragmatic, decentralised approach that preserves high standards while maintaining efficiency and proximity to firms and investors. His message to the industry was clear: Luxembourg’s voice carries weight in Europe, and now is the moment to use it.
Expert insights from the panel discussion
Returning to the ALFI Private Assets Conference, the focus on the reform deepened later that day with a panel discussion dedicated entirely to the topic of carried interest. Building on Minister Roth’s keynote, the session gathered leading figures from the private markets industry to explore how this legislative shift could shape Luxembourg’s future as a centre for investment decision-making and fund leadership.
The panel, moderated by Keith O’Donnell (Managing Partner, ATOZ Tax Advisors Luxembourg) and joined by Paddy Croft (Head of Tax, Astorg Asset Management) and Magnus Pantzar (Global Head of Tax and Structuring, EQT) — the latter participating via video call from Stockholm — advanced the discussion beyond fiscal mechanics toward the broader strategic direction of the reform.
Paddy Croft drew parallels with developments in the United Kingdom, highlighting that while the UK has recently tightened certain carried interest rules, Luxembourg has opted for a more flexible, forward-looking approach that reflects its responsiveness to market dynamics. Magnus Pantzar, speaking from Sweden, noted that his home country had also sought to modernise its carried interest framework but eventually failed as it faced obstacles due to political divisions and administrative complexity.
All three experts agreed that the reform would not result in an immediate relocation of front-office functions. Instead, they viewed it as a gradual but meaningful step toward attracting more senior professionals over time — particularly in direct-deal and strategic roles that build on Luxembourg’s established strengths in fund structuring, governance, and cross-border operations.
The panel emphasised that such a structural shift takes time. Yet, by providing tax clarity and international competitiveness, Luxembourg is laying the groundwork to attract decision-making functions, retain top talent, and strengthen the link between fund operations and investment execution.
Looking Ahead: A Platform for the Future
Over the past decades, Luxembourg has continuously strengthened its role as Europe’s leading fund centre, driven by advances in legal frameworks, investor protection, and regulatory innovation. Through the introduction of flexible legal vehicles, a robust supervisory framework, and consistent alignment with European standards, the country has positioned itself as a jurisdiction that combines efficiency with legal certainty.
These efforts have elevated Luxembourg to new heights. Today, it stands as Europe’s largest fund domicile and the world’s second largest, with more than €7.3 trillion in assets under management and over 1,400 fund and asset management companies. Its funds are distributed across more than 70 countries, making it the global leader in cross-border fund distribution.
These achievements, supported and advanced by the Association of the Luxembourg Fund Industry (ALFI), reflect years of proactive cooperation between industry professionals and policymakers. ALFI’s work, together with the Ministry of Finance’s focus on education and innovation, is further illustrated by the creation of the Private Assets Track at the University of Luxembourg. This new master’s specialisation, designed to equip students with the technical and practical skills required in today’s alternative investment landscape, strengthens the bridge between academia and the fund industry. I am personally part of this programme, which reflects Luxembourg’s commitment to preparing the next generation of professionals for a rapidly evolving private markets environment.
The new carried interest regime builds on this momentum. By attracting deal-oriented and strategic activities, it supports the development of the entire Private Equity value chain from fundraising and governance to portfolio management, execution, and exit. This evolution enhances the country’s competitiveness and opens new pathways for young professionals to take part in the decision-making side of the investment process.
Final Reflections: Shaping the Next Chapter
The carried interest reform of 2025 marks a new stage in Luxembourg’s financial evolution. Parliament approval is expected later this year, and once enacted, the reform will enhance Luxembourg’s attractiveness for fund management activities by aligning fiscal policy with long-term goals of innovation, transparency, and sustainable growth. While its full effects will unfold over time, it reinforces Luxembourg’s transition from a fund domicile into a complete private capital centre built on expertise, trust, and forward-looking policy.
For the next generation of finance professionals, this development creates an opportunity to grow within an environment that values responsibility, innovation, and global relevance. The ongoing collaboration between policymakers, industry leaders, and universities will determine how this progress translates into lasting value for investors and society alike.
Luxembourg’s success has always rested on adaptability and cooperation. As it continues to invest in talent, education, and policy modernisation, the country stands ready to define the next era of private capital in Europe, one that combines opportunity with purpose and leadership with lasting impact.
Written by Lenny Verlaine, Master’s student in Finance & Economics in the new Private Assets Track) and member of the Goldbridge Investment Club.
