On 17 December 2025, the Luxembourg Parliament adopted the law introducing a tax credit for private individuals investing in innovative start-ups (the Law of 19 December 2025, the “Law”). The Law applies as from tax year 2026.
This Law follows Draft Law No. 8526, submitted to the Luxembourg Parliament on 4 April 2025, which intended to introduce a tax credit amounting to 20% of the equity investment made by private individuals in eligible start-up entities, as described in our previous article Subsequently, on 17 June 2025, the Luxembourg Council of State issued its opinion on the Draft Law, raising a number of constitutional and practical issues, which were analysed in our October article
As adopted, the Law largely reflects the structure and mechanics of the Draft Law, while incorporating certain amendments following the Council of State’s opinions. This article summarises the final regime and highlights the main changes compared to the Draft Law.
Overview of the final regime
Eligible taxpayers and investments
The tax credit is available to Luxembourg resident individuals and assimilated non-resident individuals taxable in Luxembourg. Professional investments including investments made through an enterprise are excluded so that, in a nutshell, the tax credit is only made available to taxpayers acting in the context of the management of their private wealth. The founders of the start-up entity as well as any person in a subordinate relationship are excluded from the regime.
Eligible investments must be made in cash, either upon incorporation or during a subsequent share capital increase, and any subscription and payment must take place in the same tax year.
The tax credit amounts to 20% of the qualifying investment (capital and share premium) with a maximum per tax year of EUR 100.000. Any excess amount is not reportable. Where the tax credit (within this cap) exceeds the income tax due for the year, the excess is non-refundable but may be carried forward to subsequent tax years.
The investment must not result in a participation exceeding 30% of the share capital of the start-up entity. In addition, the maximum amount of capital raised from eligible taxpayers is capped at EUR 1.5 million per start-up entity.
Eligible start-up entities
Form and tax regime
The start-up entity must be either:
- A fully taxable Luxembourg resident entity; or
- A company resident in another EEA Member State, fully taxable to a tax corresponding to Luxembourg corporate income tax and carrying out its innovative activity through a Luxembourg permanent establishment.
Where the tax credit is requested for an investment in a capital company or cooperative company resident in another EEA Member State with a Luxembourg permanent establishment, the innovative activity and exclusion conditions (relating to law firms and audit/accounting firms) must be met only at the level of that permanent establishment.
Where the tax credit is requested for an investment in a Luxembourg resident entity with a foreign permanent establishment, the innovative activity condition must be met only at the level of the head office.
Newly formed
At the end of the tax year for which the tax credit is requested, the start-up entity must have been in existence for less than 5 years.
Size Requirements
The start-up entity must have less than 50 employees and either:
- a total balance sheet not exceeding EUR 10,000,000; or
- turnover not exceeding EUR 10,000,000.
These conditions must be met at the end of the financial year ending during the tax year for which the tax credit is requested, or in the case of a start-up entity formed during the tax year for which the tax credit is requested, at the end of the first financial year.
Group membership
Where the start-up entity is part of a group, the size condition must be assessed at group level. Each entity of the group must have been formed for less than five years and compliance with the size condition must be certified by an auditor or chartered accountant.
For the purposes of this requirement, the group comprises the entity and all partner enterprises or linked enterprises within the meaning of Annex I, Article 3 of EU Regulation No. 651/2014.
Innovative activity
The start-up entity must be engaged in an innovative activity.
This condition is met where:
- at least 2 persons work full-time for the entity (not necessarily employees, managers/directors are included but external contractors are excluded); and
- during at least one of the three financial years preceding the investment, at least 15% of the entity’s operating expenses were dedicated to R&D (condition to be realised within the first year if the investment takes place the year of formation).
The eligible R&D expenses exclude subcontracted activities, and compliance with the R&D expense condition must be certified by an auditor or chartered accountant.
Key changes from the Draft Law
Definition of “associated enterprises"
The Council of State formally opposed the definition of group relationships set out in the Draft Law, considering it circular and unclear. As adopted, the Law addresses this concern by expressly referring to the definition of “partner” (entreprise partenaires) and “related” (entreprises liées) contained in Annex I, Article 3 of Regulation (EU) No 651/2014.
Direct holding vs. tax-transparent vehicles
Under the Draft Law, the tax credit was limited to direct shareholdings, excluding any indirect investment, including through tax-transparent entities.
Following the Council of State’s opinion, the Law now allows investments made through tax-transparent vehicles to qualify, provided that the investment conditions are met, in proportion to the investor’s fraction held in the invested net assets. For these purposes, such holdings are treated as direct holdings.
This amendment addresses the Council of State’s concerns regarding the principle of equality before the law.
Timing of capital contributions
The requirement that capital contributions be fully paid within the tax year has been retained, despite the Council of State’s concerns that this condition may be restrictive in practice and suggested a 12-month payment period from the subscription date.
Innovation requirement
While the Council of State raised concerns regarding potential duplication with other existing certification related to innovation regimes (i.e., Draft Law No. 8314, enacted on 13 June 2025), the Law maintains the innovation criteria and certification mechanism as initially foreseen, with some drafting adjustments.
Employee and founder exclusion
The tax credit remains unavailable to the founders of the start-up entity as well as any person in a subordinate relationship during the relevant tax year. Despite the Council of State’s view that this exclusion may be disproportionate, the legislator chose to retain this restriction in the Law.
Ownership cap and investment ceiling
The regime retains the 30 % ownership cap per investor and the EUR 1.5 million cap per start-up entity is confirmed. In line with the Council of State’s opinions, the Law clarifies that capital contributions without issuance of shares (e.g., account 115 contributions) are excluded from the scope of the tax credit.
Sectoral exclusions
The Council of State pointed out that the Draft Law excluded chartered accountants and audit firms, but did not expressly exclude accountants, which could raise issues under the principle of equality before the law. As adopted, the Law clarifies this point by expressly excluding audit firms, chartered accountants and accountants.
Compliance and documentation requirements
The tax credit must be claimed through the annual income tax return.
The documentation to be attached includes:
- a certificate issued by the start-up confirming the capital paid up, the percentage held by the taxpayer and the capital subscribed by eligible investors; and
- a certificate confirming that the start-up entity meets the eligibility conditions.
The taxpayer must commit to hold the shares for a minimum period of 3 years, with annual documentation through the tax return. Failure to meet the holding requirement results in a retroactive adjustment, subject to limited statutory exceptions (e.g., bankruptcy, disability).
Conclusion
The Law of 19 December 2025 introduces a tax measure aimed at facilitating the financing of innovative start-ups by private individuals. While the final regime remains largely aligned with Draft Law No. 8526, it incorporates several targeted amendments following the Council of State’s opinions.
Nevertheless, the regime continues to be subject to a significant number of conditions. As already noted by the Council of State during the legislative process, these conditions may limit the practical scope of the measure considering its intended objective.
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