Luxembourg

Luxembourg Personal Income Tax (PIT) Reform – Introduction of a single tax class 

In January 2026, the Luxembourg government tabled Draft Bill 8676, introducing one of the most significant personal tax reforms in decades: the move to a single tax class and full individual taxation. This reform is scheduled to apply from tax year 2028. At its core, the reform introduces a single tax class applicable to all taxpayers, removing distinctions based on marital or family status, reinforcing the principle of tax neutrality irrespective of personal life choices. This is combined with the full individualisation of taxation, meaning that each taxpayer will be assessed independently on their own income and expenses, rather than on a household basis, under a ‘one taxpayer, one tax return’ approach.

As part of this new framework, all taxpayers will follow a common filing logic with a single tax return and be subject to a unified tax scale reduced from 23 to 10 brackets, making the system easier to understand and more predictable.

The reform also introduces new tax allowances and increases certain existing deductions, while maintaining selected mechanisms through a transitional regime for taxpayers currently subject to joint taxation. In this respect, the reform provides for a gradual transition from joint to individual taxation. Taxpayers who are already married or in a registered partnership before the entry into force of the reform may opt to remain within the current joint taxation system. These couples will be eligible to benefit from a specific transitional regime (‘Tarif T’), which broadly mirrors the current tax class 2 treatment.

This regime will remain available for an extended transition period (up to 25 years), thereby ensuring continuity and avoiding an abrupt change in tax burden for existing couples, while progressively aligning the system towards individual taxation for future taxpayers.

Overall, the reform is designed to simplify the tax system, improve transparency, and better align taxation with evolving professional and family situations, in line with broader trends observed across Europe.

Revised carried interest regime

Luxembourg has introduced a revised carried interest regime (Law of 22 January 2026, retroactive to 1 January 2026), providing a clearer, more robust and permanent framework.

The regime confirms the qualification of carried interest as miscellaneous income (capital gains nature) and distinguishes between:

• Contractual carry: when the carried interest is not represented by a participation in an alternative investment fund (AIF):
  • Taxable upon exit (payment) as extraordinary income, at max. 12.85%.
  • No personal investment needed / no taxation at entry.
• Investment-linked carry: when the carry is represented by a participation in an AIF, or for carried interest that is inseparably linked to a direct or indirect participation in an AIF:
  • Miscellaneous income taxed as capital gains, i.e. no taxation if the holding period > 6 months and no substantial shareholding.
  • No tax consequences upon acquisition at fair market value.

The Law applies to: (i) individuals performing functions in relation to management of investments as employees, partners, managers, or directors of AIFMs, management companies, or AIFs, and (ii) individuals involved in the management of an AIF under an advisory services agreement, whether this agreement is concluded directly or through one or more entities.

The reform enhances tax certainty and alignment with market practices, while reinforcing Luxembourg’s competitiveness for AIF managers and front-office talent.

New tax measures to boost Luxembourg’s financial sector and start-up ecosystem

Encouraging investment in start-ups is the aim of Law of 19 December 2025.

The law sets out the conditions under which investors may benefit from this tax measure:

• The start-up must be less than five years old, have its registered office in Luxembourg, and constitute a ’permanent establishment‘ (PE), meaning it must employ at least two full-time equivalent staff, but fewer than 50. Its annual turnover must not exceed 10 million euros (EUR). To ensure a degree of innovation, at least 15% of its expenditure must be dedicated to research and development (R&D). Law firms and companies operating in the real estate sector are expressly excluded from this scheme.
• The investor must hold the capital for a minimum of three years and must not have any direct employment relationship with the start-up, nor be its founder. The investment must exceed EUR 10,000 but may not represent more than 30% of the start-up’s capital.
• The tax credit is set at 20% of the capital invested, capped at EUR 100,000 per year.

This new start-up tax credit applies as of the 2026 tax year.

In addition, the Luxembourg government is currently considering introducing a dedicated stock-option income tax regime for employees in start-ups and as well as a reform of the income tax regime of carried interest.

New measures impacting Luxembourg pension system

The Luxembourg government (Law of 22 December 2025) introduced increased pension contribution rates from 24% to 25.5 % in 2026, with increased pension contributions from the State, employers, and employees from 8% to 8.5%.

The Luxembourg government also extended the contribution period for early retirement by eight months by 2030 and progressively each year.

To encourage employees to retire closer to the legal retirement age, the Luxembourg government grants, as of 2026, a tax allowance of up to EUR 750 per month (EUR 9,000 per year) for employees that would meet the criteria for early retirement but decide to keep working.