Carried interest 2026: the jurisdiction map for fund principals

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 six core regimes are set out first, followed by a comparison of Singapore, the UAE, Switzerland, Germany, the Netherlands, Ireland, Jersey and Guernsey.

• The UK — Finance Act 2026 (c. 11), s. 58, inserting sections 23I–23R and Schedule A1 into ITTOIA 2005 and moving carry into the trading-profits framework through a deemed trade. It has effect for the tax year 2026-27 and subsequent years — that is, from 6 April 2026 — but in relation to investment management services whenever performed.
• Luxembourg — Bill of Law No. 8590, formally adopted and applying to income from 1 January 2026.
• Italy — the long-standing art. 60 of Decree-Law 50/2017 with its safe harbour.
• France — the PFU regime.
• The US — IRC § 1061, which OBBBA (signed 4 July 2025) deliberately left untouched.
• Hong Kong — the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026, which widens the zero-rate carry regime (gazetted 12 June 2026, not yet enacted as of September 2026).

The 2026 shift is less about headline rates than about divergence. The UK tightens its regime and extends its reach to relevant non-resident receipts and UK workdays; Luxembourg and Italy build a predictable preferential corridor; the US holds the status quo; Hong Kong proposes to widen its 0% regime, while Singapore has announced a proposed exemption discussed below. For a principal, tax residence and the form in which carry is received now matter more than the mere fact of earning it.

Carry can no longer be planned on a global average. From 2026 the UK taxes it as income — effectively 34.075% for qualifying and up to 47% for non-qualifying — and reaches non-residents through UK workdays. Luxembourg offers 11.45% or full exemption for participation-linked carry. Italy applies 26% under its safe harbour. France applies the 31.4% PFU when carry qualifies. The US left § 1061 and its three-year holding intact. Jurisdiction and form now outweigh the size of the carry.

The key parameters of the six regimes: rate, condition for relief and the state of the rule.

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. The capital gains tax regime it replaces had charged carry at a single 32% rate since 6 April 2025 and ended on 5 April 2026. The charging framework itself shifts, not only the rate: 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; the dividing line still turns on the holding period, and the sole test is the average holding period (AHP). The rates below are those for taxpayers on the additional rate.

Not the whole sum is taxed. Under § 23I(2)(b) ITTOIA the profits of the deemed trade are the non-qualifying profits in full plus 72.5% of the qualifying profits: the multiplier applies only to the second part, and only after each part has been reduced by its share of the permitted deduction under § 23N. That is where the gap in the table comes from — the marginal rate is the same, the base is not. Sums already charged as earnings under s. 62 or Part 7 of ITEPA 2003 drop out of the base (§ 23I(5)), and § 23J offers an irrevocable election not to apply § 23I at all to carry that would have been trading profit anyway, by notice to HMRC no later than 31 January after the end of the tax year concerned.

A sliding scale applies between 36 and 40 months; the minimum co-investment and personal holding-period conditions discussed earlier did not make the final version. 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 spends more than three hours performing investment management services in the UK. Internationally mobile managers will need to track travel and working hours. Some easing applies to qualifying carry, and only a sliver of it to non-qualifying carry that was expected to qualify (§ 23K(4)) — which makes qualification a question not only of rate but of falling within UK jurisdiction at all.

The definition of a day is statutory, and finer than it looks. § 23K(6)(b) ITTOIA makes a day a UK workday where the individual spends more than three hours in the UK performing investment management services — for any scheme, not only the one the carry comes from. A day below that threshold stays an applicable workday and lands in the denominator of the fraction but not the numerator. Time spent travelling to or from the UK by air, sea or tunnel counts as spent overseas (§ 23K(8)). For a non-resident, the numerator on the qualifying part drops days before 30 October 2024, days in a "non-UK tax year" — one in which the non-resident accumulated fewer than sixty UK workdays — and days preceding a break of three or more such years (§ 23K(5)).

The new-resident regime does not rescue the UK part of the carry. The same Act removed the profits of a § 23I deemed trade from the list of qualifying foreign income in § 845H ITTOIA, leaving relief only for the non-UK part: 72.5% of the qualifying profits outside the UK part of the trade, and the pre-arrival proportion of the non-qualifying profits.

The working-day definition here is its own, and it does not match the one used for overseas workday relief: carry counts a day by the three-hour threshold and by investment management services, while the relief counts it by where the duties of the employment were performed, with no hourly threshold. A manager on an employment contract keeps both tallies off one timesheet, and the same day can enter them differently — the relief's parameters are in Overseas Workday Relief.

Alongside the same reform: QAHCs, BADR and the anti-avoidance regime

Three provisions sit next to carry and catch the same manager.

FA 2026 Sch. 3 para 2 narrowed the qualifying asset holding company regime for new residents. The relief under § 845H ITTOIA and under Sch. D1 TCGA is now addressed to a person who provided investment management services in connection with investment arrangements to which a QAHC is party, and only to interests in the QAHC itself acquired in the course of providing those services. It applies to income arising and gains accruing on or after the day of royal assent.

The entrepreneurs' relief rate changes in the same April. Business asset disposal relief under TCGA 1992 s. 169N(3) moves from 14% to 18% for disposals made on or after 6 April 2026 (Finance Act 2025, c. 8, s. 8(4)–(6)). A manager exiting a co-investment or a stake in the management company meets the new rate, and computes it alongside the new carry regime rather than separately.

Part 6 of FA 2026 added a layer that changes the price of an aggressive structure. Chapter 1 (ss. 159–165) prohibits the promotion of certain tax avoidance arrangements and backs it with civil penalties and a criminal offence. Chapter 2 (ss. 166–176) introduces promoter action notices, with certification of promoters, publication and reporting to regulators. Chapter 3 (ss. 177–208) gives HMRC anti-avoidance information notices — to connected persons, third parties, unidentified connected persons and financial institutions, with criminal and civil sanctions for failure to comply and for concealing information. For the section on holding companies below, that means the correspondence and the banking trail of a structure are reachable through a separate instrument, not only through the taxpayer.

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 more than six months and represents less than 10% of the fund's equity. The fund's tax transparency, if any, is disregarded.

Whether a recipient who is not tax resident in Luxembourg is taxed there is a separate question: the government's explanatory memorandum refers it to the applicable double tax treaty or, failing one, to the non-resident rules of art. 156 LIR. 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, and there are three.

• 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).
• 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. Only its address changes: art. 60 is repealed with effect from 1 January 2027 by the new consolidated income tax code (Testo unico delle imposte sui redditi, Legislative Decree of 19 June 2026 No. 117), which carries the regime over into its art. 212 with no change of substance — the 1% commitment, the hurdle and the five-year holding are reproduced word for word.

France: the PFU, or the full progressive march

In France, qualification decides everything: it splits carry into two regimes with radically different burdens.

The PFU rate rose from the former 30% after the CSG increase in the 2026 social security financing law. The gap between inside and outside the regime is the most dramatic of all the jurisdictions considered here, and it is precisely 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 the 2026 dynamics sit in Europe — and in Hong Kong.

Hong Kong: Bill 2026 drops HKMA certification and the hurdle rate

In Hong Kong, eligible carried interest is taxed at 0% profits tax (Schedule 16D IRO, in effect since the year of assessment 2020/21), but the regime's perimeter has been narrow: certification through the HKMA, PE transactions only and a mandatory hurdle rate.

The Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 — gazetted on 12 June 2026, first reading in LegCo on 24 June; by August 2026 the LegCo Bills Committee had completed its clause-by-clause examination and the Government was targeting resumption of the second reading debate in the second half of 2026. The Bill leaves the rate untouched and radically widens the scope along three lines.

• HKMA certification goes.
• Qualifying income is no longer confined to PE transactions: it takes in all asset classes of the UFE fund regime, untaxed dividends and offshore income, and the fund's other taxable profits.
• The hurdle rate requirement disappears, and the distribution rules are relaxed: a wider definition of 'associate', and qualifying employees may receive carry through other entities, alongside the existing salaries tax concession.

Widening qualifying income can bring carry from funds beyond private equity, hedge funds included, within the 0%, provided it is a non-discretionary return linked to the fund's investment performance under the fund or management agreement; a proprietary trading business is not a 'fund', and its payouts do not qualify (FSTB, 12 August 2026). The significant risk condition stays.

As of September 2026 the Bill is not yet law, but it will apply retrospectively from the year of assessment 2025/26 (periods from 1 April 2025). In implementing the measures, the IRD will issue administrative guidance where necessary (FSTB, 12 August 2026). The family limb of the same bill — the Schedule 16C expansion and the HK$240m threshold — is covered in the Hong Kong FIHV article.

Eight additional jurisdictions: conditions before rates

The comparison below is current as of 26 September 2026. It distinguishes the fund's tax position from the manager's receipt and, where relevant, the shareholder's later distribution. A local exemption does not remove another country's tax on its resident or on services performed there.

Timing and qualification checks

Singapore. The MAS announcement is a proposal with an expected YA 2027 start, not a completed set of entitlement rules. Qualifying funds are those within sections 13D, 13O, 13OA, 13U or 13V and managed by Singapore-based managers; economic-substance conditions apply at fund level. An existing fund exemption does not by itself exempt its manager. YA is an assessment year: under the IRAS preceding-year basis, it must not be translated mechanically into a payment date of 1 January 2027.

UAE and Switzerland. These rows require characterisation before a rate can be quoted. Under the FTA definition, personal investment is for the individual's own account, is neither carried on under nor requires a licence, and is not a commercial business under the Commercial Transactions Law. This is why a reward for managing other investors' capital cannot simply be labelled a tax-free personal investment. The Swiss federal answer likewise separates private investment gains from performance remuneration.

Germany and Ireland. The German statutory test is a capital-return condition within a defined asset-managing structure; it is not the Italian five-year/1% safe harbour. Ireland's three-year rule and R&D/innovation restriction concern the underlying relevant investments. Its 12.5% company rate is a tax at that recipient, not the owner's final tax after distribution.

Netherlands. The 95% same-year condition makes distribution timing part of the Box 2 route. Belastingplan 2026 also introduced a separate anti-avoidance rule in §3.95b(6) for moving from an indirect structure without a substantial interest to one with it: pre-existing value growth cannot simply be moved into the favourable route. The deferred multiplier is a different amendment: Article I(C)(1), effective in 2028 under Article L(1a).

Jersey and Guernsey. Read the partnership waterfall and acquisition documents. Jersey's statement follows capital profits through the partnership. Guernsey M44 additionally examines market remuneration for services, the price paid for the interest, arm's-length terms and permitted leaver/vesting/transfer restrictions; joining after the first investment requires checking that aggregate investments have not risen above aggregate acquisition cost. Income such as dividends is a separate question. Neither island's result establishes exemption in the country where a non-resident recipient lives or works.

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

The rate is only half the decision; the other half is the legal recipient. Taking carry personally can be the appropriate route for an individual or transparent-partnership regime, including the qualifying German, Jersey and Guernsey cases above. A holding company may permit deferral until distribution or access to participation exemption, but neither benefit follows from its name: carry must have the required legal character, and substance, beneficial-ownership and anti-avoidance conditions still apply.

An operating company is relevant where it genuinely provides management services: staff, an office and its own decision-making functions (CIGA). Those facts support its business character, but they do not turn service income into capital gains or automatically secure relief. The Maltese 6/7 refund, participation exemption and treaty rates mentioned as possible planning tools each need a separate eligibility analysis; they are not a common carry regime. Compare tax at the company, any onward distribution and the individual's applicable regime before choosing between an operating company, a holding company and direct receipt. For a US person, a foreign corporate recipient may introduce CFC/PFIC issues, so that structure is modelled separately.

The practical comparison is therefore between the documented legal arrangements and their total tax cost. Genuine activity matters where the rule requires it; it is not a substitute for the particular capital, remuneration, holding-period or distribution conditions in each jurisdiction.

Application

What follows in practice. For an internationally mobile manager, the UK workdays rule turns business trips to London into a tax event — it has applied since 6 April 2026, so travel and working hours are now tracked as a matter of routine. 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.

Where this is heading

The direction is shared: developed jurisdictions increasingly tie carry to where the manager actually lives and works and to real co-investment; formal qualification on paper no longer works. UK extraterritoriality is the first instance of a country reaching for a non-resident's carry, and other financial centres are watching the move closely. In parallel, CRS and automatic exchange make cross-border distributions immediately visible to every tax authority, so a quiet difference in treatment between countries stops working. The practical takeaway for the coming years is simple: qualification, residence and substance are evidenced with documents in advance, before the fund begins distributing profits.

Two relocation routes managers compare are Italy with its €300k flat tax on foreign income and the UAE with zero personal income tax. Both routes require a genuine transfer of tax residence. For UAE carry, also apply the wages/personal-investment/business distinction above; the absence of personal income tax does not exempt a natural person's taxable business from Corporate Tax.