The Luxembourg Government filed Draft Law No 8782 (the "Draft Law") with the Luxembourg Parliament (Chambre des Députés) on 1 July 2026, proposing a comprehensive reform of the tax regime applicable to employee stock option plans under the Luxembourg Income Tax Law of 4 December 1967, as amended (the "LITL"). The Draft Law pursues a twofold objective: introducing a new favourable tax regime for stock option plans of innovative start-ups and scale-ups, and codifying the general rules applicable to all other stock option plans in a dedicated provision of the LITL. The Draft Law was approved by the Government in Council on 26 June 2026 upon proposal of the Minister of Finance.
The Draft Law is part of a broader policy agenda aimed at strengthening Luxembourg's attractiveness for innovative companies. It implements the fifth measure of the Government's "10 Action Points for Start-ups" plan presented in March 2025, and is consistent with the European Commission's "Blue Carpet" initiative and its recent EU Inc. proposal (i.e. the proposed new pan-European corporate form designed to facilitate cross-border operations for SMEs), both of which advocate for taxation of employee stock options only at the time of the disposal of the underlying shares.
New specific regime for innovative start-ups (Articles 100bis and 104ter LITL)
The centrepiece of the Draft Law is the introduction of a dedicated tax regime for stock option plans of young innovative entities (jeunes entreprises innovantes), referred to as employer entities (entités employeurs). Under this new regime, the only taxable event for the employee benefiting from stock options is the disposal of the shares acquired through the exercise of the options. Neither the grant nor the exercise of the options triggers any tax liability. The benefit in kind resulting from the exercise of the options is assessed on a flat-rate basis at zero euros pursuant to the new Article 104ter LITL. The taxable income upon disposal of the acquired shares is equal to the difference between the sale price of the shares and the exercise price paid by the employee, and is taxed as extraordinary income at one quarter of the overall tax rate (quart du taux global), in the category of miscellaneous income (revenus nets divers). Notably, the general capital gains provisions of Articles 99bis (speculative gains) and 100 (disposal of a substantial participation) LITL are expressly disapplied, meaning that the disposal is taxable under Article 100bis LITL irrespective of the employee's participation percentage or the holding period of the shares.
This regime is available on an opt-in basis, with the employer making the election for each plan individually. Employer entities wishing to apply the regime to options granted to their employees must transmit a detailed electronic notification to the competent tax office (bureau d'imposition RTS) by 1 March of the following year. Failure to comply with these reporting obligations results in the non-application of the specific regime.
In order to qualify as an eligible employer entity, the company must cumulatively satisfy a number of conditions at the end of the financial year preceding the grant of the options: (i) it must be a capital company or cooperative, fully taxable in Luxembourg or in another EEA Member State with a Luxembourg permanent establishment; (ii) it must have been incorporated less than ten years prior; (iii) it must employ fewer than 150 employees; (iv) its total balance sheet or turnover must not exceed EUR 30 million; (v) it must carry out innovative activities, evidenced by R&D expenditure representing at least 15% of total operating expenses in at least one of the three preceding financial years, as certified by an approved auditor or chartered accountant; and (vi) it must not be active in certain excluded sectors, including legal services, audit, real estate, regulated investment vehicles and listed companies. Where the employer entity is part of a group, the size conditions are assessed at group level.
In order to qualify as an eligible employer entity, the company must cumulatively satisfy the following conditions at the end of the financial year preceding the grant of the options:
It must be a capital company or cooperative, fully taxable in Luxembourg or in another EEA Member State with a Luxembourg permanent establishment;
It must have been incorporated less than ten years prior;
It must employ fewer than 150 employees;
Its total balance sheet or turnover must not exceed EUR 30 million;
t must carry out innovative activities, evidenced by R&D expenditure representing at least 15% of total operating expenses in at least one of the three preceding financial years, as certified by an approved auditor or chartered accountant; and
It must not be active in certain excluded sectors, including legal services, audit, real estate, regulated investment vehicles and listed companies.
As regards employees, the options must be non-freely negotiable, must not be granted in substitution of existing remuneration, and the beneficiary must not hold, directly or indirectly, more than 25% of any of the capital, voting rights or profit rights of the employer entity (or any entity within its group) at the date of grant or during the preceding 24 months.
Clarification of the general regime (Article 104bis LITL)
For stock option plans that do not meet the conditions of the new specific regime, or where the employer has not opted in, the Draft Law introduces a new Article 104bis LITL codifying the general rules previously set out in administrative circulars. Freely negotiable options are taxed as employment income at the time of grant, based on the difference between the market value (or estimated realisable value) of the options and the amount paid by the employee. Non-freely negotiable options are taxed at the time of exercise, based on the difference between the market value (or estimated realisable value) of the underlying shares and the exercise price. Where the shares are subject to a lock-up period, a flat-rate discount of 5% per year of lock-up (capped at 20%) is applied to reduce the taxable benefit. In both cases, the benefit is treated as salary income subject to wage tax withholding at the marginal rate. Any subsequent capital gain realised on the disposal of the shares remains subject to the general provisions of Articles 99bis and 100 LITL, as applicable.
Entry into force and practical implications
The Draft Law will apply to options granted from tax year 2027 onwards, regardless of whether the grant is made under a new or an existing stock option plan. The legislative procedure now continues with a request for the opinion of the Council of State (Conseil d'État).
The proposed reform, if adopted, would not only offer increased legal certainty, but also represent a material improvement for Luxembourg's start-up and scale-up ecosystem. By deferring taxation to the moment of disposal, eliminating the potential need for complex valuations at exercise, and applying a reduced tax rate, the new specific regime is designed to address the key pain points that have historically limited the effectiveness of stock option plans for innovative companies.
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