AGEFI Luxembourg - septembre 2025

Septembre 2025 5 AGEFI Luxembourg Economie Continuedpage 1 Importantly, the Participation CI seem to com- prise not only capital gains but also profit distri- butions by/on so-called “carry-vehicles” / “carry shares”throughwaterfallpayments,eventhough thispointisnotclearlysettledandmaydeservefur- therclarifications.AlthoughtheDraftBillrefersto “speculation gains”, this seems due to the fact that thefirst sentence of the current article 99bisLIR(notamendedbytheDraft Bill) mentions that “it is always taxable as a speculation gain [… ]”, suggesting that any income deriving fromaparticipation (i.e. dividends,redemptionproceeds, capital gains) is treated as a spec- ulation gain to the extent (i) the payment falls in the definitions of carried interest and (ii) the income is inseparable fromthe participation. Whilst the current article 99bis LIR refers to “specu- lation income deriving from the realisation of units, shares or securities […]”, the proposed redraftedar- ticle refers to carried interest as defined in the previ- ous paragraph, dedicated to Contractual CI, hence to the right to share in the overperformance of the fund, irrespective of the form. A different interpre- tationwould, in theviewof the authors, be inconsis- tentwith the rationaleof theproposedregime, based ontheobservationthatthereareseveralformsofpar- ticipation to the overperformance that do not neces- sarily take the form of a capital gain. If this interpretation is correct, then the Participation CI regimewould be applicable to carry fees that remu- nerate theperformance of themanager aswell to in- come allocated to the AIF manager through a waterfall system, to the extent either compensation is inextricably linked toan interest held in theAIF.A clarification on this point would bewelcome. ForeignAIFs andnon-residentmanagers Although not explicitly set out in the Draft Bill, it is anticipatedthattheproposedregimewouldapplyto AIFs established both in Luxembourg and in other jurisdictions. The Draft Bill applies to both resident andnon-residentcarryholders.However,asnon-res- idents carry holders are subject to Luxembourg tax- ation in limited cases, the practical relevance of the beneficial provisions for this group remains limited. Tax treatment PursuanttotheDraftBill,ContractualCIwouldben- efit froma 75% exemption, resulting in amaximum marginal rate of 11.45%. The Draft Bill opens the favourable treatment to Contractual CI interest that do not necessarily take the form of capital gains, which until now were not common in the Luxem- bourgmarket practice. Participation CI would, on the other hand, be fully exempt if the participation is held for more than six months and it doesnot qualifyas an“important par- ticipation” (if the taxpayer, together with any mem- bers of his household, never held, in the five preceding years, 10% or more in the share capital of the company inwhich the participation is held). In both cases, the results of a participation that does not embody the carry interest (suchas carrysharesor shares in a carry vehicle) does not fall in the scope of theproposed regime. This applies not only topartici- pations privately acquired by the AIF manager, but also to the participation compulsorily acquired in compliance with the Participation CI plan (also referred toasCo-Investment shares). Also, the allocation of the AIF interest to thecarryholderfreeofchargeoratavalue that is lower than the fair market value wouldbe subject to theordinary tax treat- mentandnotqualify,itself,asaContractual CI or as a ParticipationCI. Expanded scope of beneficiaries The reformed regime also addresses theprevious lim- ited subjective scope of the carried interest regime. Unlike the current frame- work,which limits the eli- gibility to employees of theAIFMormanagement company, the newprovi- sions extend to any natural person directly or indi- rectlyinvolvedinthemanagementofaLuxembourg or foreignAIF and receiving a compensation for the overperformanceofthefund.ThisincludesAIFman- agers, individuals at the service of the management company or of the investment advisor, independent directorsandmembersoftheinvestmentcommittee. Eligibilityisthereforenotcontingentonemployment statusor the sourceof the carried interest payment. It shouldhoweverberemindedthatcarriedinterestre- munerate the AIF manager for “the good perform- ance of the investment portfolio that he chose and managed”; the regime is therefore not available to other kinds of remuneration, such as the bonus paid toanemployeenotinvolvedintheAIFmanagement. Additional flexibility ThebeneficialtreatmentofContractualCIisnolonger conditionedonthepriorrecoupmentofinvestors’ini- tial capital. This enables the application of the regime to “deal-by-deal” carried interest paid during the fund’s lifecycle. However, the Draft Bill’s commen- taries clarify that “overperformance”—implicitly ref- erencingahurdlerate,applicableeitheronadealbasis or as a“wholeof a fund”basis—must bedetermined in linewithmarket practice toprevent abuse. Participation CI may encompass compensation linked to direct or indirect fund holdings, including interests in a “carry vehicle.” To prevent abuse, the commentariesstipulatethatagenuineeconomiclink must exist between the right to share in the fund’s overperformance and the relevant participation. ForthepurposesofParticipationCI,AIFsaredeemed to be tax opaque by default, regardless of their legal form. This simplification eliminates the need for a look-through analysis of the fund or carry vehicle and, more importantly, allows the application of the beneficial regime to any payments attached to the participation in theAIF itself, which in case of trans- parencyof theAIFwouldnot have anyautonomous tax relevance. The simplification does not apply to standard co-investment vehicles; potentially, carried interest holders may have to follow a double decla- ration path for the carried interest participation and co-investment held through different partnerships, evenwhen the co-investment is not voluntary but is a condition to access the carried interest benefits. Conclusions The Draft Bill does not introduce a completely new taxation system for carried interest, but it has poten- tially significant impact thanks to a clear, broad, and versatiledefinitionof‘carriedinterest’.Theclearstate- ment that carried interest compensate theAIFman- agers for the goodperformance of the assets selected and managed, would usefully prevent any future discussion onwhether carried interest can only take the form of capital gains, as currently one may read fromtheletterofthelawinforce,oralsoincludeother forms of payment, as it would seem reasonable. As recognisedintheintroductiontotheDraftBill,carried interesthavea“multifaceted”nature( caractèreprotéi- forme ) which requires a flexible approach. If confirmed, the Draft Bill has potential to promote furthergrowthoftheLuxembourgAIFindustryand the advancement of the front-office domestic fund managementmodel. DiogoDUARTE de OLIVEIRA, Partner Chiara BARDINI, Tax Counsel BakerMcKenzie Luxembourg Towards a Coherent Framework: Luxembourg’s Proposed Reform on Carried Interest Taxation