Luxembourg introduces draft law on the tax treatment of employee stock options
- Articles and memoranda
- Posted 01.07.2026
On 1 July 2026, the Luxembourg government submitted a Bill to Parliament proposing a significant overhaul of the tax treatment of employee stock options (the “Bill”).
The objective is twofold: first, to introduce a specific preferential regime for young innovative companies, and second, to codify and clarify the general tax treatment applicable to stock options more broadly. The initiative forms part of a wider policy effort to strengthen Luxembourg's attractiveness for start-ups and scale-ups and to facilitate the recruitment and retention of highly qualified talent.
The proposed framework can be read through two separate lenses: a special regime for qualifying young innovative companies and a general regime applicable to stock options that do not fall into the scope of the special regime.
Key takeaways of the special regime for qualifying young innovative companies
- Under this regime, taxation would in principle no longer arise at grant or at exercise. Instead, the taxable event would occur only upon the sale of the underlying shares acquired by the employee.
- In practical terms, the taxable income would correspond to the capital gain realised on disposal, i.e. the difference between the sale price of the shares and the amount paid by the employee to acquire them.
- That gain would be taxed as extraordinary income at one quarter of the global tax rate. This approach is intended to align taxation with the moment when the employee actually receives liquidity, while also avoiding the valuation difficulties typically associated with non-listed start-up shares at grant or exercise.
- Access to the special regime would, however, be tightly restricted.
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| - must be less than 10 years old; - has fewer than 150 employees; - and has balance sheet total or turnover not exceeding EUR 30 million; - must carry on an innovative activity, which notably requires at least two full-time equivalent employees and R&D expenditure representing at least 15% of operating expenses in the conditions set out in the draft law. | ||
| Those innovation and size criteria are technical and may, in certain cases, need to be supported by certification from an approved statutory auditor or accountant, in particular where group-level tests are relevant. Companies will therefore need to assess eligibility carefully rather than assume that the regime is available as soon as they operate in an innovative environment. | ||
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| - the options must be non freely negotiable; - the options must be granted to employees receiving employment income from the employer entity; - the options must not serve as a substitute for cash remuneration; - the beneficiary must not hold, at grant or during the preceding 24 months, more than 25% of the capital, voting rights or profit rights in the employer entity or any group entity. | ||
- The special regime is also subject to several exclusions and safeguards. In particular, it would not apply to certain regulated or excluded sectors, listed companies, SICARs, real estate businesses and certain professional services firms such as law firms, audit firms and accountancy firms. Entities resulting from certain mergers or demergers are also excluded.
- The special regime is not automatic. It would apply only if the employer opts into the regime and complies with the related filing and reporting formalities.
Key takeaways of the general regime for stock options
Alongside this new special regime, the Bill would also insert into the Luxembourg Income Tax Law a new statutory framework for the general tax treatment of stock options. This largely codifies the principles already applied in practice, while improving legal certainty.
- Under the proposed general regime, a distinction would be made between freely transferable options and non-freely transferable options.
- Freely transferable options would be taxable at grant, with the taxable benefit corresponding to the difference between the market value, or estimated realisable value, of the options at that time and any amount paid by the employee to acquire them.
- By contrast, non-freely transferable options would be taxable at exercise. In that case, the taxable benefit in kind would be equal to the difference between the market value, or estimated realisable value, of the underlying shares at exercise and the exercise price. Where the acquired shares are subject to a lock-up period, a flat-rate discount of 5% per year of lock-up would be available, capped at 20%, provided the employer complies with the relevant reporting requirements.
Another point worth noting is that virtual options appear to fall outside the statutory option definitions addressed by the Bill. This may be relevant for employers that use phantom equity or cash-settled incentive arrangements rather than genuine share-based options.
The Bill also introduces employer reporting obligations for both regimes. As a general rule, the relevant information would need to be filed electronically with the competent wage tax office before 1 March of the year following the relevant tax year. The content of the reporting differs depending on whether the employer applies the general regime or opts for the special regime for qualifying young innovative companies.
The new rules are intended to apply to options granted from tax year 2027 onwards. The Bill is currently at draft stage and may still evolve during the legislative process.
