Luxembourg publishes legislation overhauling tax treatment of employee stock option plans: a landmark reform for the innovation ecosystem

The new rules would apply to options granted as from the 2027 tax year and amend the Income Tax Law of 4 December 1967 as amended (L.I.R.).

Background and policy rationale

This bill of law (projet de loi) forms part of the government’s broader start-up agenda. It is the second pillar of a coherent fiscal strategy for innovation, following the introduction of the start-up tax credit by the law of 19 December 2025, and directly implements the fifth of the “10 action points for start-ups” plan presented by the government in March 2025.

The diagnosis is widely shared at European level: innovative young companies struggle to recruit and retain highly skilled talent, as they cannot match the salary levels offered by larger, established firms in their early stages. Employee equity participation mechanisms are a natural answer to this constraint — but they need to be underpinned by a clear, predictable tax framework adapted to the realities of these companies. This is precisely what the bill of law seeks to deliver, aligning Luxembourg with the direction set by the EU Commission, notably through its “Blue Carpet” initiative and the proposed EU Inc. framework, which also advocates for taxation solely at the point of sale.

1. New specific regime for innovative young companies (Articles 100bis and 104ter L.I.R.)

The centrepiece of the reform is the introduction of a new Article 100bis L.I.R., read in conjunction with a new Article 104ter L.I.R., establishing a derogating tax regime reserved for stock option plans granted by eligible “employer entities”.

Eligibility conditions for employer entity

To benefit from the regime, the employer entity must satisfy all the following criteria, assessed at the close of the financial year immediately preceding that in which the options are granted:

• Age criterion: incorporated for fewer than ten years (assessed from the date of registration in the Trade and Companies Register (RCS)).
• Headcount criterion: fewer than 150 employees (measured in full-time equivalent).
• Financial criterion: balance sheet total or turnover not exceeding EUR 30 million (both thresholds must be exceeded simultaneously to exclude the entity).
• Innovation criterion: the entity must have dedicated at least 15% of its operating expenses to research and development (R&D) in at least one of the three preceding financial years — a threshold that must be certified by an approved statutory auditor (réviseur d’entreprises agréé) or a chartered accountant.
• Minimum staffing: at least two persons (full-time equivalent) working for the entity.
• Legal form: capital company or cooperative (either resident in Luxembourg or elsewhere in the EEA with a Luxembourg permanent establishment).
• Nature of options: only non-freely transferable options (options non librement négociables), i.e. options that are neither listed nor freely assignable, qualify under the start-up-specific regime.

Certain sectors are excluded, including law firms, audit and accounting firms, real estate companies, SICARs, listed entities and companies resulting from mergers or demergers. Where the employer entity is part of a group, the headcount and financial criteria are assessed at consolidated group level, with mandatory certification by a statutory auditor or chartered accountant.

Notably, unlike the start-up tax credit under Article 154quaterdecies L.I.R., the bill of law does not exclude entities that have distributed dividends or reduced their share capital since incorporation — a pragmatic adaptation reflecting the different objectives of the two regimes.

Conditions applicable to employee beneficiary

The employee must receive employment income within the meaning of Article 95 L.I.R. from the employer entity. The employee must not hold, directly or indirectly, more than 25% of the capital, voting rights or profit rights of the entity (or of any other group entity) — either on the grant date or at any point during the preceding twenty-four months. Individuals already holding a significant stake are therefore explicitly excluded from the regime. In addition, options may not be granted in substitution for all or part of the employee’s existing annual remuneration.

A structurally simplified tax mechanism

The reform introduces a fundamental change to the tax treatment across the full life cycle of an option plan:

• Grant of options: no taxation — no taxable event.
• Vesting: no taxable event.
• Exercise of options: the benefit in kind is valued at a lump-sum amount of zero euros (Article 104ter L.I.R.) — no tax is due at this stage, even if the fair market value of the shares significantly exceeds the exercise price.
• Disposal of shares: the taxable gain equals the difference between the disposal price and the exercise price paid by the employee and is taxed at one quarter of the overall rate (as extraordinary income under Article 132 L.I.R.).

This treatment marks a structural deviation from the general tax regime, under which the benefit in kind arising on the exercise of non-freely transferable options is taxable at the point of exercise — generating a tax liability at a time when no liquidity has yet been realised by the employee and when the risk of loss remains high.

Importantly, the exercise price may be freely determined by the employer entity — including at zero euros — provided it is clearly stated in the option plan. Where the exercise price is set at zero, the full disposal price constitutes the taxable gain.

Practical procedure and employer opt-in

The application of the specific regime is conditional on an express election by the employer entity, made on a plan-by-plan basis. This election is formalised by an electronic filing submitted to the competent RTS tax office before 1 March of the year following the year in which the options were granted, accompanied by a list of beneficiaries and the relevant plan information. Failure to comply with this filing obligation results in the definitive loss of the favourable regime for the plan in question, with automatic reversion to the general regime.

Practical note: the relevant grant date is the date on which options are attributed (grant date), which is distinct from the vesting date. An entity incorporated nine years before the grant date can therefore validly fall within the regime, even if the options only become exercisable after the ten-year existence threshold has elapsed.

Illustrative example

An employer grants 500 non-freely transferable options to an employee on 15 January 2027 with an exercise price of EUR 10 per share. The employee exercises all options on 30 March 2029, when the fair market value is EUR 20 per share, and subsequently sells all the shares on 15 July 2030 at EUR 30 per share.

Under the start-up regime (Articles 100bis/104ter): no tax is due at grant, vesting or exercise. At disposal, the taxable gain is EUR 10,000 (i.e. 500 × (30 – 10)), taxed at one quarter of the employee’s overall rate.

Under the general regime (Article 104bis, further discussed in Section 2): at exercise, the employee is taxed on a benefit in kind of EUR 5,000 (i.e. 500 × (20 – 10)) at the general progressive tax rates. Any subsequent capital gain on disposal (here EUR 5,000, i.e. 500 × (30 – 20)) falls under the general capital gains rules (Articles 99bis/100 L.I.R.).

2. Codification of general regime (Article 104bis L.I.R.)

The bill of law goes beyond the start-up-specific regime. It also clarifies and codifies the general tax regime applicable to stock option plans — which had previously been governed by general tax principles and by the Circular of the Director of Contributions L.I.R. No. 104/2 of 29 November 2017, as repealed and replaced by the Circular of 14 December 2020. These principles are now enshrined directly in a new Article 104bis L.I.R., providing enhanced legal certainty for all stakeholders.

Scope of general regime

The new Article 104bis L.I.R. applies to all subscription or acquisition option plans that do not fall within — or for which the employer has not elected to apply — the specific regime under Articles 100bis and 104ter L.I.R. Its scope is broader: it covers both non-freely transferable options and freely transferable options and is open to any company regardless of size or age.

Key principles codified

The provision draws a distinction based on the nature of the options:

• Freely transferable options (listed or freely assignable): the benefit in kind is taxable at the time of grant. It equals the difference between the market value (or estimated realisable value) of the options at the grant date and the amount paid by the employee. No lump-sum valuation is permitted — the value is determined using a recognised methodology (e.g. Black-Scholes).
• Non-freely transferable options: the benefit in kind is taxable at the time of exercise. It equals the difference between the market value (or estimated realisable value) of the participation interests obtained and the exercise price. A flat-rate discount of 5% per year of lock-up period is available, capped at 20% of the value of the shares, subject to compliance with the employer’s filing obligations.
• Virtual options — i.e. purely contractual rights entitling the beneficiary to a cash payment calculated by reference to the value or performance of the company, without conferring any right to subscribe for or acquire actual participation interests or any shareholder status — are explicitly excluded from both the general and the start-up-specific regimes. Benefits relating to virtual options are taxable under the general L.I.R. rules applicable to employment income, at the time of the cash payment.

In both cases, employer filing obligations are set at 1 March of the year following, respectively, the year of grant (for freely transferable options) or the year of exercise (for non-freely transferable options), submitted electronically to the competent RTS tax office.

Start-up regime vs. general regime: key differences at a glance

Feature	Specific regime for innovative young companies (Art. 100bis / 104ter L.I.R.)	General regime applicable to all companies (Art. 104bis L.I.R.)
Eligible entities	Innovative young companies (< 10 years, < 150 FTEs, balance sheet/turnover ≤ EUR 30m, 15% R&D threshold)	Any company, regardless of size or age
Type of options	Non-freely transferable only	Freely transferable and non-freely transferable
Taxable event	Disposal of shares only	Grant (freely transferable) or exercise (non-freely transferable)
		Subsequently, at disposal of the underlying participation (if any – general capital gains rules)
Tax rate	One quarter of the overall rate (extraordinary income)	Marginal income tax rate (employment income)
Valuation	No valuation required at grant or exercise	Fair market value at grant (recognised methodology, e.g. Black-Scholes) or exercise (fair market value less exercise price if any)
Lock-up discount	N/A (no tax at exercise)	5% per year, capped at 20% (non-freely transferable options only)

The new regime should apply to options granted as from the 2027 tax year. Plans already in place and options granted before that date remain subject to existing rules. Companies considering establishing new plans should begin structuring them now to be positioned to benefit from the new regime from the outset. The bill of law is now subject to the opinion of the Conseil d’État [State Council] and to parliamentary debate, and may be amended during the legislative process.