LUXEMBOURG’S NEW TAX FRAMEWORK FOR EMPLOYEE STOCK OPTIONS: A GAME CHANGER FOR START-UPS AND SCALE-UPS
On 1 July 2026, the Luxembourg Government submitted a draft law No. 8782 to Parliament proposing a new tax framework for employee stock options granted by certain innovative start-ups and scale-ups.
The draft law No. 8782 (the Draft Law) would amend the Luxembourg income tax law of 4 December 1967 (LITL) to support Luxembourg’s innovation ecosystem and help high-growth businesses attract and retain talent through equity-based incentives. Subject to the completion of the legislative process, the proposed rules would apply to stock options granted from the 2027 tax year onwards.
Key advantage: practical tax timing
Under the existing Luxembourg rules, employee stock options may be taxed when granted or exercised. Taxation is generally based on the value of the benefit obtained by the employee.
For unlisted companies, this can present two challenges:
- the value of the shares may be difficult to determine
- the employee may face a tax liability before any shares are sold and before any liquidity is available (“cash dry situation”)
The Draft Law addresses this issue for qualifying plans by shifting the relevant taxable event to the disposal of the shares. In other words, the employee would not be taxed when the option is granted or when it is exercise, and taxation would only arise upon the sale of the relevant shares (when the employee is likely to have the funds to meet the tax liability).
| Event | Tax treatment |
|---|---|
| Grant / exercise of the option | No taxation (any benefit in kind is deemed to be zero) |
| Sale of the shares | The difference between the sale price and the exercise price:
|
Main features of the proposed favourable regime
New Articles 100bis and 104ter LITL would create a dedicated tax framework for qualifying employee stock option plans.
The regime would be reserved for young innovative companies meeting several cumulative conditions:
- being incorporated for less than 10 years
- employing fewer than 150 employees
- having at least two full-time equivalent employees
- not exceeding EUR 30 million in turnover or balance sheet total
- satisfying an “innovation” criterion, generally linked to Research and Development (R&D) expenditure representing at least 15% of operating expenses in at least one of the three preceding financial years
These conditions are assessed at the time the options are granted and are not re-tested upon exercise or disposal of the underlying shares.
The regime would generally apply to Luxembourg resident capital companies or cooperatives, as well as certain EEA entities operating through a Luxembourg permanent establishment. Certain sectors and entities would be excluded, such as listed companies, SICARs, real estate businesses, law firms, audit firms and accounting firms.
Employees holding, directly or indirectly, more than 25% of the capital, voting rights or profit rights of the employer or relevant group entities would be excluded. The options would also need to be non-transferable.
The regime would be limited to options giving access to actual equity interests. Virtual stock options, phantom shares and other cash-settled arrangements would remain outside the scope of the proposed rules.
Employer election and compliance requirements
The application of the regime would not be automatic. The employer would need to electronically opt in on a plan-by-plan basis.
While the proposed regime is obviously favourable, it will require appropriate structuring and documentation and together with evidence that the relevant conditions are met.
Next steps
Companies considering stock option plans should already evaluate whether they are likely to qualify for the proposed regime.
In particular, they should assess:
- whether they meet the age, headcount and financial thresholds
- whether the innovation criterion can be substantiated
- whether the relevant employees are eligible, including under the 25% shareholding limitation
- whether the options are non-transferable and properly documented
- whether the plan rules are aligned with the intended tax treatment
- whether internal processes are in place to comply with the required RTS notification
If adopted, the proposed regime would represent a significant development for Luxembourg’s innovation and entrepreneurial ecosystem. By aligning taxation with the actual liquidity event and providing preferential tax treatment for qualifying gains, the regime would significantly strengthen Luxembourg’s competitiveness as a location for start-ups and scale-ups seeking to attract, incentivise and retain top talent.
How Ogier can help
Our tax experts in Luxembourg provide tailored tax solutions to help you achieve your objectives. If you would like to discuss how the proposed regime could affect your employee stock option plans, assess whether your company may qualify or review the related tax structuring considerations in Luxembourg, contact our Tax team in Luxembourg.
Key contacts
Muriel Jarosz | Associate | Legal @Ogier
Aurélie Clementz | Partner | Legal @Ogier
Hadrien Brémon | Counsel | Legal @Ogier
