Conflict of interest considerations arising from the new Luxembourg tax regime on carried interest (Bill 8590)

Bill 8590, effective as from 1 January  2026, introduces a substantially revised tax framework for carried interest earned in the context of alternative investment funds (AIFs). The reform pursues legitimate and clearly articulated objectives: strengthening Luxembourg’s competitiveness in private capital and alternative investment strategies, attracting key decision-makers and “front-office” activities, and clarifying the tax treatment of performance-based remuneration.

A significant innovation of the new regime lies in its expanded personal scope. Carried interest may now be granted not only to employees of AIFMs or management companies, but also to individuals working “with or for” the manager, including non-employees such as independent board members of an AIF. This extension represents a structural shift. Independent directors were historically outside the scope of carried interest arrangements and, correspondingly, outside the tax regime applicable to such remuneration. Their inclusion reflects market realities, where performance-linked incentives are increasingly discussed beyond the management layer but it also raises new governance questions that go beyond tax policy.

Under Luxembourg company law, board members must act exclusively in the corporate interest of the company they serve. They do not represent investors, shareholders, or specific stakeholder groups. This principle is particularly important for independent directors, whose role is to provide objective oversight, challenge management decisions, and safeguard sound governance.

Where an independent director holds, directly or indirectly, a participation-linked carried interest in the AIF, that director may become economically aligned with fund performance in a manner similar to an investor or manager. This alignment may give rise to actual or perceived conflicts of interest, notably in areas such as asset valuation and valuation methodologies, timing of exits or distributions, acceptance of risk profiles that maximise short-term performance and approval or oversight of remuneration and performance metrics.

Given that carried interest is inherently performance-sensitive, even the perception that governance decisions could be influenced by personal upside may undermine trust in the board’s independence.

While Bill 8590 comprehensively revises the tax treatment of carried interest, it does not introduce or reference governance-specific safeguards addressing these new situations. In particular, the reform does not clarify:

1. whether and how independent directors receiving carried interest should be treated for conflict-of-interest purposes;

2. whether additional disclosure, recusal, or approval mechanisms should apply;

3. how such arrangements interact with existing duties under company law, AIFMD rules, and CSSF governance expectations.

We at ILA consider that the success and credibility of the new carried interest regime depend not only on tax attractiveness, but also on robust governance standards.

The 2026 carried interest tax regime represents an important step in enhancing Luxembourg’s attractiveness for alternative investment managers. However, its broader personal scope, particularly the inclusion of independent directors, calls for a complementary governance reflection. ILA stands ready to contribute to this discussion and to support the development of balanced solutions that preserve both Luxembourg’s competitiveness and its high standards of corporate governance.

We recommend to treat carried interest for independent directors as an exceptional and carefully controlled incentive, not a default remuneration tool.

ILA, The Luxembourg Institute of Governance Legal & Advocacy Committee