New stock option tax regime for employees of innovative companies

The draft law introduces a specific regime for stock option plans granted by qualifying innovative companies. Under the proposed rules, no taxation would arise upon the grant of options, vesting of options, or exercise of options as the benefit in kind would be deemed to be zero. Instead, taxation would be deferred until the employee disposes of the shares acquired through the exercise of the options.

The taxable income would correspond to the difference between the sale proceeds received by the employee and the amount paid to acquire the shares (i.e. the exercise price). The resulting gain would qualify as extraordinary income and be taxed at one quarter of the employee's global tax rate.

According to the explanatory memorandum, this approach is intended to eliminate valuation difficulties associated with unlisted start-ups, reduce administrative burdens, and avoid imposing tax liabilities before employees have generated any liquidity from their investment.

Scope of the regime

The new regime would only be available where the employer qualifies as a "young innovative company". To meet this definition, the company must generally:

  • be less than ten years old;
  • employ fewer than 150 employees;
  • have annual turnover or total assets not exceeding EUR 30 million;
  • carry out innovative activities; and
  • satisfy several additional eligibility conditions.

An activity will generally be regarded as innovative where, among other requirements, at least two employees work for the business and where research and development expenditure represents at least 15% of operating expenses.

The regime would not be available to certain sectors, including listed companies, SICARs, real estate businesses, law firms, audit firms and accounting firms.

Conditions applicable to employees and plans

The preferential regime would apply only to non-transferable options granted to employees. Employees holding, directly or indirectly, more than 25% of the capital, voting rights or profit rights of the employer (or relevant group entities) at grant or during the preceding 24 months would be excluded.

The bill also contains anti-abuse provisions designed to prevent the replacement of cash remuneration with tax-favored stock options. In addition, the explanatory memorandum confirms that cash-settled or "phantom" equity arrangements are outside the scope of the new regime.

Clarification of the ordinary stock option regime

Alongside the new start-up regime, the bill introduces a new article 104bis in the Luxembourg income tax law intended to codify the ordinary tax treatment of employee stock option plans. The proposed provision largely reflects the principles currently applied in practice.

Under this regime, transferable options would generally remain taxable upon grant, whereas non-transferable options would generally remain taxable upon exercise. The bill also formalizes valuation rules and provides for a valuation discount of up to 20% where acquired shares are subject to a lock-up period.

Administrative requirements

Application of the new start-up regime would not be automatic. The employer would need to elect into the regime on a plan-by-plan basis and satisfy specific reporting obligations vis-à-vis the Luxembourg tax authorities. Failure to comply with these requirements would result in the loss of the preferential treatment.

Entry into force

If adopted in its current form, the new rules would apply to stock options granted from tax year 2027 onwards.

Our observations

The bill represents a significant development in Luxembourg's approach to employee equity compensation. By deferring taxation until a liquidity event and applying a reduced effective tax burden to realized gains, the proposed regime would position Luxembourg more competitively alongside jurisdictions that have introduced targeted start-up share option regimes.

While the proposal remains subject to the parliamentary legislative process and may be amended before enactment, it is likely to be of particular interest to Luxembourg-based start-ups, scale-ups, venture-backed businesses and multinational groups with innovation-focused operations in Luxembourg.

We will keep you informed of further developments. In case of questions about this legislative proposal, please reach out to your trusted Loyens & Loeff contact person or to the authors of this article.