New stock-option tax regime effective from 2027

At a glance

A new stock-option tax regime is introduced for certain young innovative companies, allowing taxation below 12%. Specific tax reporting obligations will also apply to all companies offering stock-option plans.

A closer look

On 1 July 2026, the Luxembourg government submitted draft law n°8782 to Parliament. This bill amends the amended law of 4 December 1967 on income tax (LITL) and pursues two main objectives: (i) clarifying the general tax rules already applicable to stock-option plans, and (ii) introducing a brand-new, favorable regime specifically designed for plans granted by certain young innovative companies. The new regime is intended to help Luxembourg start-ups and scale-ups attract and retain talent.

The new rules are expected to apply from the tax year 2027 onwards, regardless of whether the grant is made under a new or an existing plan.
 

The new favorable regime (Articles 100bis and 104ter LITL)

How it works 

• At grant or at exercise: No taxation.
• At sale of the shares: The capital gain is taxed as extraordinary income at one quarter of the taxpayer's overall tax rate (i.e. below 12%). The taxation timing is aligned with the proposed EU regime on employee stock-option plans for the EU Inc. in the 28th regime proposal^[1].

This regime eliminates the dry tax issue, where employees are taxed on paper gains before any liquidity event, and removes the need (and cost) to value unlisted shares at grant or exercise.
 

Which companies qualify as “young innovative companies” 

A company can benefit from the new regime if it meets the following conditions:

• It is a capital or cooperative company incorporated for less than 10 years.
• It is a fully taxable resident of Luxembourg or of the European Economic Area (EEA). Additional conditions apply for EEA entities.
• It has fewer than 150 employees.
• Its balance sheet total or turnover does not exceed EUR 30,000,000.
• It is an innovative company, meaning it has a minimum of two employees and R&D expenditure representing at least 15% of operating expenses in at least one of the last three financial years, as certified by a certified auditor (réviseur) or chartered accountant.
• It is not active in certain excluded sectors (e.g., law firms, audit or accounting firms, real estate, SICARs, listed companies, entities resulting from certain mergers or demergers).

These thresholds are significantly higher than those used for the existing start-up tax credit for individuals (Article 154quaterdecies LITL), reflecting the fact that this regime also targets companies in a later growth-stage phase.
 

Which employees qualify 

Employees can benefit from the new regime if they meet the following criteria:

• They receive salaried income from the employer within the meaning of Article 95 LITL.
• They do not hold, at grant or at any point in the preceding 24 months, more than 25% of the capital, voting rights or profit rights of the employer (or group entity). This excludes founders with a significant existing stake.
• The options are not granted as a replacement for part of the employee's ordinary cash remuneration (anti-abuse rule).
   

Employer conditions and reporting 

To benefit from the new regime, the employer must explicitly opt in on a plan-by-plan basis. This is done by submitting an electronic notification to the competent tax office before 1 March of the year following the year in which the options are granted. The notification must include specific information about the beneficiaries, the plan, and the employer’s group structure.
 

Clarification of the common-law regime (new Article 104bis LITL)

For option plans that do not meet the above criteria—or where the employer chooses not to apply the new regime—the bill incorporates into law the existing administrative practice (previously set out in the now-abrogated 2017 circular):

• Freely tradable options: The benefit in kind is taxed at grant as employment income. It is valued as the difference between market (or estimated) value and any amount paid by the employee.
• Non-tradable options: The benefit in kind is taxed at exercise, valued using a generally accepted valuation method (e.g., Black-Scholes).
• Shares subject to a lock-up period: These benefit from a flat discount of 5% per year of lock-up, capped at 20%, provided the employer reports the relevant details to the tax authorities.

Capital gains realized by Luxembourg tax resident individuals on a subsequent sale of shares acquired under this common-law regime remain subject to the ordinary rules on speculative gains (Article 99bis LITL) or substantial participations (Article 100 LITL), as applicable. In practice, such gains may be exempt from tax if conditions are met.

These stock-option plans are also subject to certain reporting obligations to the competent tax office before 1 March of the year following the year of grant or exercise.

The bill will now be examined by Parliament and may be amended before final adoption. Clients that have, or are considering, equity incentive plans in Luxembourg should start reviewing their eligibility and plan design against the criteria outlined above.

^[1] https://commission.europa.eu/topics/business-and-industry/doing-business-eu/company-law-and-corporate-governance/eu-inc-new-harmonised-corporate-legal-regime_en