Tax :
Luxembourg
On 1 July 2026, a draft law No. 8782 was tabled before the Luxembourg Parliament (the Draft Law), which Draft Law proposes a significant reform of the tax regime applicable to stock option plans.[1] This initiative seeks to clarify the general regime applicable to stock options while introducing a new, dedicated regime for young innovative companies, with the aim of enhancing Luxembourg's attractiveness for talent recruitment and retention.
The Existing Regime
Under the current rules, stock options granted to employees give rise to a taxable benefit in kind, generally assessed at the time of grant for freely negotiable options or at the time of exercise for non-freely negotiable options, based on the estimated realisation value of the options or underlying shares, determined through a recognised valuation method.[2]
The valuation exercise is often complex and costly for unlisted companies, and it exposes employees to a tax charge even where no liquidity event has yet occurred.
Key Features of the Draft Law
The Draft Law maintains and clarifies, in a new dedicated article, the general regime applicable to stock options granted by any employer, regardless of size or incorporation date, while introducing a new, more favourable regime for options granted by young innovative companies. It distinguishes between two types of arrangements:
General regime stock options:
The general regime concerns options whether freely negotiable or not, granted by an employer or a related enterprise to its employees.
Under the general regime, the benefit in kind continues to be taxed at grant (for freely negotiable options) or at exercise (for non-freely negotiable options), based on the estimated realisation value less the price paid.
However, where the underlying shares are subject to a lock-up period, it is now subject to a new flat 5% per year discount (capped at 20%).[3]
Young innovative company stock options:
The new regime introduces an advantageous regime for options granted by a "young innovative company". It consists of an entity that: [4]
- is a less than ten years old Luxembourg company fully subject to tax (or an EEA tax resident company with a Luxembourg permanent establishment),
- employs fewer than 150 employees, and
- does not exceed a EUR 30,000,000 balance sheet or turnover threshold,
- fulfils certain conditions relating to innovative activity (inter alia at least two full-time employees, expenses in R&D represent at least 15% of the general expenses).
Where the employer elects to apply the new regime, the benefit in kind arising on exercise of the options is valued at zero, meaning no tax is due at exercise. Instead, taxation is deferred to the moment of disposal of the underlying shares, with the resulting gain taxed as extraordinary income at one quarter of the employee's global tax rate.[5]
To benefit from the new regime for young innovative companies, the options must be non-freely negotiable, granted to an employee who does not hold (and has not held in the preceding 24 months) more than 25% of the capital, voting rights or profit entitlements of the employer or group, and must not be granted in substitution for any part of the employee's ordinary remuneration.[6]
Once adopted, the Draft Law should apply to options granted as from tax year 2027.[7] By providing a clear and simplified tax framework for equity-based incentives thatdefers taxation until an actual liquidity event occurs, it further highlights the attractiveness of Luxembourg as a hub for innovative companies seeking to attract and retain talent.
[1] Draft Law No. 8782 modifying the Luxembourg Income Tax Law of 4 December 1967 (LITL) (Projet de loi n° 8782 portant modification de la loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenu), 1 July 2026.
[2] Draft new Article 104bis LITL.
[3] Draft new Article 104bis, paragraph 2, LITL.
[4] Draft new Article 100bis, paragraph 1, number 6, LITL.
[5] Draft new Articles 100bis and 104ter LITL.
[6] Draft new Article 100bis, paragraph 1, number 1, LITL.
[7] Draft Article 11 of the Draft Law.