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 ? 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)

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.

Joe Walsh, Director, Financial Services Tax, Forvis Mazars: Luxembourg has ushered in a revised carried interest regime, effective 1 January, aimed at strengthening its position as a hub for alternative investment fund managers (AIFMs). The overhaul is designed to enhance the tax treatment of carried interest and further cement the country’s competitiveness in the global funds industry.

Under the new framework, the regime applies to employees of AIFMs, AIF management companies and affiliated group entities (collectively, ‘Managers’). Notably, the legislation introduces a clearer distinction between two categories of carried interest:
• Participation Linked Carried Interest
This applies where the Manager’s return is tied to their own investment in the fund. Such income is fully tax-exempt provided the investment represents less than 10% of the fund’s capital and is held for more than six months.
• Contractual Carried Interest
Awarded once investment performance surpasses an agreed-upon hurdle, this category is taxed at 25% of the Manager’s standard tax rate, providing a materially lower effective burden.

Crucially, the regime does not require investors to be fully returned their capital before carried interest can be paid, opening the door to deal-by-deal carry models, which are increasingly favoured in private equity and real assets. The regime applies broadly, covering both transparent and opaque structures and any fund qualifying as an alternative investment fund, irrespective of asset class.

Ireland’s Carried Interest Model: Room for Reform?
Ireland’s carried interest framework, set out in Section 541C TCA, is similarly designed to align fund managers’ incentives with those of investors, offering preferential capital gains treatment. Under the Irish regime, carried interest arising from qualifying activities is taxed as capital gains rather than income, resulting in significantly lower rates:
• 12.5% for companies
• 15% for individuals or partnerships

To qualify, however, funds must meet narrow criteria. A “qualifying venture capital fund” must:
• Be structured as a partnership
• Invest on a long-term basis (minimum three years) in “relevant investments”, i.e. unquoted shares or securities of private companies engaged in R&D or innovation
• Require partners, including the general partner, to commit capital over time

The tax relief applies only to carried interest generated from relevant investments located in the EU, EEA, or the United Kingdom, and the carried interest itself must not exceed 20% of overall fund profits.

Industry voices argue that Ireland’s regime, while attractive on paper, is too restrictive in practice. Expanding the definition of relevant investments to include a broader range of sectors – such as infrastructure or housing – could channel investment into areas of acute national need. Similarly, the territorial limitation has been criticised as unnecessarily narrow and potentially at odds with certain double taxation agreements’ anti-discrimination clauses.

There are also calls to open the regime to opaque structures, such as ICAVs, to simplify cross-border withholding tax issues and better reflect international fund structuring norms.

This article appeared in the March 2026 edition of the Irish Tax Monitor.