🇬🇧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 legal bases in play — one for each of the six jurisdictions.

• 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, FIHV 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 makes it extraterritorial for the first time; Luxembourg and Italy build a predictable preferential corridor; the US holds the status quo; Hong Kong alone moves towards loosening — Bill 2026 widens its 0% regime. For a principal, tax residence and the form in which carry is received now matter more than the mere fact of earning it.

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 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 but not to non-qualifying — 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 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, 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, FIHV 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 regime extends to employees with a contractual right to carry, through a salaries tax exclusion.

Widening qualifying income opens the 0% to hedge fund performance fees. The significant risk condition stays (Deacons).

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). The IRD has already introduced a transitional administrative measure: eligible taxpayers may file their 2025/26 returns on the Bill's basis (KPMG). The family limb of the same bill — the Schedule 16C expansion and the HK$240m threshold — is covered in the Hong Kong FIHV article.

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.

In short: it is not only the rate that matters but through whom the carry is received. An operating company with real substance is usually more robust than a passive holding company, and a holding company beats taking carry personally: the more genuine the activity, the sturdier both the characterisation of the carry and access to preferential regimes.

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.

Where GPs themselves are looking is also visible: after the UK tightening, the main relocation destinations for managers have been Italy with its €300k flat tax on foreign income and the UAE with zero personal income tax. Both routes work only with a genuine transfer of tax residence.