🇬🇧Carried interest 2026: the jurisdiction map for fund principals

Lawyer, Family Office

Concept

Carried interest is the manager's share of fund profits above the return of investors' capital and an agreed hurdle. Economically it rewards labour; legally it usually arises as a return on a fund interest. Two decades of debate reduce to a single question — is carry a capital gain (low rate) or employment income (high rate)? In 2025–2026 several key jurisdictions rewrote their rules almost in parallel, and the map for a principal shifted more than in the entire preceding decade.

The legal bases in play: in the UK, Finance Act 2026 (which received royal assent), moving carry into the trading-profits framework from 6 April 2026; in Luxembourg, Bill of Law No. 8590, formally adopted and applying to income from 1 January 2026; in Italy, the long-standing art. 60 of Decree-Law 50/2017 with its safe harbour; in France, the PFU regime; in the US, IRC § 1061, which OBBBA (signed 4 July 2025) deliberately left untouched.

The 2026 shift is less about headline rates than about divergence. The UK tightens its regime and makes it extraterritorial for the first time; Luxembourg and Italy build a predictable preferential corridor; the US holds the status quo. For a principal, tax residence and the form in which carry is received now matter more than the mere fact of earning it.

United Kingdom: from capital gains to trading profits

From 6 April 2026 all carry in the UK is treated as trading profits — regardless of whether the manager is an employee or self-employed, and regardless of the fund's average holding period. This is not a cosmetic rate change but a shift in the charging framework itself: carry now enters self-assessment with payments on account, effectively requiring the manager to prepay tax on future distributions based on past ones.

The former concept of income-based carried interest is replaced by a split into qualifying and non-qualifying carry. Qualifying carry attracts an effective rate of around 34.1%; non-qualifying is taxed at 47% for those on the highest marginal rate. The dividing line still turns on the holding period, but the rules were rewritten so that credit funds and debt strategies find it easier to produce qualifying carry — a long-standing pain point for private credit, partly resolved.

Extraterritoriality: the UK workdays rule

The most surprising change is territorial reach. Previously non-income-based carry was taxed in the UK only when it arose to a UK resident. Now a non-resident may also fall within UK tax — on the portion of carry attributable to UK workdays, meaning any day on which the individual worked three or more hours in the UK. Internationally mobile managers will need to track travel and working hours. Some easing applies to qualifying carry but not to non-qualifying — which makes qualification a question not only of rate but of falling within UK jurisdiction at all.

Luxembourg: a corridor of predictability

Bill 8590 has been formally adopted — following the Conseil d'État's waiver of the second constitutional vote on 3 February 2026 — and applies to income from 1 January 2026. The reform expressly distinguishes two forms of carry.

Contractual carried interest

Remuneration on a purely contractual basis, with no requirement to hold an interest in the fund. It is classified as extraordinary income and taxed at one quarter of the applicable progressive rate — a maximum effective burden of 11.45%, including the solidarity surcharge.

Participation-linked carried interest

Carry tied to a direct or indirect participation in the fund. The portion attributable to the fund's outperformance is exempt from Luxembourg personal income tax — on two conditions: the participation has been held for at least six months and represents less than 10% of the fund's equity. The fund's tax transparency, if any, is disregarded.

The regime applies only to Luxembourg tax residents and does not reach non-resident recipients, even where the carry derives from a Luxembourg fund. A notable detail: the former requirement that LPs first fully recover their capital has been abolished — effectively endorsing the deal-by-deal model. Combined with the impatriate regime revised from 2025, Luxembourg is deliberately gathering front-office talent.

Italy: 26% under the safe harbour

Italy has held its regime since 2017 — art. 60 of Decree-Law 50/2017. Where the safe harbour conditions are met, carry qualifies as financial income taxed at a flat 26%, rather than as employment income on the progressive scale. The conditions are classic: managers collectively invest at least 1% of the fund’s total investment; carry is paid only after other investors have recovered their capital plus an agreed minimum return (hurdle); and the holding period is at least five years. It is one of Europe’s most stable regimes precisely because it is not rewritten every budget cycle.

France: the PFU, or the full progressive march

Qualifying carry in France is taxed under the PFU — a 30% flat tax (12.8% income tax plus social charges). But qualification is demanding, and without it carry is treated as employment income: the progressive scale, the contribution exceptionnelle sur les hauts revenus and social charges — a combined burden that can approach ~79%. The gap between inside and outside the regime is perhaps the most dramatic of all the jurisdictions here, and it is what makes correct qualification critical.

United States: the § 1061 status quo

In the US, carry is governed by IRC § 1061, introduced by the 2017 tax reform: capital gains treatment requires a three-year holding period rather than the usual one. Many expected OBBBA (signed 4 July 2025) to tighten the rule — an extension to five years was discussed. It did not happen: § 1061 was left untouched. For an American principal, the US side of planning is unchanged, and all the 2026 dynamics sit on the European side.

Through whom to receive carry: individual, holding or operating company

The rate is only half the decision; the other half is through whom the carry is received. Taking it personally is the simplest and most expensive route — the full personal rate and no flexibility. A holding company is already better: it adds a corporate layer with tax deferral until distribution and potential access to participation exemption on the return from the interest. But a pure holding company is a passive shell, vulnerable to substance tests and GAAR — it can be looked through.

An operating company is usually optimal — one that genuinely provides management services: staff, an office, its own decision-making functions (CIGA). Real activity lowers the risk of recharacterising carry as disguised employment income and supports access to reliefs — the Maltese 6/7 refund, participation exemption, treaty rates — and to economic substance. The usual order of preference: operating company → holding company → individual. One important caveat: for a US person a foreign corporate recipient itself triggers CFC/PFIC, and the order can invert — that structure is modelled separately.

Application

What follows in practice. For an internationally mobile manager, the UK workdays rule turns business trips to London into a tax event — worth building into the calendar and records well before April 2026. The choice between Luxembourg’s contractual and participation-linked forms is a fork between a fixed 11.45% and a potential zero: if the structure allows holding less than 10% for longer than six months, the economics differ fundamentally. The Italian and French regimes show a common pattern — the relief exists but is conditioned on real co-investment, a hurdle and a holding period; paper qualification does not pass. For a distributed team of principals, it is worth mapping who is tax resident where and computing carry for each individually — there is no longer a single rate for the fund.

Risks

It is worth keeping in mind separately that almost all of these regimes are residence-based: they work for a tax resident of the relevant country and do not follow the individual automatically on relocation. A change of residence mid-fund can entirely reshape the tax picture of carry already earned but not yet distributed.