Executive summary

On 1 July 2026, the Luxembourg Government submitted a draft law¹ (Draft Law) amending the Luxembourg Income Tax Law.

The Draft Law has two principal objectives: first, to introduce a specific tax regime for certain stock option plans granted by young innovative companies to support the recruitment and retention of highly qualified employees by enabling them to participate in the future value creation of their employer entity without triggering taxation before a liquidity event. If the relevant conditions are met and the employer entity elects to apply the regime, taxation would occur only upon the disposal of the shares acquired through the exercise of the options.

Second, the Draft Law would codify the general rules applicable to employee stock options in general (i.e., not covered by the specific regime), including the taxation of freely negotiable options at grant and non-freely negotiable options at exercise, with a discount applying in case of lock-up periods.

The Draft Law would apply to options granted from the 2027 tax year.

Overview

The Draft Law forms part of Luxembourg's broader policy objective to strengthen the start-up and scale-up ecosystem. The tax regime for stock option plans of young innovative companies follows the recent introduction of a tax credit for investments made by individual taxpayers in eligible start-ups and addresses a different stage of the innovation cycle by supporting young innovative companies in attracting and retaining talent through employee stock option plans.

The Draft Law also clarifies the tax treatment of stock option plans in general, which will apply to stock option plans that do not qualify for the specific young-company regime or for which the employer has not elected to apply the specific young-company regime.

Specific regime for stock option plans of young innovative companies ("specific regime")

The specific regime would apply to plans under which employees of a qualifying employer entity are granted non-freely negotiable options giving them the right to subscribe for or acquire shares or other participation rights in the employer entity or in another entity within the same group. For purposes of the specific regime, the Draft Law defines a group as consisting of the employer entity and all entities that qualify as partner enterprises or linked enterprises of the employer entity within the meaning of Annex I, Article 3 of the European Union's General Block Exemption Regulation.²

The regime requires employing entities to opt in, which triggers certain reporting requirements for them.

Employer entity eligibility

To qualify as an eligible employer entity, an entity (and in some cases the entity's group) must meet conditions as to (1) Luxembourg nexus, (2) size and age, and (3) activities, in addition to (4) not falling under one of the specific exclusions.

Luxembourg nexus: The entity must be either (1) a fully taxable resident capital company or cooperative or (2) a 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 have a Luxembourg permanent establishment.

Entity size and age: The employer entity must (1) have been established for less than 10 years, (2) employ fewer than 150 employees and (3) have a balance sheet total or revenues not exceeding €30m. These conditions generally must be met at the end of the financial year immediately preceding the year in which the options are granted. If the options are granted during the first financial year, the conditions 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. If the employer entity is part of a group, the three criteria must be assessed at the group level and criteria (2) and (3) must be certified by an approved statutory auditor or chartered accountant.

Innovative activity: The employer entity must engage in innovative activity. This requires at least two persons working full-time for the entity at the end of the financial year preceding the year in which the options are granted (for existing employer entities) or at the end of the first financial year or the end of the tax year in which the options are granted, whichever occurs first (for newly created employer entities). The employer entity must also have research and development (R&D) expenses representing at least 15% of total operating expenses in at least one of the three financial years immediately preceding the financial year in which the options are granted. For newly established employer entities, the relevant testing date is the end of the first financial year or the end of the tax year in which the options are granted, whichever occurs first. The 15% R&D threshold must be certified by an approved statutory auditor or chartered accountant. 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 would be excluded, including law firms, audit and accounting firms, entities whose principal corporate object relates to real estate activities, venture capital companies (société d'investissement en capital à risque, or SICAR), entities with securities traded on a regulated market and entities established through a merger or division.

Employee and plan eligibility

To qualify for the new tax regime, the plan must grant non-freely negotiable options (i.e., options that are neither listed nor freely transferable) to employees of a qualifying employer entity entitling them to subscribe for or acquire shares or other participation rights in the employer entity or in another entity of the same group.

Qualifying options: The options must be granted by the employer entity or another entity in the same group. Virtual options generally creating a contractual right to a cash payment linked to the value or performance of the company, without conferring actual shareholder status, are excluded from the definition of qualifying options.

Holding restrictions: The employee must not hold, either at grant or during the preceding 24 months, more than 25% of the capital, voting rights or profit rights of the employer entity or another group entity. The 25% threshold is intended to exclude founders and other persons who already have a significant economic interest in the relevant company or group.

Employment income: The employee must receive employment income from the employer entity.

Anti-abuse condition: The options must not be granted in reduction of the employee's annual compensation, including salary, emoluments and benefits. The commentaries to the Draft Law indicate that this condition is generally deemed satisfied if the employee continues to receive at least the same annual remuneration as the employee had received in the year preceding the grant of the options.

Employer entity option and resulting reporting obligations

The regime only applies if the employer opts in (otherwise, the general regime applies). The option can be made separately per option plan. An employer entity wishing to apply the specific regime must electronically transmit specified information to the competent payroll tax office before 1 March of the year following the tax year in which the options were granted. This information includes a nominative list of employees to whom options were granted, the grant dates, the number of options granted, the exercise price of the options and, where applicable, the group chart.

The employer entity must also keep supporting documentation available for the payroll tax office to verify that the conditions of the specific regime are met. Failure to comply with the reporting obligations would result in the nonapplication of the specific regime, in which case the ordinary regime would apply.

Tax treatment

For qualifying stock option plans, the Draft Law provides that the grant of the options would not be a taxable event for the employee.

Instead, taxation would occur only upon the disposal of the shares acquired through the exercise of the options. The taxable income would be equal to the difference between the disposal price of the shares and the amount paid by the employee to acquire those shares as per the option plan, i.e., the exercise price. The Draft Law does not prescribe a specific way to determine the exercise price. As per the commentaries, the exercise price may be freely set, including at €0, provided it is clearly stated in the plan. The income so determined would be taxed at one-quarter of the employee's global income tax rate (resulting in a maximum rate of approximately 11.45% including the contribution to the employment fund and based on 2026 income tax rates).

Clarification of the ordinary stock option regime

The Draft Law would also introduce a new provision clarifying the ordinary tax regime and employer reporting requirements applicable to stock option plans that do not qualify for the specific regime or for which the employer entity does not elect to apply the specific regime.

For freely negotiable options, the taxable employment benefit would arise when the options are granted. The benefit would be equal to the difference between the stock exchange value or, absent such value, the fair market value of the options at grant (determined in application of a recognized valuation method) and the amount the employee paid to acquire the options.

For non-freely negotiable options, the taxable employment benefit would arise when the options are exercised. The benefit would be equal to the difference between the stock exchange value or, absent such value, the fair market value (determined in application of a recognized valuation method) of the shares acquired upon exercise and the exercise price paid by the employee. If shares acquired upon exercise are subject to a lock-up period, the Draft Law would allow a flat discount of 5% per year of lock-up, capped at 20% of the stock exchange value or estimated realization value of the shares. The benefit of this discount would only be available if the employer entity complies with specific reporting obligations.

Just like for the specific regime, the commentaries to the Draft Law confirm that virtual options are not covered by the definition of options. Cash payments made under virtual option arrangements would therefore remain taxable under the general rules applicable to employment income.

Ordinary regime reporting obligations

For freely negotiable options, the employer entity would be required to report certain information electronically to the competent payroll tax office before 1 March of the year following the tax year in which the options were granted. This information would include a nominative list of employees to whom options were granted, grant dates, number of options granted, amount paid by the employees for the acquisition of the options, the stock exchange value or, absent such value, the estimated realization value of the options at grant and, where applicable, the group chart.

For non-freely negotiable options, the same 1 March reporting deadline applies, but by reference to the year in which the options are exercised rather than the year in which they are granted. The information to be reported is broadly similar, but must also include the number, date and exercise price of the options exercised, the stock exchange value or, absent such value, the fair market value of the shares acquired upon exercise and, where applicable, the elements supporting the application of the lock-up discount.

Entry into force

The Draft Law would apply to options granted from the 2027 tax year. The new rules would apply to options granted from that date, whether under a new plan or under an existing plan.

Implications

The Draft Law will now go through the legislative process, which involves analysis of the text by a dedicated parliamentary commission, collection of opinions from different advisory bodies (most importantly, the Council of State), discussion of and vote on the text in a parliamentary session and finally its publication in the Official Gazette (Memorial). The entire process may take a couple of months.

Employer entities considering the implementation or review of stock option plans should assess whether the specific regime could apply and should review plan design, eligibility conditions, exercise price mechanics, documentation and reporting processes. Companies that do not qualify for, or do not elect to apply, the specific regime should also consider the impact of the codified ordinary regime, including valuation requirements and related reporting obligations.