Luxembourg: A New Tax Regime for Stock Options from 2027

On 1 July 2026, Minister of Finance Gilles Roth submitted Bill No. 8782, proposing a reform of the tax treatment of stock options granted to employees. The bill pursues two main objectives: clarifying the general tax regime applicable to stock option plans and introducing a preferential tax regime for certain young innovative companies.

This proposal follows the “10-Point Action Plan for Start-ups” presented in 2025 and the tax credit for private investors adopted at the end of 2025. It is also aligned with the European strategy to support start-ups and scale-ups.

From a technical perspective, the reform also seeks to codify, for the most part, the principles previously established by Circular L.I.R. No. 104/2 of 29 November 2017, which was withdrawn in December 2020, thereby addressing the absence of an explicit legal framework that followed its withdrawal.

The proposed measures are specifically intended to enable eligible start-ups and scale-ups to attract and retain employees through equity-based remuneration, particularly where they do not necessarily have the same financial resources as more established companies.

The new rules would apply to options granted from the 2027 tax year onwards, whether under a newly established or an existing stock option plan.

1. Taxation Deferred Until the Sale of Shares

One of the main innovations of the bill concerns the timing of taxation.

Under the proposed preferential regime, the granting, vesting and exercise of stock options would not trigger any taxation. Instead, taxation would be deferred until the employee actually sells the shares acquired through the exercise of those options. Consequently, no tax would arise either when the options are granted or when they are exercised by the employee.

At the time of sale, the taxable income would correspond to the difference between the selling price of the shares and the price paid by the employee to acquire them, namely the exercise price.

The price paid by the employee would correspond to the exercise price established under the stock option plan. The bill does not impose any specific method for determining this price and does not provide for a minimum exercise price.

The resulting gain would be treated as extraordinary income and taxed at one quarter of the employee’s overall tax rate.

Applying one quarter of the overall tax rate would result in a maximum effective tax rate of approximately 11.45%, therefore below 12%, which is significantly more favourable than the ordinary taxation of employment income.

This mechanism would notably prevent employees from being taxed on a benefit before receiving any liquidity from their shares. It would also eliminate the need to determine the value of the shares when the options are granted or exercised, a valuation exercise that can be particularly complex for unlisted companies.

This represents a departure from the general rules laid down in the amended Law of 4 December 1967 on Income Tax, which provide for taxation at the overall tax rate of the benefit in kind received when options are granted or exercised. Under these general rules, gains arising from the disposal for consideration of shareholdings more than six months after their acquisition are not taxable where the seller does not hold a significant participation.

2. A Regime Reserved for Young Innovative Companies

However, this favourable tax treatment would not be available to all companies.

To qualify, the employer would have to meet the definition of a “young innovative company” and satisfy several conditions. In particular, the company would have to be less than 10 years old, employ fewer than 150 employees and have an annual turnover or balance sheet total not exceeding EUR 30 million.

More specifically, the employer would have to be a capital company or a cooperative company incorporated less than ten years earlier, fully subject to taxation and resident in Luxembourg, or resident in another European Economic Area country, subject to a tax equivalent to Luxembourg corporate income tax and operating through a permanent establishment in Luxembourg.

Except where options are granted during the company’s first financial year, these conditions would have to be satisfied at the end of the financial year immediately preceding the year in which the options are granted.

Eligibility would be assessed on the grant date, namely the date on which the options are formally awarded. Options granted while the company met the eligibility requirements could therefore continue to benefit from the regime even if those requirements were no longer satisfied when the options vested or were exercised.

The company would also have to carry out innovative activities. In particular, it would need to employ at least two employees and have allocated at least 15% of its operating expenses to research and development during at least one of the three financial years preceding the grant of the options, subject to the required certification.

The 15% threshold would have to be certified by an approved statutory auditor or a chartered accountant. The innovative activity requirement would also entail the presence of at least two full-time equivalent employees.

Certain sectors and entities would be expressly excluded from the regime, including listed companies, SICARs, real estate companies, law firms, audit firms and accounting firms. Entities resulting from certain mergers or demergers would also be excluded.

Where a corporate group is involved, certain criteria relating in particular to the company’s age, workforce and size would be assessed at group level.

3. Conditions Also Applicable to Employees

The preferential regime would be limited to non-transferable stock options granted to employees.

These options would have to entitle employees, subject to certain conditions, to subscribe for or acquire shares in their employing entity or another entity within the same group.

Virtual stock option plans and phantom shares would therefore be excluded, as they do not confer rights to actual shares and would remain taxable as cash remuneration under the ordinary rules when payment is made.

Employees who directly or indirectly held more than 25% of the share capital, voting rights or profit entitlement of their employer or certain group entities, either at the time the options were granted or during the preceding 24 months, would also be excluded.

This exclusion is particularly relevant to founders who already hold a significant ownership interest. In addition, employees would have to receive employment income from the qualifying employer within the meaning of Article 95 of the Luxembourg Income Tax Law.

The bill also includes an anti-abuse provision: stock options could not be granted as a substitute for part of an employee’s ordinary cash remuneration.

Cash-based remuneration arrangements and phantom shares would likewise be excluded from the new regime.

4. Reporting Obligations for Employers

The application of the preferential regime would not be automatic. Employers would have to expressly elect to apply it and comply with specific reporting obligations to the Luxembourg tax authorities.

The information accompanying the bill notably provides for an electronic notification to be submitted before 1 March of the year following the grant of the options. This notification would include certain information relating to the beneficiaries, the stock option plan and the group structure.

Failure to comply with the applicable obligations would result in the loss of the preferential tax treatment.

5. Clarification of the General Tax Regime for Stock Options

Bill No. 8782 does not exclusively concern young innovative companies. It also seeks to clarify the tax rules applicable to stock option plans that do not benefit from the new preferential regime, either because the company does not meet the requirements to qualify as a young innovative company or because it has not elected to apply the regime.

Accordingly, the bill aims, on the one hand, to clarify the general tax regime applicable to options to subscribe for or acquire shares and, on the other hand, to introduce a specific tax regime for stock option plans established by young innovative companies.

Under the proposed rules, transferable options would, in principle, remain taxable when granted, while non-transferable options would generally remain taxable upon exercise.

6. Proposed Entry into Force from 2027

If the bill is adopted in its current form, the new provisions would apply to stock options granted from the 2027 tax year onwards.

The reform would therefore introduce an important distinction between the ordinary stock option regime and the regime applicable to plans established by eligible young innovative companies.

For the latter, deferring taxation until the actual sale of the shares, combined with the application of one quarter of the overall tax rate, should further enhance the attractiveness of stock options as a tool for employee remuneration and retention.

However, Bill No. 8782 remains subject to the legislative process, and its provisions may therefore be amended before final adoption.

This reform would consequently strengthen Luxembourg’s attractiveness to qualified professionals, whose relocation to the Grand Duchy could, in the longer term, contribute to higher personal income tax revenues.

More broadly, the proposed regime could support the development of Luxembourg’s economic ecosystem by encouraging the establishment of new businesses, contributing to economic diversification and supporting the creation of high-value-added jobs.