Luxembourg Proposes New Tax Regime For Stock Options In Innovative Companies

The Luxembourg government has submitted a draft law on 1 July 2026 (Bill n° 8782) introducing a tax framework for employee stock option plans.

The proposal primarily introduces a new, targeted regime for stock option plans implemented by qualifying young innovative companies, while at the same time codifying the general tax treatment applicable to all other stock option plans.

As a reminder, the mechanism of stock options is usually as follows: an option is granted to the employee, it vests (becomes exercisable), the employee exercises it (pays the strike price, receives the shares), and later disposes of the shares. The new regime would clarify at which of these moments the taxation occurs as well as under which conditions.

Key takeaways

• New regime for innovative companies: Taxation would be deferred to the disposal of shares, with no effective taxation at grant or exercise.

• Reduced effective tax burden for beneficial regime: Gains realized on disposal would be taxed at 1/4^th of the global tax rate (up to approx. 11,45%).

• Strict eligibility and scope limitations: The new regime applies only to such companies qualifying as young innovative companies and is subject to an employer election.

• General regime codified: Aspects such as timing of taxation or valuation rules, including the reduction for lock-up of restricted shares (5% per year, capped at 20%) are formalized.

• Entry into force: The proposed new regulations would apply to options granted as from the 2027 tax year.

A targeted regime for innovative companies

The draft law introduces a dedicated regime under which qualifying stock options granted by young innovative companies would only be taxed on the disposal of the underlying shares, with no taxation at grant or exercise, i.e. not until an actual liquidity event.

The taxable gain would correspond to the difference between the sale price and the exercise price, taxed at the reduced rate of one quarter of the individual’s global tax rate.

One of the stated goals is also to avoid complex and costly valuation of latent gains sometimes occurring with unquoted companies.

Scope and eligibility

The new regime is limited to qualifying young innovative companies that are either a fully taxable Luxembourg-resident company, or a company established in another EEA jurisdiction subject to a comparable corporate tax and operating through a Luxembourg permanent establishment.

A company will only be considered a young innovative company if it meets the following criteria:

• It has been incorporated less than 10 years ago;
• It employs less than 150 employees;
• Its turnover or balance sheet total does not exceed EUR 30 million, and

(When the company belongs to a group of entities, these 3 conditions must be met at group level).

• It engaged R&D expenditure representing at minimum 15% of its operating expenses in at least one of the three financial years preceding the year of grant.

At employee level, key conditions include that:

• The employee does not hold directly or indirectly more than 25% of the employer entity, including during the preceding 24-month period, and
• options must be granted in addition to salary and not instead of it.

Furthermore, certain companies (e.g. law, audit and accounting firms, companies primarily active in the real estate market, listed companies, SICARs, companies resulting from a merger or demerger) are excluded from participating in the new regime.

Employer considerations

The application of the new regime is optional and must be made on a plan-by-plan basis.

Employers must comply with specific reporting obligations, including an electronic filing by 1 March of the year following the grant. Missing this filing deadline forfeits the special regime for the plan concerned, which then falls back to the general tax treatment described below.

Given the technical conditions (including group-level thresholds and R&D requirements), early assessment of eligibility and plan design will be key.

Codification of the general regime

In parallel, the draft law codifies the general tax treatment of stock option plans.

Under this general regime the taxable benefit in kind is taxed as follows:

• for freely transferable options:
  at grant on a basis corresponding to the difference between (i) stock market value (or estimated realization value if not listed) and (ii) the amount paid by the employee for the acquisition of the option.

• for non-transferable options:
  upon exercise of the option on a basis corresponding to the difference between (i) stock market value (or estimated realization value if not listed) of the shares received upon exercise and (ii) the strike price. Where the underlying shares are subject to a lock-up period, the taxable value of the shares is reduced by a flat-rate discount of 5% per year of restriction, limited to a maximum of 20%.

Outlook

The draft law is now subject to the legislative process. The reform aims to enhance Luxembourg’s attractiveness for innovative and high-growth businesses, particularly by facilitating the use of equity-based compensation to attract and retain talent. By aligning taxation with actual value realization, the new regime addresses practical liquidity constraints for employees.

In addition, the draft law codifies the general tax treatment of stock option plans in the Luxembourg Income Tax Law. Until now, this area has largely been governed by administrative guidance and circulars, rather than explicit statutory provisions. This codification is expected to enhance legal certainty and align practice with statutory law.