Luxembourg has recently established a permanent regime for Carried Interest, a topic of particular interest for general partners in private equity, strengthening its attractiveness for front office alternative investment fund activity. By contrast, the UK Government has increased the taxation of private equity general partners in recent Budgets.
Can you summarise the main features of the new Luxembourg regime?Can you outline how ‘carried interest’ is treated in Ireland currently and suggest changes that could be made to Ireland’s regime to make it more attractive for private equity?
Contributor: Angela Fleming, Partner & Head of Financial Services Tax, BDO
In Luxembourg, an updated carried interest regime adopted on 22 January 2026 modernises the regime and introduces a mechanism to reward (i) individuals performing management functions (as employees, partners, managers or directors of AIFMs, management companies or AIFs); and (ii) individuals having a role in the management of an AIF performed in the context of a service agreement in line with the results they deliver.
The new rules, which apply to carried interest received as from tax year 2026, expand the scope of eligible beneficiaries and funds and make a clear distinction between two categories of carried interest:
- Purely contractual carried interest, i.e. not linked to a direct or an indirect investment in the fund: Such carried interest, which is currently taxed at a rate of up to 45.78% (+1.4% dependence insurance contribution) will in the future be taxed at ¼ of the beneficiary’s global tax rate, i.e. a maximum of 11.45% (+1.4% dependence insurance contribution);
- Carried interest linked to an investment: The latter will be taxed according to regular capital gains rules, i.e. not taxable if held for more than 6 months and the beneficiary does not hold a substantial participation (more than 10% of the shares/quote of the underlying vehicle) s.
Furthermore, the new regime enables the inclusion of a wider scope of AIF such as debt funds. It also no longer requires investors to be repaid first and will thus include deal-by-deal arrangements.
In Ireland, carried interest which qualifies under section 541C of the Taxes Consolidation Act 1997 (“TCA 1997”) is treated as a capital gain taxable at a rate of 15% (for individuals and partnerships) or 12.5% (for companies). The regime only applies for “qualifying venture
capital funds” (QVD Funds) which meet the following conditions:
- They must be structured as a partnership;
- They must be established for the purpose of making long-term (3+ years) investments in “relevant investments”, defined as unquoted shares and securities of private trading companies engaged in research and development activities or the development of new technological, telecommunication, scientific, or business processes; and
- The partners, including the general partner, must be legally obligated to provide capital sums for investment purposes over a period of time.
The regime only applies to the proportion of carried interest derived from relevant investments in EEA states (including Ireland) and the United Kingdom. Additionally, the carried interest must not exceed 20% of the total profits of the QVD Fund.
The tax treatment of carried interest which falls outside of this regime depends on whether the income arises in the course of a trade or not. Income arising in the course of a trade may be subject to income tax, or corporation tax, with income arising in non-trading circumstances more likely to be subject to CGT at the standard rate (currently 33%). The specific treatment is dependent on the facts and circumstances of each case.