The taxation of carried interest, i.e., of the income received by investment fund managers who partner with investors to manage their funds in exchange for a share of the fund’s profits, is the subject of debates that are often more ideological than legal.
These debates generally concern the qualification of carried interest income, as either employment/professional income or investment income. Generally, the former is more heavily taxed than the latter, so this debate is not merely academic. Some consider that carried interest is a means of remunerating investment managers and their employees for a service they provide, and is therefore no different from any other form of employment/ professional income. Others argue that carried interest is a means of remunerating investment managers for their “contribution in sweat equity”, often linked to a cash investment, and is therefore similar to investment income.
The purpose of this Legitech article, put together by our Managing Partner, Keith O'Donnell, Tax Partner, Petya Dimitrova, and Chief Knowledge Officer, Marie Bentley, is to describe the Luxembourg tax treatment applicable to carried interest received by individuals employed by alternative investment fund managers.