Executive summary

The Law of 19 December 2025 amending the Income Tax Law (Law) introduces a Start-up Tax Credit for investments made by individual taxpayers in Start-up Entities.

The Law establishes a Start-up Tax Credit of 20% of the investment amount, with a cap of €100k per tax year. For an investment to be eligible for the credit, (1) the company in which the investment is made must meet specific criteria to be considered a "Start-up Entity" (including innovation, size and operational duration requirements) and (2) the investor must fulfill the eligibility requirements (including a minimum investment amount and a certain holding period for shares acquired in the entity).

This credit will be available starting from the 2026 tax year.

Detailed discussion

Overview

Resident and assimilated nonresident (at least 90% of worldwide income is subject to tax in Luxembourg) individual taxpayers are eligible for the Start-up Tax Credit for direct investments in new shares in the share capital of Start-up Entities, either at the time of incorporation or during a capital increase. To qualify for the credit, taxpayers must meet certain requirements and request the credit.

Start-Up Entity eligibility

To be eligible for the Start-up Tax Credit, the taxpayer must invest in a (1) fully taxable resident capital company or cooperative or (2) fully taxable capital company or cooperative resident in another State that is party to the Agreement on the European Economic Area (EEA), subject to a tax corresponding to the Luxembourg corporate income tax, and has a Luxembourg permanent establishment. In addition, the entity must meet the following conditions to be considered a Start-up Entity.

Entity structure and duration: The capital company or cooperative must (1) be established for less than five years, (2) employ fewer than 50 employees, and (3) have a balance sheet total or revenue of €10m or less. If the entity is part of a group, criterion (1) applies to all entities of the group and criteria (2) and (3) must be fulfilled at the group level and certified by an auditor or chartered accountant.

Innovative activity: The entity must engage in innovative activity, which requires (1) at least two persons working full-time for the entity at the end of the relevant financial year and (2) research and development (R&D) expenses representing at least 15% of total operating expenses (to be certified by an auditor or chartered accountant) during at least one of the three financial years preceding the request (for existing entities) or during the first financial year (for newly established entities). R&D is defined as systematic creative work aimed at expanding knowledge and developing new applications. Eligible R&D expenses include personnel costs for employees engaged in R&D and equipment costs used for R&D, calculated pro rata based on the time allocated to R&D activities.

Exclusions: Certain entities are not eligible for the Start-up Tax Credit, including entities that are:

• In sectors that are considered not to have an innovative character (e.g., the construction sector)
• Venture capital companies (société d'investissement en capital à risque, or SICAR)
• Entities with securities traded on a regulated market
• Established through a merger or division, distributed dividends or reduced share capital (except to offset losses)
• Subject to an unexecuted recovery order for illegal state aid
• An undertaking in difficulty within the meaning of European Union legislation

The commentaries to the Law specify that transactions that are part of artificial or circular arrangements used to obtain, as the main purpose or as one of the main purposes, the Start-up Tax Credit, fall under the General Anti-Abuse Rule. These transactions may include investments that are not utilized by the Start-up Entity for its economic development but are returned to the investor via capital reductions, dividend distributions or loans.

Taxpayer eligibility

To qualify for the Start-up Tax Credit, the taxpayer must satisfy the following conditions.

Holding requirements: The taxpayer must commit to directly hold the shares as private investment for a continuous period of at least three years from the end of the tax year for which the Start-up Tax Credit is requested. The holding of the shares through a tax-transparent entity is assimilated to a direct holding in proportion to the fraction held in the net invested assets of that entity.

No employment by Start-Up Entity: The taxpayer must not be an employee of the Start-up Entity during the tax year for which the Start-up Tax Credit is requested.

Not a founder: The taxpayer must not be considered a founder of the Start-up Entity within the meaning of the Luxembourg Company Law (i.e., the persons appearing before the notary and the subscribers to the articles of incorporation of an entity).

Start-up Tax Credit determination

The Start-up Tax Credit is granted to taxpayers based on their total investment in the share capital of Start-up Entities, including any share premium but excluding contributions to account 115 (used for equity contributions without issuance of shares), during the relevant tax year. The credit includes the following conditions and modalities.

Timing of investment: The credit applies for the tax year in which the taxpayer fully pays for the shares (including share premium).

Minimum investment: The minimum investment amount per Start-up Entity per tax year is €10k.

Holding limit: If a taxpayer holds more than 30% of the paid-up share capital of the Start-up Entity post-investment, the portion of the investment exceeding this limit is ineligible for the Start-up Tax Credit.

Investment cap: If the Start-up Entity has received more than €1.5m in total investments since its establishment from taxpayers qualifying for the Start-up Tax Credit, any amounts exceeding this threshold are not considered eligible for the Start-up Tax Credit.

Maximum Start-up Tax Credit: The Start-up Tax Credit for a tax year, per taxpayer, is 20% of the total investment (subject to the above limits) with a cap of €100k (for all investments in Start-up Entities by the taxpayer in a particular tax year). If the maximum credit exceeds the taxpayer's income tax liability for that year, the excess amount is not refundable but can be carried forward to the next tax year.

Assessment-based taxation: The Start-Up Tax Credit must be requested in the annual tax return. Taxpayers that are not otherwise required to file a tax return must continue filing tax returns for the three years following the year for which the tax credit is claimed.

Documentation requirements

Taxpayers must attach specific supporting documents to their income tax return for the tax year for which the credit is claimed, including certifications by the Start-up Entity showing that it complies with the eligibility conditions, holding limit and investment cap.

In annual income tax returns for subsequent tax years, the taxpayer must provide the necessary information to verify compliance with the minimum holding period of three years. Failure to meet this minimum holding requirement will result in corrective taxation for the tax years in which the Start-up Tax Credit was granted, except in case of bankruptcy of the Start-Up Entity, or the taxpayer's death, disability or incapacity to work.

Implications

Taxpayers that could potentially qualify for the new Start-up Tax Credit should consult with their tax advisors to fully understand the change in the law.