Luxembourg takes another important step toward strengthening its start-up ecosystem

Luxembourg further strengthens its competitive landscape with the proposal of a new dedicated tax regime for employee stock option plans in young innovative companies.

In context

This new draft bill is part of a broader effort to strengthen the attractiveness of Luxembourg for both employees and growing businesses. In recent years, both categories have already benefited from significant reforms.

By way of illustration, on the employee side, the law of December 20, 2024 amended the tax regime applicable to qualified impatriate employees, with the objective of attracting and retaining talent in the Grand Duchy and thereby enhancing the attractiveness of Luxembourg companies. This regime introduced a flat-rate exemption of 50% on gross annual remuneration up to EUR 400,000 for impatriates that meet the relevant conditions.

Similarly, on the startup side, an attractive regime was introduced at the end of 2025. The law of December 19, 2025 providing, as from 2026, for a new tax credit for individuals investing in startups amounting to 20% of the eligible investment, subject to an annual tax credit up to EUR 100,000 per tax year.

These measures are part of the “10 Action Points for Start-Ups” presented by the Ministry of the Economy and the Ministry of Finance in March 2025. This roadmap sets out concrete and specific measures aimed at continuing to enhance the attractiveness and development of the start-up and scale-up ecosystem in Luxembourg, in particular in strategic sectors of economic diversification.

More generally, this approach forms part of a wider effort to preserve the competitiveness and attractiveness of the European market, with initiatives such as the EU Startup and Scaleup Strategy published in May 2025 or the EU Inc. Framework proposal of March 2026. These initiatives aim to improve the conditions for the creation and growth of businesses within the EU and affirm the competitiveness of the internal market. The recent Taxation omnibus proposal of late June 2026 confirms this ambition.

Taken together, these developments illustrate Europe’s determination to remain competitive and to provide solutions adapted to the needs of different stakeholders, in which Luxembourg is expected to continue to play a forefront role.

It is in this context that the proposed reform of the employee stock option plan regime was published through bill n°8782, submitted on July 1, 2026 (the “Bill”). This initiative aims to modernize the tax treatment of stock options granted to employees by establishing a specific tax regime reserved for stock option plans granted when certain conditions are met. The Bill needs now to complete the relevant parliamentary proceedings, and if adopted, the new rules would apply to options granted as from the 2027 tax year and would amend the Luxembourg Income Tax Law of December 4, 1967 (“LITL”) accordingly.

In short

The Bill introduces two complementary sets of provisions:

For young innovative companies: a new stock option plan specific regime

The Bill introduces, through new Articles 100bis and 104ter LITL, a tailored tax regime specifically designed for stock option plans granted by eligible employer entities. The main features of this system are the following:

• Taxation deferred until liquidity is realized – the Bill proposes to consider that the sole event capable of generating a tax charge for the employee is the moment of disposal, i.e., the alienation of the participation interests, and not the moment of grant or the moment of exercise of the option;
• A favorable tax treatment on exit – any capital gains resulting from the alienation of the participation interests, which is equal to the difference between the disposal price of the participation interests and the amount paid by the employee for their acquisition (i.e., the exercise price of the options), is taxable at one quarter of the global tax rate;
• A targeted regime for innovative growth companies – employees potentially eligible must be employed by a company considered as innovative, i.e., it must have incurred research and development (“R&D”) expenditure representing at least 15 percent of operating expenses incurred during at least one of the last three financial years. This R&D requirement is supplemented by criteria relating to the size and duration of existence of the entity;

In other case: codification of the general regime for a greater legal certainty

In addition to specific regime for young innovative companies, the Bill clarifies the general law regime applicable to other employers (or young innovative companies that have not elected to apply the specific regime). In order to enhance legal certainty and improve the legibility of the rules, it is proposed to consolidate these tax provisions directly into a specific article of Luxembourg tax law (Article 104bis LITL).

In detail

What is a stock option?

A stock option plan is a mechanism of remuneration in kind by which an employer grants an employee the right to subscribe to or acquire shares in the employer at a pre-determined price (the exercise price), at a future date and subject to certain conditions. By offering their employees the possibility to subscribe, with favorable terms, to shares in the employing company, companies encourage employees to remain within the business, which allows them to retain their talent or facilitate recruitment through a win-win mechanism.

The Bill identifies the key phases in the life cycle of a stock option plan: (i) the grant of the options; (ii) the exercise of the options by the employee in order to become the holder of a participation in the employer; and (iii) the disposal of the acquired participation.

The former regime and the current state of the law

Pending the potential adoption of the Bill, the tax treatment of stock option plans in Luxembourg currently relies on a combination of the general rules of the LITL, as well as the clarifications derived from case law and doctrinal interpretation. Under this framework, there is a fundamental distinction between two categories of options:

• Freely transferable options
  Freely transferable options are those that may be transferred by employees as from their issuance and that cannot be cancelled after they are issued, even in the event of the employee’s dismissal. In such case, the value of the option itself constitutes the immediately taxable benefit, which means that the option is taxable on the day of its grant. The amount of the benefit is determined by subtracting the price paid by the employee for the acquisition of the option from the market value of the option. In practice, the estimated realizable value of freely transferable options that are not listed on a stock exchange may be determined using the method developed by American economists Myron Scholes and Fisher Black or another comparable financial valuation method. In the absence of such a valuation, the value of the option is presumed to be equal to 30% of the value of the underlying share on the grant date.
• Non-freely transferable options
  They are taxable at a later stage, upon exercise, after the application of a discount. Because of their non-negotiable nature, such options do not immediately enrich the beneficiary but do so only at a later point in time. Accordingly, taxation arises only upon exercise of the options (the acquisition of the shares). The benefit is calculated by deducting the acquisition price of the share from its actual value. When these participation interests are subject to a period of unavailability, a flat-rate discount of 5% per year of unavailability is applied, capped at 20% of the market value of the share.

This left the LITL in a situation where the applicable rules, although broadly established in practice, were not expressly codified in legislation. This lack of codification created uncertainty, particularly for young companies that rely heavily on equity-based compensation as a substitute for competitive cash salaries.

The new specific regime for young innovative companies

According to the Draghi report¹, European innovative companies face significant difficulties in developing, which leads many young innovative businesses to seek funding outside the EU and often relocate to the United States. In addition to financing challenges, they struggle to recruit the profiles needed for growth because, in their early years, they lack the liquidity to offer salaries comparable to large enterprises. As a result, start-ups and scale-ups increasingly use equity participation mechanisms to provide supplementary remuneration, in order to attract and retain key employees.

The Bill thus aims to provide a clear and well-known tax regime that is adapted to the constraints and specificities of these companies and their ecosystem, in order to make such stock option plans attractive and enable them to achieve their objective of attracting and retaining talent.

Eligibility conditions regarding the employer entity

The new Article 100bis LITL proposed by Article 4 of the Bill sets out the conditions for benefiting from the regime. The employer entity must satisfy all of the following criteria, assessed at the close of the financial year immediately preceding the year in which the options are granted:

• The employer entity must have been incorporated for fewer than ten years, assessed from the date of registration in the Trade and Companies Register;
• The entity must employ fewer than 150 employees on a full-time equivalent basis;
• The balance sheet total or turnover must not exceed EUR 30,000,000;

These three cumulative conditions must be completed either at the end of the first financial year or at the end of the tax year in which the options are granted, whichever of these two events occurs first. If the entity is part of a group, these three are assessed at group level and conditions (ii) and (iii) must be certified by an approved statutory auditor or a chartered accountant.

• The entity must carry on an activity of an innovative nature;

An entity is considered to exercise such an activity where at least two persons work full time for the entity and the entity has incurred R&D expenditure representing at least 15% of its total operating expenses at the close of at least one of the three financial years immediately preceding the financial year in which the options are granted. Where options are granted during the first financial year of the entity, the 15% threshold must be met either at the end of that first financial year or at the end of the tax year in which the options are granted, whichever occurs first. The 15% threshold must be certified by an approved statutory auditor or a chartered accountant. For this purpose, eligible R&D expenditure includes personnel costs allocated to R&D work together with the costs of equipment used for R&D.

• The employer must be a fully taxable collective entity resident in Luxembourg, or a fully taxable collective entity resident in another European Economic Area (“EEA”) member state with permanent establishment in Luxembourg.

If the employer is an EEA resident capital company or cooperative with a Luxembourg domestic permanent establishment, the innovative activity and exclusion described below are applied only at the level of that permanent establishment. If the employer is a Luxembourg-resident collective entity with a permanent establishment abroad, the condition regarding the innovative activity is applied only at the level of the head office in Luxembourg.

Certain sectors are excluded from eligibility, including law firms, audit and accounting firms, real estate companies, SICARs, listed entities, and companies formed through mergers or demergers.

Where the employer entity forms part of a group, the three first conditions are to be verified at group level, and the headcount and financial criteria must be certified by an approved statutory auditor or a chartered accountant.

Eligibility conditions regarding the employee

The employees willing to benefit from the favorable tax treatment provided for by Articles 100bis and 104ter LITL must receive income from employment within the meaning of Article 95 LITL, paid by the employer entity. In addition, those employees must not hold, directly or indirectly, at the time of grant or during the 24 months preceding such grant, a participation exceeding 25% of the capital, voting rights or profit rights of the employer entity or of any other entity within the group to which the employer entity belongs.

This 25% participation threshold is designed to exclude from the benefit of the new tax regime any employee who already holds a significant participation in the employer entity or in another entity of the relevant group at the time of grant (or in the preceding 24 months), given that such persons already benefit from an economic incentive by virtue of their shareholder status.

Furthermore, an anti-avoidance rule is proposed to prevent options from being granted to employees in substitution for all or part of their annual remuneration. This criterion will be deemed to be satisfied as long as an employee to whom options have been granted continues to receive at least the same annual remuneration as that received in the year preceding the year of grant of the options.

It should also be noted that the definition of “options” under Articles 100bis and 104ter LITL is limited to options to receive shares, i.e. capital instruments, and expressly excludes so-called “virtual options,” which are purely contractual rights to a cash payment calculated by reference to the value or performance of the company, without the grant of actual shares or the conferral of shareholder status. Under the principles of the LITL, taxation on virtual options occurs in the year in which the employee receives the cash payment.

Eligibility conditions regarding the options

The proposed new specific regime is accessible only to option plans under which employees of the employer entity are granted non-freely transferable options giving them the right to subscribe to or acquire, subject to certain conditions, participation interests in the employer entity or in an entity of the group to which the employer entity belongs. Non-freely transferable options are defined as options which are neither listed on a stock exchange nor freely assignable.

The limitation to non-freely transferable options is necessary for young innovative companies, which are not listed on a stock exchange and whose shares benefit from no organized secondary market. It thus makes it possible to avoid the risks of early dilution of capital while taking into account their structural illiquidity, which is incompatible with the free assignment of option rights.

In addition, the options must be granted by the employer or by an entity within the group to which that employer belongs, and the options must relate to shares in the employer or in an entity within the group to which the employer belongs.

The tax mechanism for stock option plans in young innovative companies

If the Bill is adopted in its current form, and provided the relevant conditions of the specific regime are fulfilled and the option for the regime is made, the tax treatment of the stock options would be as follows:

• The grant of the options (or the acquisition of these options) is not a taxable event;
• The exercise of the options is a taxable event and the benefit in kind is taxed, but this benefit in kind is subject to a lump-sum valuation at EUR 0; 

At these first two stages, no taxation is effectively triggered.

• The disposal of the shares acquired through the options gives rise to taxation calculated on the difference between (i) the sale price of shares, and (ii) the amount paid by the employee for their acquisition.

The zero-euro evaluation is justified by the fact that the value of young innovative companies is less an intrinsic value than a market price resulting from a negotiation, incorporating strongly uncertain assumptions and a high risk of failure since a significant proportion of these companies do not reach maturity. The benefit in kind must of course be declared by the employer in the context of the monthly salary calculation.

This approach also has the advantage of removing the need to determine the market value of the participation interests at the time of grant or exercise of the options. This is a welcome development for start-ups, whose valuation typically presents considerable practical challenges.

Freedom to set the exercise price

One particularly noteworthy aspect of the potential new regime concerns the exercise price as the Bill establishes no rule as to the modalities for determining the exercise price, which may therefore be set freely. Employer entities are thus free to determine this price according to their own criteria, or even to set it at zero euros; provided that the exercise price appears clearly in the option plan. Where the exercise price is set at zero, the full disposal price will constitute the taxable gain.

This is a meaningful degree of flexibility, particularly for early-stage companies. It removes the need for a formal valuation exercise at the time of grant, reducing implementation costs and eliminating risks of legal uncertainty associated with such a valuation.

Specific regime option & general regime

• Election of the specific regime
  The application of the described specific regime is optional and does not apply automatically. It must result from an election as provided for in what would be Article 104ter if the Bill were adopted.

  If this election is not made, a general regime applies which substantially reproduces most of the principles set out in the repealed Circular of the Director of Contributions n°104/2 of 29 November 2017, except those relating to the lump-sum valuation for freely transferable options which remain inapplicable.

• Formal introduction of the general regime
  The general regime (proposed Article 104bis LITL) has a broader scope of application than the specific regime as it applies to options granted by any company, regardless of its size or date of incorporation, provided it is the employer of the relevant employee or a related company.

The general regime draws a distinction based on the nature of the options:

• Freely transferable options (listed or freely assignable): the benefit in kind, taxable at the time of grant, is equal to the difference between (i) the market value or, failing that, the estimated realizable value of the options at the time of grant, and (ii) the amount paid by the employee for the acquisition of the options. The estimated realizable value of unlisted options is determined using a recognized valuation methodology; and
• Non-freely transferable options: the benefit in kind, taxable at the time of exercise, is equal to the difference between (i) the market value or the estimated realizable value of the participation interests obtained at the time of exercise and (ii) the exercise price of the options. Participation interests subject to a lock-up period benefit from a flat-rate discount of 5% per year of lock-up without however exceeding 20% of the market value or estimated realizable value of the participation interests obtained; provided that supporting documents are submitted.

Thus, under this general regime, the taxable event is either the grant of the options for freely transferable options or the exercise of the options for non-freely transferable options. The related income is treated as employment income, and thus taxed at the employee’s marginal income tax rate.

Conclusion

The Bill marks an expected clarification in Luxembourg’s tax treatment of equity-based compensation, and a significant milestone for young innovative companies. By fully deferring taxation to the moment of disposal, taxing the gain at one quarter of the global rate for stock option plans in young innovative companies and clarifying the general regime in Article 104bis LITL, it removes key structural obstacles for start-ups and scale-ups competing for talent and ensures legal certainty for all stakeholders. This initiative supports the diversification of the Luxembourg economy and reinforces the Grand Duchy’s attractiveness in Europe and beyond.

The Bill will now follow the legislative process before the Chamber of Deputies (Chambre des députés) and the Council of State (Conseil d’État) of the Grand Duchy of Luxembourg, and market actors should monitor its progress very closely.

The co-author Anthony Seguin (White & Case, Luxembourg) contributed to the development of this publication.

^{1 The future of European competitiveness. Part A: A competitiveness strategy for Europe, September 2024, pp. 6–9.}

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